Assignment Ch 6: Consolidation Question

POP Inc. purchased 90% of the voting shares of SOS Inc for $1,000,000 cash on January 1, 20X3; in addition, the purchase agreement also included a contingent consideration payable in cash on January 1, 20X9. Assume that since the acquisition date management believes that $200,000 is the contingent consideration likely to become payable on January 1, 20X9 (ignore time value of money). POP uses the cost method to account for its investment. On that date, SOSs Common Stock and Retained Earnings were valued at $300,000 and $500,000 respectively.

SOSs fair values approximated its carrying values with the following exceptions:

• The equipment had a fair value which was $ 120,000 higher than its carrying value, and was estimated to have a remaining useful life of 10 years from the date of acquisition with no salvage value.
• SOSs inventory had a fair value which was $15,000 less than book value. This inventory was sold by SOS in 20X3.
• SOSs skilled workforce had an exceptional reputation in the industry. Experts believed that the reputation of the work force should be valued at $200,000.

Both companies use straight line amortization exclusively for all assets and liabilities. The effective tax rate for both companies is 40%.

The Financial Statements of POP & SOS for the Year ended December 31, 20X6 are shown below:

Income Statements

POP Inc. SOS Inc.

Sales $1,300,000 $830,000

Other Revenues $400,000 $200,000

Less: Expenses:

Cost of Goods Sold: $700,000 $330,000

Depreciation Expense $30,000 $20,000

Other Expenses $120,000 $140,000

Income Tax Expense $170,000 $120,000

Net Income $680,000 $420,000

Retained Earnings Statements

Balance, Jan 1, 2016 $1,000,000 $800,000

Net Income $680,000 $420,000

Less: Dividends ($200,000) ($140,000)

Retained Earnings $1,480,000 $1.080,000

Balance Sheets

POP Inc. SOS Inc.

Cash $100,000 $340,000

Accounts Receivable $300,000 $410,000

Inventory $320,000 $475,000

Investment in SOS Inc. $1,000,000 -

Land $100,000 $80,000

Equipment (net) $220,000 $210,000

Total Assets $2,040,000 $1,515,000

Current Liabilities $160,000 $135,000

Common Shares $400,000 $300,000

Retained Earnings $1,480,000 $1,080,000

Total Liabilities and Equity $2,040,000 $1,515,000

Other Information:

1. During 20X6, SOS sold a parcel of land to POP for $100,000 cash. SOS had purchased this land in 2012 for $60,000. POP is currently using the land to hold excess inventory.

2. During 20X6 POP charged SOS $50,000 of rental fees. SOS did not pay this amount in 2016 but expects to pay the full $50,000 sometime in 20X7.

3. During December 20X6, SOS sold inventory to POP for $100,000 cash, the cost of the inventory to SOS was $70,000. 50% of these goods remained in POPs inventory at the end of 2016.

4. During December 20X5, POP sold inventory to SOS for $60,000 cash, the cost of the inventory to POP was $40,000. 40% of these goods remained in SOSs inventory at the end of 20X5. SOS eventually sold the entire inventory to an outside customer in 20X6.

5. Year 20X4 there was impairment in GW of $30,000.

REQUIRED:

1. Prepare a schedule showing the calculation of goodwill at the date of acquisition of SOS under the entity theory, and a purchase price discrepancy amortization schedule.

2. Prepare a schedule showing the inter-company realized and unrealized profits for 20X3 to 20X6. Your schedule should include both pre-tax and after-tax amounts.

c) Prepare the consolidated financial statements under the entity theory: Income statement and Retained Earnings for the year ended December 31^st, 20X6, and Balance Sheet as at December 31^st, 20X6. Show all supporting calculations. NOTE: In preparing Consolidated Statement of Retained Earnings you need to first calculate the opening retained earnings.