Big Guy Inc. purchased 80% of the outstanding voting shares of Humble Corp. for $360,000 on July
Question:
Big Guy Inc. purchased 80% of the outstanding voting shares of Humble Corp. for $360,000 on July 1, 2017. On that date, Humble Corp. had common shares and retained earnings worth $180,000 and $90,000, respectively.
The equipment had a remaining useful life of 5 years from the date of acquisition. Humble's bonds mature on July 1, 2027. Both companies use straight line amortization, and no salvage value is assumed for assets. The trademark is assumed to have a useful life of 40 years. Goodwill is tested annually for impairment.
The balance sheets of both companies, as well as Humble's fair market values on the date of acquisition are disclosed below:
Balance Sheet of Big Guy and Humble as at June 30, 2017
Big Guy
Humble
Humble
(carrying value)
(carrying value)
(fair value)
Cash
$800,000
$245,000
$245,000
Accounts Receivable
$240,000
$40,000
$40,000
Inventory
$60,000
$45,000
$50,000
Equipment (net)
$900,000
$80,000
$72,000
Trademark
$90,000
$193,000
Total Assets
b $2,000,000
$500,000
Current Liabilities
$200,000
$160,000
$160,000
Bonds Payable
$260,000
$70,000
$40,000
Common Shares
$900,000
$180,000
Retained Earnings
$640,000
$90,000
Total Liabilities and Equity
$2,000,000
$500,000
The following are the financial statements for both companies for the fiscal year ended June 30, 2020:
IncomeStatements of Big Guy and Humble for the year ended
June 30, 2020
Big Guy Humble
Sales
$640,000
$240,000
Investment Revenue
$1,600
Less: Expenses:
Cost of Goods Sold
$300,000
$160,000
Depreciation
$81,000
$34,000
Interest Expense
$34,000
$26,000
Other Expenses
$5,000
$8,000
Net Income
$221,600
$12,000
Statements of RetainedEarningsas at June 30, 2020
Big Guy Humble
Balance, July 1, 2019
$960,560
$48,000
Net Income
$221,600
$12,000
Dividends
$20,000
$2,000
Balance, June 30, 2020
$1,162,160
$58,000
BalanceSheets of Big Guy and Humble as at June 30, 2020
Big Guy
Humble
Cash
$1,200,000
$365,000
Accounts Receivable
$229,040
$55,000
Investment in Humble
$360,000
Inventory
$70,000
$70,000
Equipment (net)
$820,000
$65,000
Trademark
$85,000
Total Assets
$2,679,040
$640,000
Current Liabilities
$356,880
$332,000
Bonds Payable
$260,000
$70,000
Common Shares
$900,000
$180,000
Retained Earnings
$1,162,160
$58,000
Total Liabilities and Equity
$2,679,040
$640,000
Additional information:
An impairment test conducted in September 2018 on Big Guy's goodwill resulted in an impairment loss of $10,000 being recorded.
Both companies use a FIFO system, and Humble's entire inventory on the date of acquisition was sold during the following year.
During 2020, Humble Inc. borrowed $20,000 in cash from Big Guy Inc. interest free to finance its operations.
Big Guy uses theCost Method to account for its investment in Humble Corp.
Assume that the fair value enterprise (FVE) method applies.
Required:
a.Make statement of computation and allocation of Acquisition Differential as at June 30, 2020
b.Prepare the Balance Sheet of Big Guy on the date of the acquisition June 30, 2017
c.Make statement of amortization and impairment of Acquisition Differential as at June 30, 2020
d.Compute the Consolidated Net Income of Big Guy for the year ended June 30, 2020
e.make statement of Consolidated Retained Earnings as at June 30, 2020
f.Prepare statement of Non- Controlling Interests (NCI) Balance Sheet as at June 30, 2020
g.Prepare the Consolidated Income Statement of Big Guy for the year ended June 30, 2020
h.Prepare the Consolidated Balance Sheet of Big Guy as at June 30, 2020
Expert Answer:
