Challenge Problem: Parent Ltd. purchased 80% of Subs voting stock on January 1, Year 2 at cost of $260,000. On that date, the Subs ordinary shares totaled $120,000 and retained earnings were $140,000.

On January 1, the book values of the identifiable net assets were equal to their fair values except for the following. The Subs equipment had a useful life of 6 years on the date of acquisition. The bonds payable mature on December 31, Year 3. Both the bonds and equipment are amortized using the straight-line method.

1. Accounts receivables book value was overvalued by $25,000.

2. Equipments book value was undervalued by $45,000.

3. Bond payables book value was undervalued by $32,000.

The annual financial statements of Parent Ltd. and Sub Ltd. for the year ended December 31, Year 5 were as follows:

	Parent Ltd.	Sub Ltd.
Sales revenue	$ 450,100	$ 265,400
Other income	52,300	12,300
Total revenues	502,400	277,700
Cost of goods sold	345,300	174,500
Depreciation expense	32,400	31,300
General and administration expenses	46,000	19,000
Interest expense	12,400	10,500
Income tax expense	53,200	23,600
Total expenses	489,300	258,900
Net income	$13,100	$18,800

Additional information:

1. Annual impairment tests of goodwill resulted in losses of $8,000 in year 3 and $3,000 in Year 5.

2. During year 4, Sub sold $80,000 of inventory to its parent. Half of these sales have not been resold and remained on the books of the parent as inventory at year-end. The Subs mark up on sales to its parent was 40%.

3. During year 5, both the parent and sub declared and issued dividends. The parent reported $25,000 and the subsidiary reported $16,000 in dividends.

4. During year 5, the parent sold $100,000 of inventory to the Sub. One quarter of these sales have not been resold and remained on the books of the subsidiary as inventory at year end. The parents mark up on sales was 30%. The subsidiary owned $21,000 to its parent at year end for inventory purchases on account.

5. On August 1, Year 5, Sub borrowed $60,000 from Parent. The two-year note had interest rate of 8%. Both the principal and interest were payable on maturity.

6. On April 1, Year 5, the Sub sold equipment to the parent for $71,000. The book value of the equipment in the Subs records at date of sale was $78,000. The remaining useful life of the equipment on the date of sale was 5 years.

7. Parent uses the cost method.

8. Assume a 30% corporate tax rate.

Required:

1. Prepare the following schedules show all your calculations preferably using the alphabet to show where you got your figures from.

(a) Prepare the calculation and allocation of acquisition differential schedule

(b) Prepare the acquisition differential amortization and goodwill impairment schedule

(c) Prepare the intercompany transactions, unrealized profits on intercompany transactions and deferred taxes schedules.

(d) Calculate consolidated net income with income attributed to parent and non-controlling interests.

(e) Prepare the consolidated income statement in good form

While you are preparing the manual consolidation of the financial statements, record the following amounts in the boxes below. Only selected figures are requested. Record each dollar amount to the nearest whole number without commas or dollar signs. For example, record $10,512.6 as 10513. Record negative values with a minus sign in front, for example, -10513.

Calculation of Acquisition Differential
Implied value of 100%	Answer
Acquisition differential	Answer
Goodwill	Answer
Amortization of Acquisition Differential
Total AD amortization for year 5	Answer
Unamortized AD, Dec. 31, year 5	Answer
Unrealized profits on intercompany transactions
Opening inventory, gross profit, after tax	Answer
Ending inventory, gross profit, after tax	Answer
Equipment, year-end, year 5, after tax	Answer
Calculation of consolidated net income
Adjusted net income of the parent	Answer
Adjusted net income of the subsidiary	Answer
Attributable to parents shareholders	Answer
Consolidate Income Statement
Total revenue	Answer
Cost of goods sold	Answer
Depreciation expense	Answer
Income tax expense	Answer
Consolidated net income	Answer