exercise for advanced financial accounting

On January 1, 20X2, Page Company acquired 70% of the outstanding common shares of Sage Ltd. for $45,500 in cash. On that date, Sage had $20,000 in common shares outstanding and $20,000 in retained earnings. At the time of the acquisition, the book value of each of Sage's assets was equal to its fair value except for the following: Book value Fair value Inventory $20,000 $25,000 Buildings and equipment $60,000 $60,000 Accumulated depreciation ($10,000) The buildings and equipment had a remaining useful life of 10 years at January 1, 20X2, and the inventory on hand at the time of the purchase was sold in 20X2. Any excess paid over the fair value was for Sage's good reputation in the herb industry, which Page set up as goodwill. Following are the financial statements for Page and Sage at December 31, 20X9. Separate Entity Balance Sheets at December 31, 20x9 PAGE SAGE Assets Cash $ 29,500 $ 10,000 Accounts receivable (net) 60,000 20,000 Inventory 45,000 30,000 45,500 Investment in Sage (cost method) Buildings and equipment 90,000 100,000 Accumulated depreciation (20,000) (50,000) $ 250,000 $ 110,000 Liabilities Current liabilities $ 40,000 $ 25,000 Deferred income taxes 10,000 5,000 $ 50,000 $ 30,000 Shareholders' equity Ordinary shares $ 70,000 $ 20,000 Retained earnings 130,000 60,000 200,000 80,000 $ 250,000 $ 110,000 Statements of Income and Retained Earnings for the year ended December 31, 2009 Sales Cost of goods sold Depreciation expense Other expenses Income tax expense PANSY $ 650,000 (300,000) 350,000 14,000 231,000 42,000 287,000 63,000 67,000 $ 130,000 SAGE $ 225,000 (112,500) 112,500 12,000 75,500 10,000 97,500 15,000 45,000 $ 60,000 Net income Retained earnings - Beginning Retained earnings - Ending Statements of Income and Retained Earnings for the year ended December 31, 2009 Sales Cost of goods sold Depreciation expense Other expenses Income tax expense PANSY $ 650,000 (300,000) 350,000 14,000 231,000 42,000 287,000 63,000 67,000 $ 130,000 SAGE $ 225,000 (112,500) 112,500 12,000 75,500 10,000 97,500 15,000 45,000 $ 60,000 Net income Retained earnings - Beginning Retained earnings - Ending During 20X8 and 20X9, Sage sold merchandise to Page at a price that provides it with a gross profit of 50%. The 20x9 sale was $10,000. Page's December 31, 20X9, inventory contained $2,000 worth of these purchases from Sage, while the December 31, 20X8, inventory contained $1,000 worth of intercompany merchandise. At the end of 20X9, Page owed Sage $500 for merchandise inventory purchased on account. This liability is non-interest bearing. On December 31, 20X6, Page sold equipment having a cost of $5,000 and accumulated depreciation of $1,000 to Sage for $5,000. The remaining useful life of the equipment at the time of the sale was 10 years. In 2005, the goodwill impairment test resulted in a $5,000 loss, and for 20x9, goodwill was further impaired by $714. Neither company paid dividends during 20X9. Both companies have a 40% tax rate. Page accounts for Sage using the FVE and cost methods. Required: 1. Prepare preliminary calculations as noted below: a) Calculation of goodwill using fair values b) Calculation and allocation of acquisition differential and calculation of goodwill, and calculation of initial NCI c) Acquisition differential amortization and goodwill impairment table d) Table of realized and unrealized intercompany inventory profits e) Table of intercompany profits in capital assets and other eliminations f) Calculation of consolidated net income and NCI-I/S g) Calculation of consolidated beginning of 20x9 retained earnings h) Calculation of end of 20X9 NCI-B/S 2. Prepare Page's consolidated income statement for the year ended December 31, 20X9, and the consolidated balance sheet for December 31, 20X9. On January 1, 20X2, Page Company acquired 70% of the outstanding common shares of Sage Ltd. for $45,500 in cash. On that date, Sage had $20,000 in common shares outstanding and $20,000 in retained earnings. At the time of the acquisition, the book value of each of Sage's assets was equal to its fair value except for the following: Book value Fair value Inventory $20,000 $25,000 Buildings and equipment $60,000 $60,000 Accumulated depreciation ($10,000) The buildings and equipment had a remaining useful life of 10 years at January 1, 20X2, and the inventory on hand at the time of the purchase was sold in 20X2. Any excess paid over the fair value was for Sage's good reputation in the herb industry, which Page set up as goodwill. Following are the financial statements for Page and Sage at December 31, 20X9. Separate Entity Balance Sheets at December 31, 20x9 PAGE SAGE Assets Cash $ 29,500 $ 10,000 Accounts receivable (net) 60,000 20,000 Inventory 45,000 30,000 45,500 Investment in Sage (cost method) Buildings and equipment 90,000 100,000 Accumulated depreciation (20,000) (50,000) $ 250,000 $ 110,000 Liabilities Current liabilities $ 40,000 $ 25,000 Deferred income taxes 10,000 5,000 $ 50,000 $ 30,000 Shareholders' equity Ordinary shares $ 70,000 $ 20,000 Retained earnings 130,000 60,000 200,000 80,000 $ 250,000 $ 110,000 Statements of Income and Retained Earnings for the year ended December 31, 2009 Sales Cost of goods sold Depreciation expense Other expenses Income tax expense PANSY $ 650,000 (300,000) 350,000 14,000 231,000 42,000 287,000 63,000 67,000 $ 130,000 SAGE $ 225,000 (112,500) 112,500 12,000 75,500 10,000 97,500 15,000 45,000 $ 60,000 Net income Retained earnings - Beginning Retained earnings - Ending Statements of Income and Retained Earnings for the year ended December 31, 2009 Sales Cost of goods sold Depreciation expense Other expenses Income tax expense PANSY $ 650,000 (300,000) 350,000 14,000 231,000 42,000 287,000 63,000 67,000 $ 130,000 SAGE $ 225,000 (112,500) 112,500 12,000 75,500 10,000 97,500 15,000 45,000 $ 60,000 Net income Retained earnings - Beginning Retained earnings - Ending During 20X8 and 20X9, Sage sold merchandise to Page at a price that provides it with a gross profit of 50%. The 20x9 sale was $10,000. Page's December 31, 20X9, inventory contained $2,000 worth of these purchases from Sage, while the December 31, 20X8, inventory contained $1,000 worth of intercompany merchandise. At the end of 20X9, Page owed Sage $500 for merchandise inventory purchased on account. This liability is non-interest bearing. On December 31, 20X6, Page sold equipment having a cost of $5,000 and accumulated depreciation of $1,000 to Sage for $5,000. The remaining useful life of the equipment at the time of the sale was 10 years. In 2005, the goodwill impairment test resulted in a $5,000 loss, and for 20x9, goodwill was further impaired by $714. Neither company paid dividends during 20X9. Both companies have a 40% tax rate. Page accounts for Sage using the FVE and cost methods. Required: 1. Prepare preliminary calculations as noted below: a) Calculation of goodwill using fair values b) Calculation and allocation of acquisition differential and calculation of goodwill, and calculation of initial NCI c) Acquisition differential amortization and goodwill impairment table d) Table of realized and unrealized intercompany inventory profits e) Table of intercompany profits in capital assets and other eliminations f) Calculation of consolidated net income and NCI-I/S g) Calculation of consolidated beginning of 20x9 retained earnings h) Calculation of end of 20X9 NCI-B/S 2. Prepare Page's consolidated income statement for the year ended December 31, 20X9, and the consolidated balance sheet for December 31, 20X9