On December 31, 2017, Pepsi Ltd. purchased 70% of the outstanding ordinary shares of Cola Ltd. for $700,000. On that date, Cola's shareholders' equity consisted of ordinary shares of $400,000 and retained earnings of $160,000. The condensed financial statements for two companies for the year ended December 31, 2019 were as follows:

Balance Sheets

December 31, 2019

Pepsi

Cola

Assets

Cash

$44,000

$80,000

Accounts receivable

380,000

520,000

Inventories

550,000

540,000

Property, plant and equipment net

910,000

640,000

Investment in Cola

700,000

$2,584,000

$1,780,000

Liabilities

Current liabilities

$660,000

$560,000

Bonds payable

820,000

490,000

1,480,000

1,050,000

Shareholders' equity

Ordinary shares

200,000

400,000

Retained earnings

904,000

330,000

1,104,000

730,000

$2,584,000

$1,780,000

Income Statements

Year ended December 31, 2019

Pepsi

Cola

Sales

$2,080,000

$2,650,000

Gain on sale of equipment

36,000

60,000

2,116,000

2,710,000

Cost of goods sold

1,370,000

1,580,000

Depreciation expense

136,000

90,000

Interest and other expenses

438,000

932,000

1,944,000

2,602,000

Net income

$172,000

$108,000

Additional information

1.In negotiating the purchase price at the date of acquisition, it was agreed that the fair values of all of Cola's assets and liabilities were equal to their carrying values except for the following:

AssetCarrying ValueFair Value

Inventories$ 340,000$ 370,000

Equipment200,000250,000

Bonds payable330,000370,000

2.Both companies use first-in, first-out (FIFO) to account for their inventory and the straight-line method for amortizing their depreciable assets and any premium or discount on bonds payable. Cola's inventory has increased every year since the date of acquisition. The equipment had a remaining useful life of 5 years at the acquisition date. Cola's bonds payable mature on December 31, 2022.

3. Each year, goodwill is evaluated to determine if there has been impairment. There was no impairment in 2018. The fair value of goodwill was $310,000 at December 31, 2019.

4. During 2019, Pepsi purchased merchandise from Cola for $900,000. Cola earned a gross margin of $500,000 on these sales. Twenty percent of the 2019 purchases from Cola were still in Pepsi's inventory at the end of 2019. At the beginning of 2019, Pepsi's inventory included merchandise purchased from Cola in 2018 on which Cola had recorded a gross margin of $14,000.

5. On January 1, 2019, Cola purchased equipment from Pepsi for $216,000 that was $36,000 in excess of Pepsi's net book value for this equipment. The estimated useful life of this equipment was 9 years at the date of the intercompany sale.

6. Pepsi uses the cost method to account for its investment in Cola.

7. Ignore income taxes.

Required

a. Prepare brief notes for the Directors to answer the following questions: (6 marks) NOTE:for part a) type your answer in the textbox below in Moodle

(i)What is a "business combination"?

(ii) How is the acquirer in a business combination identified?

(iii) What is a "reverse takeover"?

NOTE: for parts b) and c) upload your excel document to Moodle (use a separate tab in excel for each problem requiring calculations).

b. Prepare a consolidated income statement for the year ended December 31, 2019. The allocation of net income between the parent and NCI is not required. (14 marks)

c. Calculate the following amounts on the consolidated balance sheet at December 31, 2019: (20 marks)

(i)Inventories

(ii) Property, plant and equipment - net

(iii) Goodwill

(iv) Bonds payable

(v) Non-controlling interest