Question
On January 1, 2017, Panama Ltd. issued shares worth $1,120,000 to Savanna Ltd. to acquire 80% of Savannas outstanding shares. On the acquisition date, Savannas
On January 1, 2017, Panama Ltd. issued shares worth $1,120,000 to Savanna Ltd. to acquire 80% of Savannas outstanding shares. On the acquisition date, Savannas statement of financial position shows share capital of $420,000 and retained earnings of $777,000. At the acquisition date, all of Savannas identifiable assets and liabilities equaled their fair values with the exception of the following:
Inventories (fair value exceeded book value by $14,000)
Investments (book value exceeded fair value by $14,000)
Equipment (fair value exceeded net book value by $105,000)
Long-term Liabilities (fair value, $500,000, exceeded carrying value by $20,000)
At the acquisition date, Savannas accumulated depreciation account for the equipment had a balance of $805,000. As of the acquisition date, Savannas equipment had a remaining useful life of 8 years. The long-term liabilities had five years to maturity.
Additional information:
Panama records its investments using the cost method and values NCI under the entity theory.
Both companies have a 40% income tax rate.
In 2017, Savanna sold all its investments for a gain of $50,000.
In 2018, Panama purchased equipment from Savanna for $120,000. At the sale date, Savannas net book value of the equipment was $90,000. Savanna had originally purchased the equipment for $140,000. After the purchase, Panama amortized the equipment at a rate of $20,000 per year for the remaining 6 years of its useful life, taking a full year of depreciation in 2018.
During 2019, Savanna purchased goods from Panama. At the end of 2019, Savanna still had $120,000 of these goods in inventory. Panama had earned a gross margin of 40% on the sale. The goods were sold to external customers in 2020.
During 2019, Panama purchased goods from Savanna. At the end of 2019, Panama still had $140,000 of these goods in inventory. Savanna had earned a gross margin of 40% on the sale. The goods were sold to external customers in 2020.
During 2020, Panama sold goods of $440,000 to Savanna. Panama earned a gross profit of $156,000 on this sale. At the end of 2020, Savanna still had $156,000 worth of goods in inventory.
During 2020, Savanna sold goods of $600,000 to Panama at a gross margin of 40%. At the end of 2020, Panama still had 30% of the goods in inventory.
During 2020, Panama received $120,000 in royalties from Savanna. Between January 1, 2017 and December 31, 2019, Panama received $600,000 in royalties from Savanna.
The financial statements for Panama and Savanna for the year ended December 31, 2020 are presented on the following page.
Condensed Statement of Comprehensive Income
For the year ended December 31, 2020
Panama Ltd. Savanna Ltd.
Revenue:
Sales $ 3,238,200 $ 2,276,400
Royalties 210,000 -
Dividends 100,800 ____-___
3,549,000 2,276,400
Expenses:
Cost of sales 1,680,000 1,260,000
Other 784,000 575,400
2,464,000 1,835,400
Income before tax 1,085,000 441,000
Income tax expense 434,000 176,400
Net and comprehensive income $ 651,000 $ 264,600
Statement of Financial Position
As of December 31, 2020
Panama Ltd. Savanna Ltd.
Assets:
Current assets:
Cash $ 70,000 $ 28,000
Accounts receivable 210,000 224,000
Inventory 252,000 140,000
532,000 392,000
Noncurrent assets:
Land 440,000 -
Equipment 7,000,000 3,780,000
Accumulated depreciation, equipment (2,478,000) (1,736,000)
Investment in Savanna 1,120,000 ____-___
6,082,000 2,044,000
Total assets $ 6,614,000 $ 2,436,000
Liabilities and shareholders equity:
Current liabilities:
Accounts payable $ 630,000 $ 280,000
Noncurrent liabilities:
Loan payable 420,000 700,000
1,050,000 980,000
Shareholders equity:
Share capital 1,980,000 420,000
Retained earnings 3,584,000 1,036,000
5,564,000 1,456,000
$ 6,614,000 $ 2,436,000
Statement of Changes in Equity Retained Earnings Section
For the year ended December 31, 2020
Panama Ltd. Savanna Ltd.
Retained earnings, beginning of the year $ 3,353,000 $ 897,400
Net income 651,000 264,600
Dividends declared (420,000) (126,000)
Retained earnings, end of year $ 3,584,000 $ 1,036,000
Required:
a) Prepare consolidated financial statements for the year ending December 31, 2020.
b) Determine the amount of consolidated net income attributable to non-controlling interest that would appear on the consolidated statement of profit or loss (i.e. income statement) as at December 31, 2020 assuming Panama used the identifiable net asset (INA) method to value the non-controlling interest on acquisition date.
c) If Panama had been accounting for its Investment in Savanna under the Equity method, calculate the following:
i. Investment in Savanna
ii. Investment income
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