Question
On January 1, Year 4, Cyrus Inc. paid $927,000 in cash to acquire all of the ordinary shares of Fazli Company. On that date, Fazlis
On January 1, Year 4, Cyrus Inc. paid $927,000 in cash to acquire all of the ordinary shares of Fazli Company. On that date, Fazlis retained earnings were $213,000. All of Fazlis assets and liabilities had fair values equal to carrying amounts except for an investment in bonds, which was worth $13,156 more than carrying amount and will mature on December 31, Year 8. The recoverable amount for goodwill was $80,000 at the end of Years 4 and 5.
In Year 4, Cyrus reported net income from its own operations (exclusive of any income from Fazli) of $138,000 and declared no dividends. In Year 4, Fazli reported net income of $103,000 and paid a $53,000 cash dividend. Cyrus uses the cost method to report its investment in Fazli and uses the effective interest method to amortize premiums or discounts on investment in bonds. The amortization of the acquisition differential pertaining to the investment in bonds was $2,617 in Year 4 and $2,636 in Year 5.
The financial statements for Cyrus and Fazli for the year ended December 31, Year 5, were as follows:
Cyrus | Fazli | ||||||
Revenues and investment income | $ | 1,058,000 | $ | 974,000 | |||
Expenses | (778,000 | ) | (814,000 | ) | |||
Profit | $ | 280,000 | $ | 160,000 | |||
Retained earnings, 1/1/Year 5 | $ | 944,000 | $ | 315,000 | |||
Profit | 280,000 | 160,000 | |||||
Dividends paid | (117,000 | ) | (55,000 | ) | |||
Retained earnings, 12/31/Year 5 | $ | 1,107,000 | $ | 420,000 | |||
Equipment (net) | $ | 844,000 | $ | 420,000 | |||
Investment in Fazli | 927,000 | 0 | |||||
Investment in bonds | 0 | 328,000 | |||||
Receivables and inventory | 544,000 | 614,000 | |||||
Cash | 185,000 | 217,000 | |||||
Total assets | $ | 2,500,000 | $ | 1,579,000 | |||
Ordinary shares | $ | 688,000 | $ | 588,000 | |||
Retained earnings | 1,107,000 | 420,000 | |||||
Liabilities | 705,000 | 571,000 | |||||
Total equities and liabilities | $ | 2,500,000 | $ | 1,579,000 | |||
Required:
(a) Prepare a schedule of changes to the acquisition differential for Years 4 and 5. (Leave no cells blank - be certain to enter "0" wherever required. Negative/Deductible amounts should be indicated by a minus sign. Omit $ sign in your response.)
Balance | Balance | |||
Jan. 1 | Changes | Dec. 31 | ||
Year 4 | Year 4 | Year 5 | Year 5 | |
Investment in bonds | $ | $ | $ | $ |
Goodwill | ||||
$ | $ | $ | $ | |
(b) Calculate investment in bonds and goodwill for the consolidated balance sheet at the end of Year 5. (Omit $ sign in your response.)
Investment in bonds | $ |
Goodwill | $ |
(c) Calculate investment income from Fazli and investment in Fazli account balances for Cyruss separate entity financial statements for Year 5, assuming Cyrus uses the: (Omit $ sign in your response.)
(i) Cost method
Cost Method | |
Investment income from Fazli | $ |
Investment in Fazli | $ |
(ii) Equity method
Equity Method | |
Investment income from Fazli | $ |
Investment in Fazli | $ |
(d) Whether the parents method of accounting for its investment in Fazli affect the amount reported for expenses in its December 31, Year 5, consolidated income statement?
multiple choice 1
-
Yes
-
No
(e) Whether the parents method of accounting for its investment in Fazli affect the amount reported for investment in bonds in its December 31, Year 5, consolidated balance sheet?
multiple choice 2
-
Yes
-
No
(f) What is Cyruss January 1, Year 5, retained earnings account balance on its separate entity financial statements assuming Cyrus accounts for its investment in Fazli using the:
(i) Cost method?
(ii) Equity method?
(Omit $ sign in your response.)
Retained earnings | ||
(i) | Cost Method | $ |
(ii) | Equity Method | $ |
(g) What are consolidated retained earnings at January 1, Year 5, assuming Cyrus accounts for its investment in Fazli using the:
(i) Cost method?
(ii) Equity method?
(Omit $ sign in your response.)
Retained earnings | ||
(i) | Cost Method | $ |
(ii) | Equity Method | $ |
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