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On January 1, Year 4, XYZ Corp. bought 8,000 (80%) of the outstanding common shares of Sam Company for $70,000 cash. Sams shares were trading

On January 1, Year 4, XYZ Corp. bought 8,000 (80%) of the outstanding common shares of Sam Company for $70,000 cash. Sams shares were trading for $7 per share on the date of acquisition. On that date, Sam had $25,000 of common shares outstanding and $30,000 retained earnings. Also on that date, the carrying amount of each of Sams identifiable assets and liabilities was equal to its fair value except for the following:

Carrying Amount Fair Value
Inventory $ 50,000 $ 55,000
Patent 10,000 20,000

The patent had an estimated useful life of five years at January 1, Year 4, and the entire inventory was sold during Year 4. XYZ uses the cost method to account for its investment.

The following are the separate-entity financial statements of XYZ and Sam as at December 31, Year 7:

BALANCE SHEETS
At December 31, Year 7
XYZ Sam
Assets
Cash $ 5,000 $ 18,000
Accounts receivable 185,000 82,000
Inventory 310,000 100,000
Investment in Sam 70,000
Equipment, net 230,000 205,000
Patent, net 2,000
$ 800,000 $ 407,000
Liabilities and Shareholders Equity
Accounts payable $ 190,000 $ 195,000
Other accrued liabilities 60,000 50,000
Income taxes payable 80,000 72,000
Common shares 170,000 25,000
Retained earnings 300,000 65,000
$ 800,000 $ 407,000

INCOME STATEMENT
Year ended December 31, Year 7
XYZ Sam
Sales $ 900,000 $ 360,000
Cost of goods sold (340,000 ) (240,000 )
Gross margin 560,000 120,000
Distribution expense (30,000 ) (25,000 )
Other expenses (180,000 ) (56,000 )
Income tax expense (120,000 ) (16,000 )
Net income $ 230,000 $ 23,000

Additional Information

  • The recoverable amount for goodwill was determined to be $10,000 on December 31, Year 7. The goodwill impairment loss occurred in Year 7.
  • XYZs accounts receivable contains $30,000 owing from Sam.
  • Amortization expense is grouped with distribution expenses and impairment losses are grouped with other expenses.

Required:

(a) Calculate consolidated retained earnings at December 31, Year 7. (Input all values as positive numbers. Omit $ sign in your response.)

Calculation of consolidated retained earnings Dec 31, Year 7

Retained earnings XYZ $
Retained earnings Sam $
Retained earnings on acquisition
Increase $
XYZ's share %
Less: Changes to acquisition differential
$

(b) Prepare consolidated financial statements for Year 7. (Input all values as positive numbers.)

On January 1, Year 4, XYZ Corp. bought 8,000 (80%) of the outstanding common shares of Sam Company for $70,000 cash. Sams shares were trading for $7 per share on the date of acquisition. On that date, Sam had $25,000 of common shares outstanding and $30,000 retained earnings. Also on that date, the carrying amount of each of Sams identifiable assets and liabilities was equal to its fair value except for the following:

Carrying Amount Fair Value
Inventory $ 50,000 $ 55,000
Patent 10,000 20,000

The patent had an estimated useful life of five years at January 1, Year 4, and the entire inventory was sold during Year 4. XYZ uses the cost method to account for its investment.

The following are the separate-entity financial statements of XYZ and Sam as at December 31, Year 7:

BALANCE SHEETS
At December 31, Year 7
XYZ Sam
Assets
Cash $ 5,000 $ 18,000
Accounts receivable 185,000 82,000
Inventory 310,000 100,000
Investment in Sam 70,000
Equipment, net 230,000 205,000
Patent, net 2,000
$ 800,000 $ 407,000
Liabilities and Shareholders Equity
Accounts payable $ 190,000 $ 195,000
Other accrued liabilities 60,000 50,000
Income taxes payable 80,000 72,000
Common shares 170,000 25,000
Retained earnings 300,000 65,000
$ 800,000 $ 407,000

INCOME STATEMENT
Year ended December 31, Year 7
XYZ Sam
Sales $ 900,000 $ 360,000
Cost of goods sold (340,000 ) (240,000 )
Gross margin 560,000 120,000
Distribution expense (30,000 ) (25,000 )
Other expenses (180,000 ) (56,000 )
Income tax expense (120,000 ) (16,000 )
Net income $ 230,000 $ 23,000

Additional Information

  • The recoverable amount for goodwill was determined to be $10,000 on December 31, Year 7. The goodwill impairment loss occurred in Year 7.
  • XYZs accounts receivable contains $30,000 owing from Sam.
  • Amortization expense is grouped with distribution expenses and impairment losses are grouped with other expenses.

Required:

(a) Calculate consolidated retained earnings at December 31, Year 7. (Input all values as positive numbers. Omit $ sign in your response.)

Calculation of consolidated retained earnings Dec 31, Year 7

Retained earnings XYZ $
Retained earnings Sam $
Retained earnings on acquisition
Increase $
XYZ's share %
Less: Changes to acquisition differential
$

(b) Prepare consolidated financial statements for Year 7. (Input all values as positive numbers.)

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