Question
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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