On January 1, Year 8, Panet Company acquired 40,000 common shares of Saffer Corporation, a public company, for $500,000. This purchase represented 8% of the outstanding shares of Saffer. It was the intention of Panet to acquire more shares in the future in order to eventually gain control of Saffer.

On January 1, Year 10, Panet purchased an additional 135,000 common shares of Saffer for $1,890,000. Saffers shareholders equity section was as follows:

10% non-cumulative preferred shares	$	500,000
Common shares, no par value, 500,000 shares outstanding		3,000,000
Retained earnings		2,700,000

On this date, the fair values of Saffers assets were equal to carrying amounts, except for inventory, which was undervalued by $120,000, and land, which was undervalued by $1,000,000.

On January 1, Year 11, Panet purchased an additional 225,000 common shares of Saffer for $3,600,000. Saffers shares were trading on the open market for $15 per share on the date of acquisition. The shareholders equity section for Saffer was as follows:

10% non-cumulative preferred shares	$	500,000
Common shares, no par value, 500,000 shares outstanding		3,000,000
Retained earnings		3,200,000

On January 1, Year 11, the fair values of Saffers assets were equal to carrying amounts except for the following:

	Carrying Amount	Fair Value
Accounts receivable	$	230,000	$	166,400
Plant and equipment (net)		10,030,000		10,930,000
Long-term liabilities		2,030,000		2,230,000

The plant and equipment had a remaining useful life of 20 years. The long-term liabilities mature on December 31, Year 20.

The balance sheets as at December 31, Year 12, and the income statements for the year ending December 31, Year 12, for the two companies are as follows:

BALANCE SHEET
		Panet			Saffer
Assets:
Cash	$	506,000		$	194,000
Accounts receivable		2,415,000			309,000
Inventories		500,000			400,000
Plant and equipment (net)		10,640,000			9,030,000
Investment in Saffer		7,417,780
Land		5,470,000			1,000,000
Total assets	$	26,948,780		$	10,933,000
Liabilities:
Current liabilities	$	3,015,000		$	515,000
Long-term liabilities		4,015,000			2,015,000
Total liabilities	$	7,030,000		$	2,530,000
Shareholders equity:
10% non-cumulative preferred shares					500,000
Common shares		9,000,000			3,000,000
Retained earnings		10,918,780			4,903,000
		19,918,780			8,403,000
Total liabilities & shareholders equity	$	26,948,780		$	10,933,000

INCOME STATEMENT
		Panet			Saffer
Sales	$	15,300,000		$	9,300,000
Investment income from Saffer		1,416,780
		16,716,780			9,300,000
Cost of goods sold		9,180,000			5,580,000
Selling and administrative expense		2,506,000			536,000
Income tax		1,038,000			736,000
Other expenses		471,000			443,000
		(13,195,000)			(7,295,000)
Net income	$	3,521,780		$	2,005,000

Additional Information

• Dividends declared and paid during Year 12:

Panet	$	500,000
Saffer		250,000

• On January 1, Year 12, the inventory of Panet contained a $91,000 intercompany profit, and the inventory of Saffer contained an intercompany profit amounting to $181,000.
• During Year 12, Saffer sold inventory to Panet for $2,400,000 at a gross profit margin of 35%. Sales of $400,000 remained in Panets inventory at December 31, Year 12.
• During Year 12, Panet sold inventory to Saffer for $3,600,000 at a gross profit margin of 45%. Sales of $250,000 remained in Saffers inventory at December 31, Year 12.
• Saffer sold a piece of equipment to Panet on July 1, Year 12, for $480,000. At that time, the carrying amount of the equipment in Saffers books was $270,000, and it had a remaining useful life of 10.5 years. Panet still owes Saffer for 30% of the purchase price of the equipment. The gain on sale has been netted against other expenses in Saffers Year 12 income statement.
• Panet uses the equity method to account for its investment in Saffer. Both companies follow the straight-line method for depreciating plant and equipment, and for premiums or discounts on long-term liabilities.
• A goodwill impairment loss of $95,000 was recorded in Year 11, and a further loss of $61,000 occurred in Year 12. The impairment losses are to be applied at 80% to Panets shareholders and 20% to non-controlling interest.
• Depreciation expense is included with selling and administrative expenses, whereas goodwill impairment losses are included in other expenses.
• Assume a 40% tax rate.

Required:

(a) Prepare the following Year 12 consolidated financial statements:

(i) Income statement

(ii) Balance sheet

(b) Calculate goodwill impairment loss and non-controlling interest on the consolidated income statement for the year ended December 31, Year 12, under the identifiable net assets method. (Omit $ sign in your response.)

Goodwill impairment loss under identifiable net assets method	$
NCI on income statement under identifiable net assets method	$

(c) If Panet had used identifiable net assets method rather than the fair value enterprise method, how would this affect the debt-to-equity ratio at the end of Year 12?

multiple choice

Increases

Decreases

(d) Prepare the consolidated financial statements using the worksheet approach. (Input all amounts as positive values. For accounts where multiple adjusting entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet. Leave no cells blank - be certain to enter "0" wherever required. Omit $ sign in your response.)

CONSOLIDATED FINANCIAL STATEMENT WORKING PAPER
PANET COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, YEAR 12
			Entries
	Panet	Saffer	Dr.	Cr.	Consolidated
Income Statements - Year 12
Sales	$	$	$		$
Investment income from Saffer
Cost of goods sold
Selling and administrative expense
Income tax
Other expenses
Net income	$	$			$
Attributable to:
Non-controlling interest					$
Shareholders of Panet
Total
Retained Earnings Statements - Year 12
Balance, January 1	$	$			$
Profit
Dividends
Balance, December 31	$	$			$
Total
Balance Sheet, December 31, Year 12
Assets:
Cash	$	$			$
Accounts receivable
Inventories
Plant and equipment (net)
Investment in Saffer
Land
Goodwill
Deferred tax asset
Total assets	$	$			$
Liabilities:
Current liabilities	$	$			$
Long-term liabilities
Shareholders equity:
10% non-cumulative preferred shares
Common shares
Retained earnings
Non-controlling interest
Total liabilities and shareholders equity	$	$			$
			$	$