Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Paper Corp. purchased 70% of the outstanding shares of Sand Ltd. on January 1, Year 2, at a cost of $83,860. Paper has always used

Paper Corp. purchased 70% of the outstanding shares of Sand Ltd. on January 1, Year 2, at a cost of $83,860. Paper has always used the equity method to account for its investments. On January 1, Year 2, Sand had common shares of $50,000 and retained earnings of $26,000, and fair values were equal to carrying amounts for all its net assets, except inventory (fair value was $4,100 less than carrying amount) and equipment (fair value was $12,600 greater than carrying amount). The equipment, which is used for research, had an estimated remaining life of six years on January 1, Year 2.

The following are the financial statements of Paper Corp. and its subsidiary Sand Ltd. as at December 31, Year 5:

BALANCE SHEETS
At December 31, Year 5
Paper Sand
Cash $ $ 17,000
Accounts receivable 39,500 29,200
Note receivable 34,000
Inventory 75,500 47,500
Equipment (net) 255,000 79,500
Land 176,000 37,000
Investment in Sand 124,530
$ 670,530 $ 244,200
Bank indebtedness $ 133,495 $
Accounts payable 64,000 56,700
Notes payable 34,000
Common shares 150,000 50,000
Retained earnings 289,035 137,500
$ 670,530 $ 244,200

INCOME STATEMENTS
For the year ended December 31, Year 5
Paper Sand
Sales $ 826,000 $ 318,900
Management fee revenue 19,200
Equity method income from Sand 322
Interest income 3,400
Gain on sale of land 18,000
845,522 340,300
Cost of sales 495,600 212,600
Research and development expenses 43,500 14,800
Interest expense 15,600
Miscellaneous expenses 113,000 26,800
Income taxes 71,560 34,440
739,260 288,640
Net income $ 106,262 $ 51,660

Additional Information

  • During Year 5, Sand made a cash payment of $1,600 per month to Paper for management fees, which is included in Sands Miscellaneous expenses.
  • During Year 5, Paper made intercompany sales of $80,000 to Sand. The December 31, Year 5, inventory of Sand contained goods purchased from Paper amounting to $24,000. These sales had a gross profit of 35%.
  • On April 1, Year 5, Paper acquired land from Sand for $34,000. This land had been recorded on Sands books at a carrying amount of $16,000. Paper paid for the land by signing a $34,000 note payable to Sand, bearing yearly interest at 10%. Interest for Year 5 was paid by Paper in cash on December 31, Year 5. This land was still being held by Paper on December 31, Year 5.
  • The value of consolidated goodwill remained unchanged from January 1, Year 2, to July Year 5. On July 1, Year 5, a valuation was performed, indicating that the recoverable amount of consolidated goodwill was $4,200.
  • During the year ended December 31, Year 5, Paper paid dividends of $80,000 and Sand paid dividends of $20,000.
  • Sand and Paper pay taxes at a 40% rate. Assume that none of the gains or losses were capital gains or losses.

Required:

(a) Prepare, in good form, a calculation of goodwill and any undepleted acquisition differential as of December 31, Year 5. (Negative amounts should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Omit $ sign in your response.)

Balance Changes to Balance
January 1, Year 2 Year 2-4 Year 5 Dec. 31, Year 5
Inventory $ $ $ $
Equipment
Goodwill
$ $ $ $

(b) Prepare Papers consolidated income statement for the year ended December 31, Year 5, with expenses classified by function. (Round your answer to nearest whole dollar.)

(c) Calculate the following balances that would appear on Papers consolidated balance sheet as at December 31, Year 5: (Leave no cells blank - be certain to enter "0" wherever required. Omit $ sign in your response.)

(i) Inventory

Inventory $

(ii) Land

Land $

(iii) Notes payable

Notes payable $

(iv) Non-controlling interest

Non-controlling interest $

(v) Common shares

Common shares $

(d) Assume that an independent business valuator valued the non-controlling interest at $33,150 at the date of acquisition. Calculate goodwill impairment loss and profit attributable to non-controlling interest for the year ended December 31, Year 5. (Omit $ sign in your response.)

Goodwill impairment loss $
Profit attributable to non-controlling interest $

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Auditing A Risk Based Approach to Conducting a Quality Audit

Authors: Karla Johnstone, Audrey Gramling, Larry E. Rittenberg

10th edition

1305080572, 978-1305465664, 1305465660, 978-1305080577

More Books

Students also viewed these Accounting questions

Question

Unions are a big help to workers.

Answered: 1 week ago

Question

What are the units of the sample correlation coefficient?

Answered: 1 week ago