Problem 5-8 LO2, 3, 5 On January 1, Year 4, Cyrus Inc. paid $964,000 in cash to acquire all of the ordinary shares of Fazli Company. On that date, Fazli's retained earnings were $200,000. All of Fazli's assets and liabilities had fair values equal to carrying amounts except for an investment in bonds, which was worth $12,988 more than carrying amount and will mature on December 31, Year 8. The recoverable amount for goodwill was $220,000 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 $125,000 and declared no dividends. In Year 4, Fazli reported net income of $80,000 and paid a $30,000 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 $2,351 in Year 4 and $2,468 in Year 5. The financial statements for Cyrus and Fazli for the year ended December 31, Year 5, were as follows: Revenues and investment income Expenses Profit Cyrus $ 928,000 674,000 $ 254,000 254,000 (104,000) Profit Retained earnings, 1/1/Year 5 $ 814,000 Dividends paid Retained earnings, 12/31/Year 5 $ 964,000 Equipment (net) $ 714,000 Investment in Fazli Investment in bonds Receivables and inventory Cash Total assets Ordinary shares 914,000 414,000 94,000 $2,136,000 $ 558,000 964,000 Fazli $ 844,000 710,000 $ 134,000 $ 250,000 134,000 (42,000) $ 342,000 $ 314,000 300,000 484,000 152,000 $1,250,000 $ 484,000 342,000 Retained earnings Liabilities Total equities and liabilities Required 614,000 $2,136,000 424,000 $1,250,000 (a) Prepare a schedule to calculate, allocate, and show changes to the acquisition differential. Explain the rationale for the accounting treatment of the $50,000 attributed to the government contract. (b) Prepare the consolidated financial statements of Big as at June 30, Year 6. 288 CHAPTER 5 Consolidation Subsequent to Acquisition Date (c) Prepare a schedule showing the changes in non-controlling interest during the year. (d) Now assume that the market value of the shares held by the non-controlling interest at the date of acquisition was $25,000. Recalculate consolidated goodwill at the end of Year 6 and goodwill impairment loss for Year 6.