QUESTION 1 (40 marks) On January 1, 2017, Picasso Corporation, parent company purchased 70% of the outstanding shares of Monet Company for $2,600,000. At that date, the book values and fair values of Monets assets and liabilities were as follows: MONET COMPANY January 1, 2017 Book Value Fair Value Cash $ 200,000 $ 200,000 Accounts receivable 600,000 600,000 Inventory 1,100,000 1,200,000 Property, plant and equipment, net 3,000,000 2,800,000 Patent 0 _ 50,000 $4,900,000 $4,850,000 Accounts payable $ 500,000 $ 500,000 Bonds payable 800,000 800,000 Common shares 2,000,000 Retained earnings 1,600,000 $4,900,000 Picasso uses the cost method to account for its investment in Monet. The companies balance sheets and income statements at December 31, 2020 were as follows: PICASSO CORPORATION AND MONET COMPANY Balance Sheets December 31, 2020 PICASSO MONET _ Cash $ 400,000 $ 450,000 Accounts receivable 1,000,000 850,000 Inventory 1,500,000 1,100,000 Property, plant and equipment 4,400,000 3,000,000 Accumulated Amortization (1,000,000) (500,000) Investment in Monet Company 2,600,000 _ $8,900,000 $4,900,000 Accounts payable $ 500,000 $ 300,000 Bonds payable 800,000 800,000 Common shares 3,000,000 2,000,000 Retained earnings 4,600,000 1,800,000 $8,900,000 $4,900,000 QUESTION 1 (continued) PICASSO CORPORATION AND MONET COMPANY Income Statements and Retained Earnings year ended December 31, 2020 PICASSO MONET _ Sales $3,500,000 $1,750,000 Dividend Revenue 35,000 -- Other Revenues 100,000 50,000 Total Revenues $3,635,000 $1,800,000 Cost of Goods Sold 2,400,000 1,300,000 Gross Profit 1,235,000 500,000 Selling and administrative expenses 204,000 84,000 Bond Interest expense 46,000 56,000 Amortization 300,000 160,000 Income Before Tax 685,000 200,000 Income taxes (30%) 205,500 60,000 Net income 479,500 140,000 Retained earnings Jan 1, 2020 4,195,500 1,710,000 Dividends 75,000 50,000 Retained earnings Dec 31, 2020 $4,600,000 $1,800,000 Additional Information 1. Property, plant and equipment (PPE) items held by Monet as of January 1, 2017 are being amortized over their useful life of 10 years. Inventory held by Monet as of January 1, 2017 was sold by September 1, 2017. The patent had an estimated useful life of 20 years at January 1, 2017. 2. During 2019 and 2020, the fair value of goodwill declined by $10,000 and $20,000, respectively. The fair value of goodwill was not impaired prior to 2019. 3. In 2019, Monet sold Picasso inventory for $90,000. Monet sold the inventory at a 25% gross profit. Similarly, in 2020 Monet sold Picasso inventory for $75,000, at a 25% gross profit. As of December 31, 2019 and 2020, one-half of the inventory remained in Picassos inventory. 4. During 2020 Picasso sold merchandise that had been purchased for $125,000 to Monet for $250,000. All of this merchandise remained in the December 31 inventory of Monet. Half of the goods purchased remained unpaid at December 31, 2020. 5. The $50,000 Other Revenues for Monet related to Monet selling land to an unrelated party on April 1, 2020. Picasso had previously sold Monet the land for proceeds of $100,000 on July 1, 2019, when the land had a cost of $80,000. QUESTION 1 (continued) 6. Other Revenues reported by Picasso in 2020 includes $40,000 management fees charged to Monet. Monet included this amount in selling and admin expenses. 7. On January 1, 2019 Picasso sold Monet equipment with a book value of $450,000 for $500,000. The equipment originally cost Picasso $630,000. It had a remaining life of five years at the date of the inter-company sale. 8. Both parties pay taxes at a rate of 30%. REQUIRED: a. Calculate goodwill relating to the acquisition of Monet on January 1, 2017 (2 marks) and prepare a acquisition differential amortization schedule to December 31, 2020. (2 marks) Use the entity theory for calculations. b. Summarize inter-company revenues and expenses (eliminations). Summarize inter-company unrealized profits and losses before and after tax for all years. (8 marks) c. Prepare a Consolidated Income Statement for the year ended December 31, 2020. (14 marks) d. Prepare a Consolidated Balance Sheet as at December 31, 2020 (14 marks) Show supporting calculations for Non-Controlling Interest and Retained Earnings at Dec. 31, 2020. (14 marks)