Question 14 (28 points) On January 1, Year 2, LINGUINI Ltd. acquired 90 percent of FUSILLI Inc. when FUSILLI's retained earnings were $900,000. The carrying values of each of Fusilli's identifiable assets and liabilities were equal to their fair values except for a piece of machinery with a carrying value and fair value of $70,000 and $90,000 respectively. As at January 1, Year 2, the machinery had an estimated useful life of 10 years. LINGUINI accounts for its investment under the cost method. FUSILLI sells inventory to LINGUINI on a regular basis at a markup of 30 percent of selling price. The intercompany sales were $150,000 in Year 2 and $180,000 in Year 3. The total amount owing by LINGUINI related to these intercompany sales was $50,000 at the end of Year 2 and $40,000 at the end of Year 3. On January 1, Year 3, the inventory of LINGUINI contained goods purchased from FUSILLI amounting to $60,000, while the December 31, Year 3, inventory contained goods purchased from FUSILLI amounting to $70,000. Both companies pay income tax at the rate of 40 percent. Selected account balances from the records of LINGUINI and FUSILLI for the year ended December 31, Year 3, were as follows: Inventory Machinery and Equipment Accounts Payable Opening Retained Earnings Revenues Cost of Sales Depreciation Provision for income taxes LINGUINI $500,000 326,000 600,000 2,400,000 4,000,000 3,100,000 35,000 80,000 FUSILLI $300,000 160,000 320,000 1,100,000 2,500,000 1,700,000 20,000 50,000 Required: Required: a) Determine the amount to report on the Year 3 consolidated financial statements for the above noted accounts. (25 marks) b) Explain (with calculations) how non-controlling interest on the Year 3 consolidated income statement and Year 3 consolidated balance sheet will be affected by the intercompany transactions noted above. (3 marks) Question 14 (28 points) On January 1, Year 2, LINGUINI Ltd. acquired 90 percent of FUSILLI Inc. when FUSILLI's retained earnings were $900,000. The carrying values of each of Fusilli's identifiable assets and liabilities were equal to their fair values except for a piece of machinery with a carrying value and fair value of $70,000 and $90,000 respectively. As at January 1, Year 2, the machinery had an estimated useful life of 10 years. LINGUINI accounts for its investment under the cost method. FUSILLI sells inventory to LINGUINI on a regular basis at a markup of 30 percent of selling price. The intercompany sales were $150,000 in Year 2 and $180,000 in Year 3. The total amount owing by LINGUINI related to these intercompany sales was $50,000 at the end of Year 2 and $40,000 at the end of Year 3. On January 1, Year 3, the inventory of LINGUINI contained goods purchased from FUSILLI amounting to $60,000, while the December 31, Year 3, inventory contained goods purchased from FUSILLI amounting to $70,000. Both companies pay income tax at the rate of 40 percent. Selected account balances from the records of LINGUINI and FUSILLI for the year ended December 31, Year 3, were as follows: Inventory Machinery and Equipment Accounts Payable Opening Retained Earnings Revenues Cost of Sales Depreciation Provision for income taxes LINGUINI $500,000 326,000 600,000 2,400,000 4,000,000 3,100,000 35,000 80,000 FUSILLI $300,000 160,000 320,000 1,100,000 2,500,000 1,700,000 20,000 50,000 Required: Required: a) Determine the amount to report on the Year 3 consolidated financial statements for the above noted accounts. (25 marks) b) Explain (with calculations) how non-controlling interest on the Year 3 consolidated income statement and Year 3 consolidated balance sheet will be affected by the intercompany transactions noted above
