QUESTION #1(48 MARKS)

PART A(41 MARKS)

On January 1^st. 2017, the X Company purchased 60% of the Y Company for $900,000. At this date the book values and fair values of Y were as follows:-

Book Value Fair Value

Cash..$ 300,000$300,000

Accounts receivable280,000..250,000

Inventory.. 320,000..360,000

Equipment (net) 700,000. 630,000

$1,600,000

Accounts Payable$ 240,000.$260,000

Long-term debt.. 120,000.200,000

Common Stock 800,000

Retained Earnings.. 440,000

$1,600,000

The 2021 financial statements of X& Y are as follows:-

X&Y Company

Balance Sheets

December 31^st. 2021

X..Y..

Cash..300,000240,000

Accounts Receivable780,000..300,000

Due from Y.105,000

Inventory..970,000.500,000

Investment in Y.900,000

Equipment(net)1,405,000.800,000

TOTAL ASSETS$4,460,000..$1,840,000

Accounts Payable.1,040,000..250,000

Due to X...105,000

Long-term liabilities. 600,000205,000

Common shares. 2,000,000800,000

Retained Earnings 820,000480,000

TOTAL LIABILITIES AND OWNERS EQUITY.$4,460,000$1,840,000

X&Y COMPANY

Statements of Income and Retained Earnings

Year ended December 31^st. 2021

XY.

Sales..$1,900,000..$1,000,000

Dividend Income.. 60,0000

Interest Income... 10,000..0

TOTAL REVENUE.$1,970,000$1,000,000

Cost of Goods Sold 1,200,000.....700,000

770,000.. 300,000

Expenses:-

Selling and administrative..200,000 50,000

Amortization. 80,000 40,000

Interest and other expenses 90,000.. 30,000

Income Tax expense.160,000. 72,000

NET INCOME. 240,000...108,000

Retained Earnings, January 1^st.2021 700,000...472,000

Dividends.(120,000).(100,000)

Retained Earnings, December 31^st. 2021$820,000.$480,000

Additional Information:-

i. As of January 1^st, 2017, the capital assets of Y had a remaining useful life of 10 years. The long -term debt matures in 5 years.

ii. Each year goodwill is evaluated to determine if there has been a permanent impairment.

Goodwill impairment was $70,000 in 2019, $60,000 in 2020 and $50,000 in 2021.

iii. During 2020, Y sold goods to X for $300,000. All goods sold by Y have a gross profit margin of 30% of the selling price. Of these goods, $200,000 still remained in the 2020 inventory of X. In 2021 Y sold $400,000 worth of goods to X. These remained in Xs ending inventory at December 31^st. 2021.

iv. Sales of finished goods from X to Y in 2020 totaled $88,000 and in 2021 $110,000. These goods were priced at a mark up of 10% on cost. In 2020 , 25% remained in inventory at the year and in 2021 it was 40%

v. On July 1^st. 2018, X sold a machine to Y for $150,000 cash and recognized a gain of $50,000. This machine had a remaining useful life of 5 years at the time of the sale.

vi. Both companies pay taxes at the rate of 40%.

Required:-

iii. Calculate the following amounts that would appear on Xs December 31^st. 2021 consolidated statement of income and retained earnings :-

a. Cost of goods sold(2.5 marks)

b. Amortization expense(2 marks)

c. Interest and other expenses(1.5 marks)

d. Retained Earnings(9 marks).