Question 2(30 marks)

PRIME Inc. purchased 80% of the common shares of SQUARE Inc. for $5,000,000 on January 1, 2017. On that date, SQUARE Inc.'s Common Shares and Retained Earnings were valued at $3,440,000 and $2,170,000 respectively.

SQUARE's fair values approximated its carrying values with the following exceptions:

• Inventory had a fair value $30,000 less than book value.
• Land was valued $370,000 more than book value.
• Equipment with a remaining life of 10 years had a fair value $270,000 less than book value. Patents with a market value of $470,000 and a remaining life of 5 years had been developed by SQUARE and were not on its balance sheet.
• A long-term liability had a fair value $170,000 more than book value. This liability was paid off during 2020.
• SQUARE'S accumulated depreciation on the date of acquisition was$370,000. Both companies use the straight-line depreciation method.
• During 2021, SQUARE paid dividends totalling $500,000.
• Both companies have an income tax rate of 40%.
• PRIME uses the FVE method and the cost method to account for its investment in SQUARE Inc.
• The Financial Statements of both companies for the Year endedDecember 31, 2021, are shown below.

TRU Open Learning

ACCT 4201: Advanced Financial Accounting

A2-5

Income Statements

PRIME Inc.

SQUARE Inc.

$4,400,000 2,400,000

2,900,000 200,000

200,000 $3,200,000

SQUARE Inc. $700,000 1,000,000 3,800,000

2,500,000

Sales $13,000,000

Other Revenues

Less: Expenses

Cost of Goods Sold Other Expenses

Income Tax Expense Net Income

Balance Sheets

1,800,000

10,100,000 200,000

200,000 $4,000,000

Depreciation and amortization

300,000

300,000

PRIME Inc. Cash $1,070,000 Accounts Receivable 1,360,000 Inventory 6,000,000 Investment in SQUARE Inc. 5,000,000 Land 6,000,000

TRU Open Learning

A2-6

Assignment 2

Plant and equipment

Accumulated depreciation Total Assets

Current Liabilities Deferred income tax Bonds Payable

Common Shares

Retained Earnings

Total Liabilities and Equity

Other Information:

20,200,000

(4,400,000) $35,230,000 $5,030,000 1,600,000 8,000,000 10,000,000 10,600,000 $35,230,000

13,200,000

(3,600,000) $17,600,000 $5,960,000 100,000 2,500,000 3,440,000 5,600,000 $17,600,000

During 2020, PRIME sold merchandise for $1,070,000 to SQUARE. On December31, 2020, SQUARE's inventory included $321,000 of these goods. During 2021,PRIME sold merchandise for $2,070,000 to SQUARE. On December 31, 2021,SQUARE's inventory included $621,000 of these goods.PRIMEprices its sales based on a 33 1/3% (thirty three and one third per cent) gross profit on sales.

During 2020, SQUARE sold merchandise for $870,000 to PRIME. On December31, 2020, PRIME's inventory included $170,000 of these goods.During 2021, SQUARE sold merchandise for $1,270,000 to PRIME. On December 31, 2021,PRIME's inventory included $570,000 of these goods. SQUARE prices its salesbased on a 40% gross profit on sales.

SQUARE owes PRIME $120,000 on account.

During 2021, SQUARE sold a plot of Land to PRIME for a gain of $470,000.

TRU Open Learning

ACCT 4201: Advanced Financial Accounting A2-7

Required:

a) Prepareallthecalculationsrequiredtoprepareconsolidatedfinancial statements.

1. Calculate the acquisition differential, goodwill, and NCI, and prepare the ADA table
2. Calculate unrealized inventory profits before and after tax
3. Calculate consolidated net income and the NCI share.
4. Calculate consolidated retained earnings and NCI Balance Sheet.

Calculations above are required in order to earn marks on part b). Assignments submitted without supporting calculations will receive zero for this question.

b) Prepareaconsolidatedincomestatementthatincludesasectionbelownet income attributing income to shareholders of PRIME and NCI shareholders. Prepare consolidated balance sheet for 2021. Prepare statements in good form.(30 marks)