Question 2 (30 points, 70 Minutes) Pippen Corporation ("Pippen") owns 80% of the outstanding voting shares of Scottie Corporation ("Scottie), having acquired its interest January 1, 2017 for $100,000. At the time of the acquisition, Scottie Corporation had a shareholders' equity totaling $50,000, made up of retained earnings of $30,000 and common shares of $20,000. The following accounts had fair values higher (or lower) than its carrying values: Accounts payable fair value is $10,000 higher than carrying value. Equipment fair value is $40,000 higher than carrying value. Brand fair value is $20,000 higher than carrying value. The equipment had a remaining useful life at the time of acquisition of five years. The brand has an indefinite useful life. Pippen Corporation accounts for its investment in Scottie Corporation using the cost method. Income Statement Year Ended December 31, 2020 Scottie $300,000 20,000 Sales Gain on sale of land Dividend income Total revenue Pippen $600,000 0 40.000 640,000 380,000 38,000 164.000 582,000 $58.000 Cost of goods sold Income tax expense Operating expenses Total expenses Net Income 320,000 134,000 42,000 80,000 256,000 $64.000 Statement of Changes in Equity-Partial-Retained Earnings Section Year Ended December 31, 2020 Opening retained earnings Net income Dividends Ending retained earnings Pippen $400,000 58,000 (100,000) $358,000 Scottie $100,000 64,000 (40,000) $124,000 Additional Information: 1. Scottie had reported a gain of $20,000, relating to land sold to Pippen on January 1, 2020. This land had not been owned on January 1, 2017. 2. There were no goodwill impairment losses recorded from 2017-2019. 3. Scottie was identified to be its own separate CGU. Carrying value of CGU December 31, 2020 = $130,000 Fair Value of CGU December 31, 2020 = $125,000 Value in Use of CGU December 31, 2020 = $120,000 Cost to sell = 3% of fair value 4. Intercompany sales and inventory data for 2019 and 2020 (Inventory remaining presented below as grossed up value): 2019 2020 Sales by Pippen to Scottie $40,000 $60,000 Inventory remaining $20,000 $40,000 Sales by Scottie to Pippen $50,000 $50,000 Inventory remaining $10,000 $35,000 Profit margins on sales by Pippen to Scottie are 40%. Profit margins on sales by Scottie to Pippen are at 30%. 5. Both companies have a tax rate of 40%. Required - (Please use the Fair Value Enterprise Method (Entity Method) for the below) A) Prepare the purchase price allocation. (4 points) B) Calculate the goodwill impairment loss for the year ended December 31, 2020. Please explain the methodology for your calculation using IFRS terminology (in 1-2 sentences) (3 Points) C) Prepare the amortization of the acquisition differential schedule as at December 31, 2020. Please show movements from January 1, 2017 to December 31, 2020. (3 Points) For parts D-F, calculate the balances as they would appear on the consolidated income statement for the year ended December 31, 2020: D) Revenue (All revenue line items, show each consolidated line item separately) (3 Points) E) Cost of goods sold (5 Points) F) Net income attributable to controlling Interest (8 Points) G) Assuming Pippen has land of $300,000 and Scottie has land of $100,000 as at December 31, 2020, calculate the consolidated land that would appear on the consolidated statement of financial position as at December 31, 2020. (2 Points) H) Now assume that Pippen uses the equity method to account for its investment in Scottie. What would be the net income recorded by Pippen on its standalone financial statements using the equity method? Please explain your answer in 1-2 sentences (2 points) Question 2 (30 points, 70 Minutes) Pippen Corporation ("Pippen") owns 80% of the outstanding voting shares of Scottie Corporation ("Scottie), having acquired its interest January 1, 2017 for $100,000. At the time of the acquisition, Scottie Corporation had a shareholders' equity totaling $50,000, made up of retained earnings of $30,000 and common shares of $20,000. The following accounts had fair values higher (or lower) than its carrying values: Accounts payable fair value is $10,000 higher than carrying value. Equipment fair value is $40,000 higher than carrying value. Brand fair value is $20,000 higher than carrying value. The equipment had a remaining useful life at the time of acquisition of five years. The brand has an indefinite useful life. Pippen Corporation accounts for its investment in Scottie Corporation using the cost method. Income Statement Year Ended December 31, 2020 Scottie $300,000 20,000 Sales Gain on sale of land Dividend income Total revenue Pippen $600,000 0 40.000 640,000 380,000 38,000 164.000 582,000 $58.000 Cost of goods sold Income tax expense Operating expenses Total expenses Net Income 320,000 134,000 42,000 80,000 256,000 $64.000 Statement of Changes in Equity-Partial-Retained Earnings Section Year Ended December 31, 2020 Opening retained earnings Net income Dividends Ending retained earnings Pippen $400,000 58,000 (100,000) $358,000 Scottie $100,000 64,000 (40,000) $124,000 Additional Information: 1. Scottie had reported a gain of $20,000, relating to land sold to Pippen on January 1, 2020. This land had not been owned on January 1, 2017. 2. There were no goodwill impairment losses recorded from 2017-2019. 3. Scottie was identified to be its own separate CGU. Carrying value of CGU December 31, 2020 = $130,000 Fair Value of CGU December 31, 2020 = $125,000 Value in Use of CGU December 31, 2020 = $120,000 Cost to sell = 3% of fair value 4. Intercompany sales and inventory data for 2019 and 2020 (Inventory remaining presented below as grossed up value): 2019 2020 Sales by Pippen to Scottie $40,000 $60,000 Inventory remaining $20,000 $40,000 Sales by Scottie to Pippen $50,000 $50,000 Inventory remaining $10,000 $35,000 Profit margins on sales by Pippen to Scottie are 40%. Profit margins on sales by Scottie to Pippen are at 30%. 5. Both companies have a tax rate of 40%. Required - (Please use the Fair Value Enterprise Method (Entity Method) for the below) A) Prepare the purchase price allocation. (4 points) B) Calculate the goodwill impairment loss for the year ended December 31, 2020. Please explain the methodology for your calculation using IFRS terminology (in 1-2 sentences) (3 Points) C) Prepare the amortization of the acquisition differential schedule as at December 31, 2020. Please show movements from January 1, 2017 to December 31, 2020. (3 Points) For parts D-F, calculate the balances as they would appear on the consolidated income statement for the year ended December 31, 2020: D) Revenue (All revenue line items, show each consolidated line item separately) (3 Points) E) Cost of goods sold (5 Points) F) Net income attributable to controlling Interest (8 Points) G) Assuming Pippen has land of $300,000 and Scottie has land of $100,000 as at December 31, 2020, calculate the consolidated land that would appear on the consolidated statement of financial position as at December 31, 2020. (2 Points) H) Now assume that Pippen uses the equity method to account for its investment in Scottie. What would be the net income recorded by Pippen on its standalone financial statements using the equity method? Please explain your answer in 1-2 sentences (2 points)