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Posted on Jul 16, 2024

Question 2 (80 points) HANOVER, plc purchased 66 2/3% of the voting shares of STEWART Inc for 750,000 on January 3, 2016. On that date,

Question 2 (80 points) HANOVER, plc purchased 66 2/3% of the voting shares of STEWART Inc for 750,000 on January 3, 2016. On that date, STEWART, ple's Common Shares and Retained Earnings were valued at 300,000 and 150,000 respectively. HANOVER uses the cost method to account for its investment in STEWART, plc STEWART's fair values approximated its carrying values with the following exception: STEWART's bonds payable had a fair value which was 57,000 higher than their carrying value. The bonds payable mature on December 31, 2025. Both companies use straight line amortization exclusively, The Financial Statements of both companies for the Year ended December 31, 2020 are shown below: Income Statements HANOVER, plc 750,000 150,000 STEWART, plc 600,000 90,000 Sales Other Revenues Less: Expenses Cost of Goods Sold Depreciation Expense Other Expenses Income Tax Expense Net Income 600,000 30,000 90,000 72,000 108,000 480,000 15,000 45,000 60,000 90,000 Retained Earnings Statements Balance, July 1, 2019 Net Income Less: Dividends Retained Earnings, June 30, 2020 HANOVER, plc 300,000 108,000 -33.000 375,000 STEWART, plc 360,000 90,000 -45,000 405,000 Balance Sheets HANOVER, plc 225,000 525.000 300,000 750,000 60,000 540,000 2,400,000 STEWART, plc 180,000 240,000 270,000 Cash Accounts Receivable Inventory Investment in STEWART, plc Land Equipment (net) Total Assets 360.000 1,050,000 Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity Other Information: 900,000 375,000 750,000 375,000 2,400,000 195,000 150,000 300,000 405,000 1,050,000 At the end of 2020, HANOVER assessed that the goodwill of STEWART was impaired by 73,000 due to declining profitability. 6 9 At the end of 2020, HANOVER assessed that the goodwill of STEWART was impaired by 73,000 due to declining profitability During 2019: HANOVER sold 90,000 worth of Inventory to STEWART, one-third of which was sold to outsiders during the year. STEWART sold 135.000 worth of inventory to HANOVER, 60% of which was sold to outsiders during the year, During 2020 HANOVER sold inventory to STEWART for 135,000 of which 80% was resold by STEWART to outside parties later that year, STEWART sold inventory to HANOVER for 180,000. Two-thirds of this inventory was resold by STEWART to outside parties in May. On March 15, 2020, STEWART sold a plot of Land to HANOVER for 60,000. The land was recorded at cost of 36,000 on STEWART's books prior to the sale. HANOVER has not yet sold the land. All intercompany sales as well as sales to outsiders are priced to generate a 45% gross profit. The effective tax rate for both companies is 33 1/3%. . REQUIRED 1. Calculate HANOVER's Consolidated Balance Sheet Goodwill at the date of acquisition. 2. Calculate realized and unrealized profits for the fiscal year ended December 31, 2020 for both companies. Show your figures before and after tax. 3. Prepare HANOVER's Consolidated Income Statement for the Year ended December 31, 2020. Show the attribution of the consolidated net income between the controlling and non-controlling interests. 4. Calculate the non-controlling interest (Balance Sheet) as at December 31, 2020. 5. Calculate Consolidated Retained Earnings as at December 31, 2020, Question 2 (80 points) HANOVER, plc purchased 66 2/3% of the voting shares of STEWART Inc for 750,000 on January 3, 2016. On that date, STEWART, ple's Common Shares and Retained Earnings were valued at 300,000 and 150,000 respectively. HANOVER uses the cost method to account for its investment in STEWART, plc STEWART's fair values approximated its carrying values with the following exception: STEWART's bonds payable had a fair value which was 57,000 higher than their carrying value. The bonds payable mature on December 31, 2025. Both companies use straight line amortization exclusively, The Financial Statements of both companies for the Year ended December 31, 2020 are shown below: Income Statements HANOVER, plc 750,000 150,000 STEWART, plc 600,000 90,000 Sales Other Revenues Less: Expenses Cost of Goods Sold Depreciation Expense Other Expenses Income Tax Expense Net Income 600,000 30,000 90,000 72,000 108,000 480,000 15,000 45,000 60,000 90,000 Retained Earnings Statements Balance, July 1, 2019 Net Income Less: Dividends Retained Earnings, June 30, 2020 HANOVER, plc 300,000 108,000 -33.000 375,000 STEWART, plc 360,000 90,000 -45,000 405,000 Balance Sheets HANOVER, plc 225,000 525.000 300,000 750,000 60,000 540,000 2,400,000 STEWART, plc 180,000 240,000 270,000 Cash Accounts Receivable Inventory Investment in STEWART, plc Land Equipment (net) Total Assets 360.000 1,050,000 Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity Other Information: 900,000 375,000 750,000 375,000 2,400,000 195,000 150,000 300,000 405,000 1,050,000 At the end of 2020, HANOVER assessed that the goodwill of STEWART was impaired by 73,000 due to declining profitability. 6 9 At the end of 2020, HANOVER assessed that the goodwill of STEWART was impaired by 73,000 due to declining profitability During 2019: HANOVER sold 90,000 worth of Inventory to STEWART, one-third of which was sold to outsiders during the year. STEWART sold 135.000 worth of inventory to HANOVER, 60% of which was sold to outsiders during the year, During 2020 HANOVER sold inventory to STEWART for 135,000 of which 80% was resold by STEWART to outside parties later that year, STEWART sold inventory to HANOVER for 180,000. Two-thirds of this inventory was resold by STEWART to outside parties in May. On March 15, 2020, STEWART sold a plot of Land to HANOVER for 60,000. The land was recorded at cost of 36,000 on STEWART's books prior to the sale. HANOVER has not yet sold the land. All intercompany sales as well as sales to outsiders are priced to generate a 45% gross profit. The effective tax rate for both companies is 33 1/3%. . REQUIRED 1. Calculate HANOVER's Consolidated Balance Sheet Goodwill at the date of acquisition. 2. Calculate realized and unrealized profits for the fiscal year ended December 31, 2020 for both companies. Show your figures before and after tax. 3. Prepare HANOVER's Consolidated Income Statement for the Year ended December 31, 2020. Show the attribution of the consolidated net income between the controlling and non-controlling interests. 4. Calculate the non-controlling interest (Balance Sheet) as at December 31, 2020. 5. Calculate Consolidated Retained Earnings as at December 31, 2020