QUESTION1

On January 1, 2017, Pinehurst Corporation, parent company purchased 85% of the outstanding shares of Sand Hill Company for $3,000,000.At that date, the book values and fair values of Sand Hill's assets and liabilities were as follows:

SAND HILL COMPANY

January 1, 2017

Book ValueFair Value

Cash$200,000$200,000

Accounts receivable600,000600,000

Inventory1,100,0001,200,000

Property, plant and equipment, net3,000,0002,800,000

Patent0 _50,000

$4,900,000$4,850,000

Accounts payable$600,000$500,000

Bonds payable800,000800,000

Common shares2,000,000

Retained earnings1,500,000

$4,900,000

Pinehurst uses the cost method to account for its investment in Sand Hill.The companies' balance sheets and income statements at December 31, 2020 were as follows:

PINEHURST CORPORATION AND SAND HILL COMPANY

Balance Sheets

December 31, 2020

PINEHURSTSAND HILL

Cash$400,000$450,000

Accounts receivable600,000850,000

Inventory1,500,0001,100,000

Property, plant and equipment4,400,0003,000,000

Accumulated Amortization(1,000,000)(500,000)

Investment in Sand Hill Company3,000,000_

$8,900,000$4,900,000

Accounts payable$500,000$300,000

Bonds payable800,000800,000

Common shares3,000,0002,000,000

Retained earnings4,600,0001,800,000

$8,900,000$4,900,000

PINEHURST CORPORATION AND SAND HILL COMPANY

Income Statements and Retained Earnings

year ended December 31, 2020

PINEHURSTSAND HILL

Sales$3,500,000$1,750,000

Dividend Revenue42,500--

Other Revenues100,00050,000

Total Revenues$3,642,500$1,800,000

Cost of Goods Sold2,400,0001,200,000

Gross Profit1,242,500600,000

Selling and administrative expenses204,00084,000

Bond Interest expense46,00056,000

Amortization300,000160,000

Income Before Tax692,500300,000

Income taxes (30%)207,75060,000

Net income484,750210,000

Retained earnings Jan 1, 20204,190,2501,640,000

Dividends75,00050,000

Retained earnings Dec 31, 2020$4,600,000$1,800,000

Additional Information

1.Property, plant and equipment (PPE) items held by Sand Hill as of January 1, 2017 are being amortized over their useful life of 10 years.Inventory held by Sand Hill as of January 1, 2017 was sold by September 1, 2017.The patent had an estimated useful life of 20 years at January 1, 2017.

2.During 2019 and 2020, the fair value of goodwill declined by $15,000 and $25,000, respectively.The fair value of goodwill was not impaired prior to 2019.

3.In 2019, Sand Hill sold Pinehurst inventory for $90,000.Sand Hill sold the inventory at a 25% gross profit.Similarly, in 2020 Sand Hill sold Pinehurst inventory for $75,000, at a 25% gross profit.As of December 31, 2019 and 2020, one-half of the inventory remained in Pinehurst's inventory.

4.During 2020 Pinehurst sold merchandise that had been purchased for $125,000 to Sand Hill for $200,000.All of this merchandise remained in the December 31 inventory of Sand Hill.Half of the goods purchased remained unpaid at December 31, 2020.

5.The $50,000 "Other Revenues" for Sand Hill related to Sand Hill selling land to an unrelated party on April 1, 2020.Pinehurst had previously sold Sand Hill the land for proceeds of $100,000 on July 1, 2019, when the land had a cost of $75,000.

Other Revenues reported by Pinehurst in 2020 includes $50,000 management fees charged to Sand Hill.Sand Hill included this amount in selling and admin expenses.

7.On January 1, 2019 Pinehurst sold Sand Hill equipment with a book value of $450,000 for $525,000.The equipment originally cost Pinehurst $630,000.It had a remaining life of five years at the date of the inter-company sale.

8.Both parties pay taxes at a rate of 30%.

REQUIRED:

a.Calculate goodwill relating to the acquisition of Sand Hill on January 1, 2017 (2 marks) and prepare a acquisition differential amortization schedule to December 31, 2020. (2 marks)Use the entity theory for calculations.

b.Summarize inter-company revenues and expenses (eliminations).

Summarize inter-company unrealized profits and losses before and after tax for all years. (8 marks)

c.Prepare a Consolidated Income Statement for the year ended December 31, 2020. (14 marks)

d.Prepare a Consolidated Balance Sheet as at December 31, 2020 (14 marks)

Show supporting calculations for Non-Controlling Interest and Retained Earnings at Dec. 31, 2020.

(14 marks)