Questions 3 & 4: Comprehensive questions (48 marks) Q3: Prepare consolidated income statement for the year ended June 30, 2018 under the entity theory Q4: Prepare consolidated balance sheet as of June 30, 2018 under the entity theory Answers to Q3 and Q4 are based on the following information. Par Inc. purchased 75% of the 10,000 outstanding voting shares Sub Inc. had on July 1, 2017 for $750,000. On that day, the market price for Sub is $36 per share, its equipment had an average remaining useful life of 4 years from the date of acquisition (assuming cach piece of the equipment has a 4-year remaining useful life), its buildings had an average remaining useful life of 50 years, and its bank loan would mature on July 1, 2022. Both companies use straight line amortization for identifiable assets and liabilities, and no salvage values are assumed for assets. Par uses the cost method to account for its equity investments. Par and Sub both pay income tax at a rate of 40%. Par receives dividends only from Sub. The Balance Sheets of both companies, as well as Sub's fair market values on the date of acquisition are below: Par Inc. Sub Inc. Sub's Fair Value $500,000 $140,000 $ 60,000 $750,000 $150,000 $315,000 $ 85,000 $ 45,000 Cash Accounts Receivable Inventory Investment in Sub Inc Equipment (net) Buildings Goodwill Total Assets $315,000 $ 85,000 $ 40,000 $ 85,000 $200,000 $ 80,000 $105,000 10,000 $640,000 $1,600,000 Current Liabilities Bank Loan Common Shares Preferred Shares Retained Earnings Total Liabilities and Equity $280,000 $ 85,000 $100,000 $160,000 $700.000 $100,000 $540,000 $1,600,000 $280,000 $ 80,000 $185,000 $ 95,000 $640,000 The following are the trial financial statements for both companies for the fiscal year ended June 30, 2018: Income Statements: Sales Dividends income Cost of Goods Sold Depreciation Interest Expense Gain on Asset Disposal Other Expenses including tax Net Income Par Inc $800,000 $4250 $213.550 $ 30,000 S 12,500 $ 18,200 $530,000 Sub Inc. $300,000 $180,000 $ 21,000 $ 40,000 $ 1.000 $ 10,000 $ 50,000 Retained Earnings Statements Balance, July 1, 2017 Net Income Less: Dividends Balance, June 30, 2018 $ 540,000 S 530,000 (S 10,000) $1,060,000 $95,000 $50,000 ($ 5,000) $140,000 Balance Sheets Cash Accounts Receivable Investment in Sub Inventory Equipment (net) Buildings Goodwill Total Assets Par $ 507,500 $ 250,000 $ 855,000 $ 90,000 $ 767,500 Sub S465.000 $ 35,000 $ 40,000 $ 75,000 $ 105,000 $ 10,000 $ 730,000 $2,470,000 Current Liabilities Bank Loan Common Shares Preferred Shares Retained Earnings Total Liabilities and Equity $ 450,000 $160,000 $ 700,000 $ 100,000 $1,060,000 $2,470,000 $325,000 $ 80,000 $185,000 $140,000 $ 730,000 (Additional information is on the next page) 10 Additional information as below: 1. On Feb. 1. 2018, Par sold inventories to Sub for $80,000 with $65,000 being collected on the day of the sales and the remaining will be collected on August 1, 2018. As at June 30, 2018, 20% of the purchased inventories remained in the Sub's inventory account. 2. On March 1, 2018, Sub sold a piece of equipment to Par for $6,000 cash, and recorded a pre- tax gain of $1,000 as the result of this sale. 3. On May 1, 2018, Par acquired additional 1,000 Sub's shares for $105,000. 4. Sub declared dividends on June 10, 2018 Bonus (3 marks) On Jan. 1, 2019, Venturer A contributed an equipment to JV for a 47% Interest. The equipment has a fair value of $800,000 and a carrying value of $400,000 as well as 10 years remaining Life. Venturer B contributed technology with a fair value of $900,000 for a 53% interest in JV. Required: 1) Journal entry Venturer A should make on the day of investments. 2) Journal entry Venturer A should make On Dec 31, 2019. Questions 3 & 4: Comprehensive questions (48 marks) Q3: Prepare consolidated income statement for the year ended June 30, 2018 under the entity theory Q4: Prepare consolidated balance sheet as of June 30, 2018 under the entity theory Answers to Q3 and Q4 are based on the following information. Par Inc. purchased 75% of the 10,000 outstanding voting shares Sub Inc. had on July 1, 2017 for $750,000. On that day, the market price for Sub is $36 per share, its equipment had an average remaining useful life of 4 years from the date of acquisition (assuming cach piece of the equipment has a 4-year remaining useful life), its buildings had an average remaining useful life of 50 years, and its bank loan would mature on July 1, 2022. Both companies use straight line amortization for identifiable assets and liabilities, and no salvage values are assumed for assets. Par uses the cost method to account for its equity investments. Par and Sub both pay income tax at a rate of 40%. Par receives dividends only from Sub. The Balance Sheets of both companies, as well as Sub's fair market values on the date of acquisition are below: Par Inc. Sub Inc. Sub's Fair Value $500,000 $140,000 $ 60,000 $750,000 $150,000 $315,000 $ 85,000 $ 45,000 Cash Accounts Receivable Inventory Investment in Sub Inc Equipment (net) Buildings Goodwill Total Assets $315,000 $ 85,000 $ 40,000 $ 85,000 $200,000 $ 80,000 $105,000 10,000 $640,000 $1,600,000 Current Liabilities Bank Loan Common Shares Preferred Shares Retained Earnings Total Liabilities and Equity $280,000 $ 85,000 $100,000 $160,000 $700.000 $100,000 $540,000 $1,600,000 $280,000 $ 80,000 $185,000 $ 95,000 $640,000 The following are the trial financial statements for both companies for the fiscal year ended June 30, 2018: Income Statements: Sales Dividends income Cost of Goods Sold Depreciation Interest Expense Gain on Asset Disposal Other Expenses including tax Net Income Par Inc $800,000 $4250 $213.550 $ 30,000 S 12,500 $ 18,200 $530,000 Sub Inc. $300,000 $180,000 $ 21,000 $ 40,000 $ 1.000 $ 10,000 $ 50,000 Retained Earnings Statements Balance, July 1, 2017 Net Income Less: Dividends Balance, June 30, 2018 $ 540,000 S 530,000 (S 10,000) $1,060,000 $95,000 $50,000 ($ 5,000) $140,000 Balance Sheets Cash Accounts Receivable Investment in Sub Inventory Equipment (net) Buildings Goodwill Total Assets Par $ 507,500 $ 250,000 $ 855,000 $ 90,000 $ 767,500 Sub S465.000 $ 35,000 $ 40,000 $ 75,000 $ 105,000 $ 10,000 $ 730,000 $2,470,000 Current Liabilities Bank Loan Common Shares Preferred Shares Retained Earnings Total Liabilities and Equity $ 450,000 $160,000 $ 700,000 $ 100,000 $1,060,000 $2,470,000 $325,000 $ 80,000 $185,000 $140,000 $ 730,000 (Additional information is on the next page) 10 Additional information as below: 1. On Feb. 1. 2018, Par sold inventories to Sub for $80,000 with $65,000 being collected on the day of the sales and the remaining will be collected on August 1, 2018. As at June 30, 2018, 20% of the purchased inventories remained in the Sub's inventory account. 2. On March 1, 2018, Sub sold a piece of equipment to Par for $6,000 cash, and recorded a pre- tax gain of $1,000 as the result of this sale. 3. On May 1, 2018, Par acquired additional 1,000 Sub's shares for $105,000. 4. Sub declared dividends on June 10, 2018 Bonus (3 marks) On Jan. 1, 2019, Venturer A contributed an equipment to JV for a 47% Interest. The equipment has a fair value of $800,000 and a carrying value of $400,000 as well as 10 years remaining Life. Venturer B contributed technology with a fair value of $900,000 for a 53% interest in JV. Required: 1) Journal entry Venturer A should make on the day of investments. 2) Journal entry Venturer A should make On Dec 31, 2019