Task

4

Consolidation

On January 1, 2011, Parflex Corporation exchanged $344,000 cash for 90% of Eagle

Corporations outstanding voting stock. Eagles acquisition date balance sheet follows:

Cash and

receivables

$ 15,000

Liabilities

$ 76,000

Inventory

35,000

Common stock

150,000

Property and

equipment (net)

350,000

Retained earnings

174,000

$400,000

$400,000

On January 1, 2011, Parflex

prepared the following fair

-

value allocation schedule:

Consideration transferred by Parflex

$344,000

10% noncontrolling interest fair value

36,000

Fair value of Eagle

380,000

Book value of Eagle

324,000

Excess fair over book value

56,000

to

equipment (undervalued, remaining life of 9 years)

18,000

to goodwill (indefinite life)

$38,000

The companies financial statements for the year ending December 31, 2013, follow:

Parflex

Eagle

Sales

$ (862,000)

$(366,000)

Cost of goods sold

515,000

209,000

Depreciation expense

191,200

67,000

Equity in Eagles earnings

(79,200)

0

Separate company net income

$ (235,000)

$ (90,000)

Retained earnings 1/1

$ (500,000)

$(278,000)

Net income

(235,000)

(90,000)

Dividends paid

130,000

27,000

Retained earnings 12/31

$ (605,000)

$(341,000)

Cash and receivables

$ 135,000

$ 82,000

Inven

tory

255,000

136,000

Investment in Eagle

488,900

0

Property and equipment (net)

964,000

328,000

Total assets

$ 1,842,900

$ 546,000

Liabilities

$ (722,900)

(55,000)

2

2

Common stock

Parflex

(515,000)

0

Common stock

Eagle

0

(150,000)

Retained earnings 12/31

(605,000)

(341,000)

Total liabilities and owners equity

$(1,842,900)

$(546,000)

a.

Compute the goodwill allocation to the controlling and noncontrolling interest.

b.

Show how Parflex determined its Investment in Eagle account balance.

c.

Determine the amounts that should appear on Parflexs

December 31, 2013,

consolidated statement of financial position and its 2013 consolidated income

statement.

d.

What are the total credits/debits associated with the consolidating journal entries

for the controlling entry?

e.

Based on your knowledge of consolidations,

w

hat are some accounting issues

associated with

Eagle

s

acquisition

?

Explain you

r journal entries

.

Task 5

-

Foreign Currency

Sendelbach Corporation is a U.S.

based organization with operations throughout the

world. One of its subsidiaries is headquartered in Toronto. Although this wholly owned

company operates primarily in Canada, it engages in some transactions through a

branch

in Mexico. Therefore, the subsidiary maintains a ledger denominated in Mexican

pesos (Ps) and a general ledger in Canadian dollars (C$). As of December 31, 2013,

the subsidiary is preparing financial statements in anticipation of consolidation with the

U.

S. parent corporation. Both ledgers for the subsidiary are as follows:

Main Operation

--

Canada

Debit

Credit

Accounts payable

C$ 35,000

Accumulated depreciation

27,000

Buildings and equipment

C$167,000

Cash

26,000

Common stock

50,000

Cost of

goods sold

203,000

Depreciation expense

8,000

Dividends paid, 4/1/13

28,000

Gain on sale of equipment, 6/1/13

5,000

Inventory

98,000

Notes payable

due in 2016

76,000

Receivables

68,000

Retained earnings, 1/1/13

135,530

Salary expense

26,000

Sales

312,000

Utility Expense

9,000

3

3

Branch Operation

7,530

Totals

C$640,530

C$640,530

Branch Operation

--

Mexico

Debit

Credit

Accounts payable

PS 49,000

Accumulated depreciation

19,000

Buildings and equipment

Ps 40,000

Cash

59,000

Depreciation expense

2,000

Inventory (beginning

income statement)

23,000

Inventory (ending

income statement)

28,000

Inventory (ending

balance

sheet

)

28,000

Purchases

68,000

Receivables

21,000

Salary Expense

9,000

Sales

124,000

Main office

30,000

Totals

Ps 250,000

Ps 250,000

Additional Information

The Canadian subsidiarys functional currency is the Canadian dollar, and

Sendelbachs

reporting currency is the U.S. dollar. The Canadian and Mexican

operations are not viewed as separate accounting entities.

The building and equipment used in the Mexican operation were acquired in

2005 when the currency exchange rate was C$0.25 5 Ps 1.

Pu

rchases should be assumed as having been made evenly throughout the fiscal

year.

Beginning inventory was acquired evenly throughout 2012; ending inventory was

acquired evenly throughout 2013.

The Main Office account on the Mexican records should be conside

red an equity

account. This balance was remeasured into C$7,530 on December 31, 2013.

Currency exchange rates for 1 Ps applicable to the Mexican operation follow:

Weighted average, 2012

C$0.30

January 1, 2013

0.32

Weighted average rate for 2013

0.34

December 31, 2013

0.35

The December 31, 2012, consolidated balance sheet reported a cumulative

translation adjustment with a $36,950 credit (positive) balance.

4

4

The subsidiarys common stock was issued in 2004 when the exchange rate was

$0.45 5 C$1.

The s

ubsidiarys December 31, 2012, Retained Earnings balance was

C$135,530, a figure that has been translated into US$70,421.

The applicable currency exchange rates for 1 C$ for translation purposes are as

follows:

January 1, 2013

US$0.70

April 1, 2013

0.69

June 1, 2013

0.68

Weighted average rate for 2013

0.67

December 31, 2013

0.65

a.

Remeasure the Mexican operations figures into Canadian dollars. (

Hint

: Back

into the beginning net monetary asset or liability position.)

b.

Prepare financial statements (inc

ome statement, statement of retained earnings,

and balance sheet) for the Canadian subsidiary in its functional currency.

c.

Translate the Canadian dollar functional currency financial statements into U.S.

dollars so that Sendelbach can prepare consolidated f

inancial statements.

Task

6

Partnerships

Following is the current balance sheet for a local partnership of doctors:

Cash and current assets

$30,000

Liabilities

$40,000

Land

180,000

A, capital

20,000

Building and equipment (net)

100,000

B, capital

40,000

C, capital

90,000

D, capital

120,000

Totals

$310,000

Totals

$310,000

The following questions represent independent situations:

a.

E is going to invest enough money in this partnership to receive a 25 percent

interest. No goodwill or

bonus is to be recorded. How much should E invest?

b.

E contributes $36,000 in cash to the business to receive a 10 percent interest in

the partnership. Goodwill is to be recorded. Profits and losses have previously

been split according to the following perce

ntages: A, 30 percent; B, 10 percent;

C, 40 percent; and D, 20 percent. After E makes this investment, what are the

individual capital balances?

c.

E contributes $42,000 in cash to the business to receive a 20 percent interest in

the partnership. Goodwill is

to be recorded. The four original partners share all

5

5

profits and losses equally. After E makes this investment, what are the individual

capital balances?

d.

E contributes $55,000 in cash to the business to receive a 20 percent interest in

the partnership. No

goodwill or other asset revaluation is to be recorded. Profits

and losses have previously been split according to the following percentages: A,

10 percent; B, 30 percent; C, 20 percent; and D, 40 percent. After E makes this

investment, what are the individ

ual capital balances?

e.

C retires from the partnership and, as per the original partnership agreement, is

to receive cash equal to 125 percent of her final capital balance. No goodwill or

other asset revaluation is to be recognized. All partners share profit

s and losses

equally. After the withdrawal, what are the individual capital balances of the

remaining partners?

f.

Which tax regulations must be taken into account in applying income and

deductions to partnerships?

Prompts

1.

Task 4

-

If Parflex

Corporation exchanged $344,000 cash for ONLY 40% of Eagle

Corporations outstanding voting stock, how would this problem have changed?

2.

Task 5

-

What if the Canadian and Mexican operations were viewed as separate

accounting entities and

the

Canadian su

bsidiary's functional currenc

y was NOT the

Canadian Dollar.

How would your approach to this problem be changed?