There is a $50,000 dividend that Beta declares and pays for the years 2011 and 2012
- Equity method entries for 2011 and summary of debits and credits to investment income and investment account;
- Consolidated balance sheet and income statement for 2011;
Problem 1 (120 points) Alpha Ltd. effectively gained control over Beta Inc. by acquiring 70% of Beta's common shares paying $200,000 in cash and issuing shares with value of $500,000 to Beta's shareholders on December 31, 2010. The balance sheets of Alpha (including the effects of the acquisition) and Beta on December 31, 2010 are shown below: BALANCE SHEET Post-Acquisition ALPHA Dec 31 2010 BETA Dec 31 2010 Cashe A/R Inventory Other current assets Equipment Equipment acc depr Building Building acc depr Goodwille Investment in Be 500,000 670,000 930,000 240,000 800,000 (200,000) 320,000 500,000 220,000 50,000 400,000 (200,000) 450,000 (45,000) 50,000 700,000 e 3,640,000 1,745,000 le Accounts payable LT liabilities Common Stock R/E 1,250,000 1,730,000 1,000,000 (340,000) 3,640,000 1,050,000 268,7814 400,000 26,219 1,745,000 At the date of acquisition, the due diligence team determined the following fair values: A/R Inventory Equipment LT Liab. BETA FV 480,000 210,000 250,000 293,097 The turnover of receivables and inventory is one year and Beta's equipment had a useful life of five years at the acquisition date. The long-term liabilities balance on this date is comprised of just one specific bank loan with a remaining term of four years. During 2011 the following transactions took place: Beta's sales were entirely made to Alpha. Beta's sales had a markup of 1.6 times COGS. At the end of 2011, 20 percent of the items sold to Alpha were still in Alpha's inventory. . Alpha sold some product components to Beta for $96,000. Alpha's sales to Beta had a markup of 1.2 times COGS. At the end of 2011, 50 percent of the items sold to Beta were still in Beta's inventory. + Alpha sold equipment to Beta on January 1, 2011 for $40,000. This equipment had a net book value of $60,000 and a useful life of four years at the time of the sale. . Beta sold a building to Alpha for on July 1, 2011 for $525,000. This building had a net book value of $393,750 and a useful life of 17.5 years at the time of the sale. + There was a balance of $85,000 in intercompany accounts payable and receivable on December 31, 2011. Beta issued a five year bond on December 30, 2011 at par with the following characteristics: Discount Amortized BONDS ISSUED ON DEC 30 2011 WHEN MARKET RATE = COUPON RATE = 12% FACE VALUE = 500,000 MATURE DEC 31 2016 BETA Calculations Face Value Unamortized Carrying Effective Cash 12/31 Prem/Discount Amount Intereste Interest 2011 500,000 -0- 500,000 2012 500,000 500,000 60,000 60,000+ 2013 500,000 500,000 60,000 60,000 20142 500,000 -0- 500,000 60,000 60,000 20152 500,000 -0- 500,000 60,000 60,000+ 2016 500,000 -0- 500,000 60,000 60,000 -O-c -O-c -O-ck -O-sk -O-de -0-4 -0-4 The financial statements of Alpha and Beta for 2011 and 2012 were as follows: BALANCE SHEET ALPHA Dec 31 2011 BETA Dec 31 2011 Cash A/R Inventory Other current assets Equipment Equipment acc depr Building Building acc depr Goodwille Investment in Be 27,500 268,500 920,000 235,000 720,000 (380,000) 525,000 e (15,000) e 407,746 430,000 345,000 55,000 440,000 (290,000) 50,000 686,927 e 2,987,927 1,437,746 340,000+ 1,730,000 120,000 768,781 Accounts payable LT liabilities NCI Common Stock R/E 1,000,000 (82,073) 2,987,927 400,000 148,965 1,437,746 INCOME STATEMENT ALPHA 2011 BETA 2011 600,000 1,200,000 (20,000) Salese Loss on sale of equipment Gain on sale of building Equity in Investee Income 131,250 21,927 1,201,927 731,250 COGS Operating expenses Eq depreciation Building depreciation Interest expense 610,000 52,500 180,000 15,000 86,500 944,000 375,000 50,000 90,000 11,250 32,254 558,504 Net Income 257,927 172,746 Problem 1 (120 points) Alpha Ltd. effectively gained control over Beta Inc. by acquiring 70% of Beta's common shares paying $200,000 in cash and issuing shares with value of $500,000 to Beta's shareholders on December 31, 2010. The balance sheets of Alpha (including the effects of the acquisition) and Beta on December 31, 2010 are shown below: BALANCE SHEET Post-Acquisition ALPHA Dec 31 2010 BETA Dec 31 2010 Cashe A/R Inventory Other current assets Equipment Equipment acc depr Building Building acc depr Goodwille Investment in Be 500,000 670,000 930,000 240,000 800,000 (200,000) 320,000 500,000 220,000 50,000 400,000 (200,000) 450,000 (45,000) 50,000 700,000 e 3,640,000 1,745,000 le Accounts payable LT liabilities Common Stock R/E 1,250,000 1,730,000 1,000,000 (340,000) 3,640,000 1,050,000 268,7814 400,000 26,219 1,745,000 At the date of acquisition, the due diligence team determined the following fair values: A/R Inventory Equipment LT Liab. BETA FV 480,000 210,000 250,000 293,097 The turnover of receivables and inventory is one year and Beta's equipment had a useful life of five years at the acquisition date. The long-term liabilities balance on this date is comprised of just one specific bank loan with a remaining term of four years. During 2011 the following transactions took place: Beta's sales were entirely made to Alpha. Beta's sales had a markup of 1.6 times COGS. At the end of 2011, 20 percent of the items sold to Alpha were still in Alpha's inventory. . Alpha sold some product components to Beta for $96,000. Alpha's sales to Beta had a markup of 1.2 times COGS. At the end of 2011, 50 percent of the items sold to Beta were still in Beta's inventory. + Alpha sold equipment to Beta on January 1, 2011 for $40,000. This equipment had a net book value of $60,000 and a useful life of four years at the time of the sale. . Beta sold a building to Alpha for on July 1, 2011 for $525,000. This building had a net book value of $393,750 and a useful life of 17.5 years at the time of the sale. + There was a balance of $85,000 in intercompany accounts payable and receivable on December 31, 2011. Beta issued a five year bond on December 30, 2011 at par with the following characteristics: Discount Amortized BONDS ISSUED ON DEC 30 2011 WHEN MARKET RATE = COUPON RATE = 12% FACE VALUE = 500,000 MATURE DEC 31 2016 BETA Calculations Face Value Unamortized Carrying Effective Cash 12/31 Prem/Discount Amount Intereste Interest 2011 500,000 -0- 500,000 2012 500,000 500,000 60,000 60,000+ 2013 500,000 500,000 60,000 60,000 20142 500,000 -0- 500,000 60,000 60,000 20152 500,000 -0- 500,000 60,000 60,000+ 2016 500,000 -0- 500,000 60,000 60,000 -O-c -O-c -O-ck -O-sk -O-de -0-4 -0-4 The financial statements of Alpha and Beta for 2011 and 2012 were as follows: BALANCE SHEET ALPHA Dec 31 2011 BETA Dec 31 2011 Cash A/R Inventory Other current assets Equipment Equipment acc depr Building Building acc depr Goodwille Investment in Be 27,500 268,500 920,000 235,000 720,000 (380,000) 525,000 e (15,000) e 407,746 430,000 345,000 55,000 440,000 (290,000) 50,000 686,927 e 2,987,927 1,437,746 340,000+ 1,730,000 120,000 768,781 Accounts payable LT liabilities NCI Common Stock R/E 1,000,000 (82,073) 2,987,927 400,000 148,965 1,437,746 INCOME STATEMENT ALPHA 2011 BETA 2011 600,000 1,200,000 (20,000) Salese Loss on sale of equipment Gain on sale of building Equity in Investee Income 131,250 21,927 1,201,927 731,250 COGS Operating expenses Eq depreciation Building depreciation Interest expense 610,000 52,500 180,000 15,000 86,500 944,000 375,000 50,000 90,000 11,250 32,254 558,504 Net Income 257,927 172,746
