Subsidiary $80,000 550 14,000 The financial statements for Parent and Subsidiary are summarized as follows. Parent Income Statement for the Year Ended Dec 31, 2020 Sales. $300,000 Dividend revenue.. 3,800 Loss on sale of land.. Loss on sale of machinery. 40,000 Gain on sale of equipment. 2,000 Cost of sales.... 148,000 Depreciation expense. 5,000 Selling & administrative expenses. 7,800 Tax expense.. 12,000 Net income 93,000 Retained earnings, January 1, 2020. 80,000 Dividend 2,000 Retained earnings, December 31, 2020. $171,000 60,000 60,000 2,000 1,550 8,000 55,000 10,000 1,500 $63,500 Balance Sheet at Dec 31, 2020 Capital stock ($10 per share for both companies). Retained earnings... Total equity. Current liabilities.. Dividend payable...... Loan payable to Parent. Total liabilities and equity Parent $2,000,000 171,000 2,171,000 219,000 2,000 Subsidiary $100,000 63,500 163,500 212,000 1,500 4,000 $381,000 $2,392,000 Land.. Buildings.. Accumulated depreciation. Equipment..... Accumulated depreciation... Machinery..... Accumulated depreciation. Furniture....... Accumulated depreciation. Cash..... Accounts receivable, net. Dividend receivable..... Loan receivable from Subsidiary.. Inventories.. Investment in Subsidiary.. Total Assets $800,000 1,000,000 (200,000) 250,000 (60,000) 70,000 (8,000) 10,000 (2,000) 172,500 80,000 1,500 4,000 150,000 124,000 $2,392,000 $176,000 100,000 (20,000) 45,000 (5,000) 14,000 (3,400) 6,000 (600) 28,450 10,250 300 30,000 $381,000 3 Question On 1 January 2020, Parent Ltd acquired (on an ex-dividend basis) all the outstanding shares of Subsidiary Ltd whose shareholders are to receive one share in Parent Ltd for every four shares held, plus $31,944 cash payable in three years' time. Parent also paid $50,000 consulting and brokerage fees. Shares of Parent were trading at $40 per share on 1 Jan, but due to doubts as to whether the share price would remain at or above this level, Parent agreed to supply cash to the value of any decrease in the share price below $40. This guarantee was valid until Dec 31, 2020. Parent believed that there was a 50% chance that the share price would fall to $36. On the acquisition day, all identifiable assets and liabilities of Subsidiary Ltd were recorded at fair values except for the following: Fair value ($) 30,000 35,000 Inventories Buildings Accumulated depreciation Net amount Land Book value ($) Status 10,000 Sold 40% during 2020 48,000 A further 5-year life (8,000) 40,000 90,000 Sold at $76,000 during 2020 70,000 In addition, on the acquisition date Subsidiary had two unrecorded items: a self-generated patent of $15,000 (fair value) with a 5-year life and a contingent liability of $9,000 (fair value), which has not been settled by the year end. Assumptions: 1) There has been no change in Subsidiary's outstanding capital stock since Parent acquired its interest, 2) The accounting period is from January 1 to December 31 for both companies, 3) The share price of Parent remained at above $40 after acquisition, 4) The income tax rate is 30%, and 5) The incremental borrowing rate for Parent Ltd is 10%. Addition information follows. 1. All of Subsidiary's inventory sales for 2020 were made to Parent. By the end of the year, 20% of these inventories were still held on hand by Parent. 2. Subsidiary sold equipment with a book value of $100,000 to Parent on Dec 31, 2020 for $160,000. This equipment had a further 4-year life. 3. Parent sold machinery to Subsidiary at $40,000 below its carrying amount on July 1, 2020. Depreciation rate is 10% per year on the cost. (Half-year depreciation rule applies) 4. Parent sold to Subsidiary an item of inventory on 1 January 2020 for $6,000 cash (with a cost of $4,000). Subsidairy used this item as furniture with a straight-line annual depreciation rate of 10%. 5. Parent's year-end test of goodwill indicated an impairment loss of $3,000. 6. Subsidiary declared dividend of $1,500 on December 31, 2020. 7. Subsidiary borrowed $4,000 from Parent on December 1, 2020. 2 Required: 1. Determine the cost of acquisition for Parent Ltd at the date of acquisition. (6 marks) 2. Determine the amount of goodwill (if any) involved in business combination and explain in what account the acquirer should report goodwill arising from business combination. (15 marks) 3. Provide consolidation worksheet entries as at December 31 2020. (33 marks) 4. Prepare consolidated income statement and balance sheet for 2020. (42 marks) 5. a. In the case of negative goodwill (bargain purchase), what accounting standard you need to follow before recognizing it as a gain? (2 marks) b. Suppose you are a key management personnel of Subsidiary Ltd and you also control another business. Explain whether Parent Ltd is a related party of your own business. (2 marks) END 4 Subsidiary $80,000 550 14,000 The financial statements for Parent and Subsidiary are summarized as follows. Parent Income Statement for the Year Ended Dec 31, 2020 Sales. $300,000 Dividend revenue.. 3,800 Loss on sale of land.. Loss on sale of machinery. 40,000 Gain on sale of equipment. 2,000 Cost of sales.... 148,000 Depreciation expense. 5,000 Selling & administrative expenses. 7,800 Tax expense.. 12,000 Net income 93,000 Retained earnings, January 1, 2020. 80,000 Dividend 2,000 Retained earnings, December 31, 2020. $171,000 60,000 60,000 2,000 1,550 8,000 55,000 10,000 1,500 $63,500 Balance Sheet at Dec 31, 2020 Capital stock ($10 per share for both companies). Retained earnings... Total equity. Current liabilities.. Dividend payable...... Loan payable to Parent. Total liabilities and equity Parent $2,000,000 171,000 2,171,000 219,000 2,000 Subsidiary $100,000 63,500 163,500 212,000 1,500 4,000 $381,000 $2,392,000 Land.. Buildings.. Accumulated depreciation. Equipment..... Accumulated depreciation... Machinery..... Accumulated depreciation. Furniture....... Accumulated depreciation. Cash..... Accounts receivable, net. Dividend receivable..... Loan receivable from Subsidiary.. Inventories.. Investment in Subsidiary.. Total Assets $800,000 1,000,000 (200,000) 250,000 (60,000) 70,000 (8,000) 10,000 (2,000) 172,500 80,000 1,500 4,000 150,000 124,000 $2,392,000 $176,000 100,000 (20,000) 45,000 (5,000) 14,000 (3,400) 6,000 (600) 28,450 10,250 300 30,000 $381,000 3 Question On 1 January 2020, Parent Ltd acquired (on an ex-dividend basis) all the outstanding shares of Subsidiary Ltd whose shareholders are to receive one share in Parent Ltd for every four shares held, plus $31,944 cash payable in three years' time. Parent also paid $50,000 consulting and brokerage fees. Shares of Parent were trading at $40 per share on 1 Jan, but due to doubts as to whether the share price would remain at or above this level, Parent agreed to supply cash to the value of any decrease in the share price below $40. This guarantee was valid until Dec 31, 2020. Parent believed that there was a 50% chance that the share price would fall to $36. On the acquisition day, all identifiable assets and liabilities of Subsidiary Ltd were recorded at fair values except for the following: Fair value ($) 30,000 35,000 Inventories Buildings Accumulated depreciation Net amount Land Book value ($) Status 10,000 Sold 40% during 2020 48,000 A further 5-year life (8,000) 40,000 90,000 Sold at $76,000 during 2020 70,000 In addition, on the acquisition date Subsidiary had two unrecorded items: a self-generated patent of $15,000 (fair value) with a 5-year life and a contingent liability of $9,000 (fair value), which has not been settled by the year end. Assumptions: 1) There has been no change in Subsidiary's outstanding capital stock since Parent acquired its interest, 2) The accounting period is from January 1 to December 31 for both companies, 3) The share price of Parent remained at above $40 after acquisition, 4) The income tax rate is 30%, and 5) The incremental borrowing rate for Parent Ltd is 10%. Addition information follows. 1. All of Subsidiary's inventory sales for 2020 were made to Parent. By the end of the year, 20% of these inventories were still held on hand by Parent. 2. Subsidiary sold equipment with a book value of $100,000 to Parent on Dec 31, 2020 for $160,000. This equipment had a further 4-year life. 3. Parent sold machinery to Subsidiary at $40,000 below its carrying amount on July 1, 2020. Depreciation rate is 10% per year on the cost. (Half-year depreciation rule applies) 4. Parent sold to Subsidiary an item of inventory on 1 January 2020 for $6,000 cash (with a cost of $4,000). Subsidairy used this item as furniture with a straight-line annual depreciation rate of 10%. 5. Parent's year-end test of goodwill indicated an impairment loss of $3,000. 6. Subsidiary declared dividend of $1,500 on December 31, 2020. 7. Subsidiary borrowed $4,000 from Parent on December 1, 2020. 2 Required: 1. Determine the cost of acquisition for Parent Ltd at the date of acquisition. (6 marks) 2. Determine the amount of goodwill (if any) involved in business combination and explain in what account the acquirer should report goodwill arising from business combination. (15 marks) 3. Provide consolidation worksheet entries as at December 31 2020. (33 marks) 4. Prepare consolidated income statement and balance sheet for 2020. (42 marks) 5. a. In the case of negative goodwill (bargain purchase), what accounting standard you need to follow before recognizing it as a gain? (2 marks) b. Suppose you are a key management personnel of Subsidiary Ltd and you also control another business. Explain whether Parent Ltd is a related party of your own business. (2 marks) END 4