Chapter 9, Problem 7 Closing inventory profits Before Tax After tax 40% tax

Transcription

1 Chapter 9, Problem 7 Cost of 70% of Simon 900,000 Book value of Simon Common stock 550,000 Retained earnings Jan ,000 Net income to April 1 (¼ 200,000) 50,000 1,000,000 70% 700,000 Purchase discrepancy 200,000 Allocated: FV BV 70% 0 Balance broadcast rights 200,000 Cost of 60% of Fraser 600,000 Book value of Fraser Common stock 300,000 Retained earnings Jan ,000 Net income to April 1 (¼ 150,000) 37, ,500 60% 382,500 Purchase discrepancy 217,500 Allocated FV BV 60% 0 Balance broadcast rights 217,500 Closing inventory profits Before Tax After tax 40% tax Simon selling 32,000 12,800 19,200 Princeton selling 18,000 7,200 10,800

2 (a) Princeton Corp. Calculation of Consolidated Net Income for the Year Ended December 31, Year 7 Income of Princeton 100,000 Less: Broadcast rights amortization see part (c) 15,000 Dividends from Simon (70% 30,000) 21,000 Closing inventory profit after tax 10,800 46,800 53,200 Income of Simon (¾ 200,000) 150,000 Less: Broadcast rights amort. see part (c) 16,312 Dividend from Fraser (60% 70,000) 42,000 Closing inventory profit after tax 19,200 77,512 72,488 Income of Fraser (¾ 150,000) 112,500 Simon s share 60% 67, ,988 Princeton s share 70% 97,992 Consolidated net income 151,192

3 (b) Calculation of noncontrolling interest Dec. 31, Year 7 Fraser shareholders' equity Dec ,000 Noncontrolling interest s share 40% 272,000 Simon shareholders' equity Dec. 31 1,120,000 Retained earnings Fraser Dec ,000 Acquisition 337,500 Increase 42,500 60% 25,500 Less: Broadcast rights amount 16,312 9,188 1,129,188 Less: Closing inventory profit after tax 19,200 1,109,988 Noncontrolling interest s share 30% 332,996 Noncontrolling interest 604,996 (c) Calculation of consolidated broadcast rights Dec. 31, Year 7 Broadcast rights Simon 200,000 Less: amortization Year 7 (200, ¾) 15, ,000 Broadcast rights Fraser 217,500 Less: amortization Year 7 (217, ¾) 16, , ,188

4 Problem 8 Cost of 90% of preferred shares (180/200) 19,800 Book value of preferred: Share capital 20,000) Dividends in arrears (200 x 5 x 2) 2,000) 22,000) 90% ) 19,800 Purchase discrepancy 0 Cost of 80% of common shares (800/1,000) 24,000 Book value of common: Share capital 10,000) Retained earnings 12,000) Less preferred dividend arrears (2,000) 20,000) 80% ) 16,000 Purchase discrepancy brand names 8,000 Intercompany revenues and expenses Dividends preferred (90% x 1,000) 900 common (80% x [9,000 1,000]) 6,400 7,300 Management fees 20,000 Rent (3, ,000) 5,000 Sales 33,000

5 Intercompany profits Before Tax After tax 40% tax Opening inventory X selling 1, Closing inventory X selling 2,500 1,000 1,500 Building realized Y selling 1, Calculation of consolidated net income Year 5 X net income 29,700 Less: Dividends from Y 7,300 Brand name amortization (8,000 40) 200 Closing inventory profit 1,500 9,000 20,700 Add: opening inventory profit ,540 Total Preferred Common Y net income 17,500 1,000 16,500 Add: building profit 780 1,000 17,280 90% 80% ,824 14,724 36,264

6 Consolidated Income Statement Year 5 Sales (600, ,000 33,000) 967,000 Rent (11,200 5,000) 6, ,200 Cost of sales (343, ,700 33,000 1, ,500) 546,700 Depreciation (20, ,000 1,300) 88,700 Selling and admin. (207, ,000 20,000) 261,000 Interest (1, ,000) 7,700 Brand name amortization 200 Income tax (20, , ,000) 29, ,380 Net income entity 39,820 Less: noncontrolling interest 3,556 (10% 1,000) + (20% 17,280) Net income 36,264

7 Chapter 10, Problem 12 (a) Intercompany eliminations Rent (125,000 x 40%) 50,000 Intercompany profits Before Tax After tax 40% tax Land Kent Selling in ,000 Considered realized 60% 45,000 Considered unrealized in % 30,000 Realized in 2005 (50%) 15,000 6,000 9,000 Unrealized at end of 2005 (50%) 15,000 6,000 9,000 Calculation of consolidated net income 2005 Net income, Kent 800,000 Less: dividends 40% x 80,000 32,000 Purchase discrepancy amortization 9,500 41, ,500 Add: land gain 9, ,500 Net income, Laurier 230,000 40% 92, ,500

8 Kent Corp. Consolidated Income Statement for the Year Ended December 31, 2005 Sales (3,000,000 + [40% x 1,200,000]) 3,480,000 Other income (200,000 [40% x 80,000] + [40% x 70,000] 50,000) 146,000 Gain on sale of land (15,000 + [40% x 100,000]) 55,000 Total 3,681,000 Cost of sales (1,400,000 + [40% x 560,000]) 1,624,000 Operating expenses (500,000 + [40% x 300,000] 50,000 12,500) 557,500 Depreciation expense (100,000 + [40% x 130,000] + 9,000) 161,000 Goodwill impairment loss 13,000 Income tax (400, ,000 + [40% x 150,000]) 466,000 2,821,500 Net income

9 (b) Significant influence Kent Corp. Income Statement for the Year Ended December 31, 2005 Sales 3,000,000 Other income (200,000 [40% x 80,000]) 168,000 Investment income (Note 1) 105,000 3,273,000 Cost of sales 1,400,000 Operating expenses 500,000 Depreciation expense 100,000 Income tax 400,000 2,400,000 Net income 873,000 Note 1: Investment income Laurier s income 230,000 Kent s percentage 40% 92,000 Less: purchase discrepancy amortization 9,500 82,500 Add: Realized gain on sale of land Kent selling (75,000 x 50% x [1 40%]) 22, ,000

10 Problem 13 (a) Intercompany eliminations Sales and purchases (6,000 60%) $3,600 Unrealized profits Before Tax After tax 40% tax Connor selling to Banff 6,000 25% On-hand inventory 1,500 Gross profit (1,800 6,000) 30% Profit in inventory 450 Considered unrealized 60% Calculation of consolidated net income Year 3 Connor net income 40,000 Less: closing inventory profit after tax ,838 Banff net income 2,500 60% 1,500 41,338 Connor Company Consolidated Income Statement for the Year Ended December 31, Year 3 Sales (150,000 + [60% 20,000] 3,600) 158,400) Cost of sales (90,000 + [60% 11,000] 3, ) 94,270) Expenses (20,000 + [60% 6,500] 108) 23,792) 117,062) Net income 41,338)

11 Connor Company Consolidated Retained Earnings Statement for the Year Ended December 31, Year 3 Balance Jan. 1 30,000) Net income 41,338) Balance Dec ,338) Connor Company Consolidated Balance Sheet as at December 31, Year 3 Current assets (75,000 + [60% 6,000] 270) 78,330 Fixed assets (190,000 + [60% 72,000]) 233,200 Accumulated depreciation (60,000 + [60% 5,000]) (63,000) Other assets (16,000 + [60% 8,000]) 20,800 Deferred charge - income taxes ,438 Current liabilities (33,000 + [60% 18,500]) 44,100 Long-term debt (45,000 + [60% 40,000]) 69,000 Capital stock 85,000 Retained earnings 71, ,438 (b) The gain recognition principle states that gains should be recorded when they are realized i.e. when a transaction has occurred with an outside entity and consideration is received. When Connor sold inventory to Banff, sixty percent of the gain is considered to be unrealized because Connor is considered to be selling to itself since it owns 60% of Banff. Since Connor is not related to Sparks and since Connor does not have exclusive control over Banff, forty percent of the sale (which is equal to Sparks 40% interest in Banff) is considered to be realized with an outsider. Problem 15 Part A

12 Fair value of plant and equipment transferred 1,000,000 Carrying value on Amco's books 300,000 Gain on transfer to joint venture (Bearcat) 700,000 Amco's portion 40% (unrealized) 280,000 Newstar's portion 60% 420,000 Immediate gain from selling to Newstar Sale proceeds cash received 500,000 Carrying value sold (500 / 1, ,000) 150, ,000 Deferred gain from selling to Newstar 70,000 (a) Jan. 1, Year 1 Cash 500,000 Investment in Bearcat (1,000, ,000) 500,000 Plant and equipment 300,000 Deferred (contra) gain Amco 280,000 Gain on transfer to Newstar 350,000 Deferred gain Newstar 70,000 Dec 31, Year 1 Investment in Bearcat 72,000 Equity earnings 72,000 (40% 180,000) Dividend receivable 30,000 Investment in Bearcat 30,000 (40% 75,000) Deferred gain Newstar 3,500 Gain on transfer to Newstar 3,500 (70,000 / 20 years) Part B If Newstar did not invest cash, the cash received by Amco had to come from the borrowings of the joint venture.

13 Cash received by Amco 500,000 From Amco's share of the borrowing 40% 200,000 From Newstar's share 60% 300,000 Sale proceeds 300,000 Carrying value sold (300 / ,000) 90,000 Gain on transfer to Newstar 210,000

14 (a) Jan. 1, Year 1 Cash 500,000 Investment in Bearcat 500,000 Plant and equipment 300,000 Deferred (contra) gain Amco 280,000 Gain on transfer to Newstar 210,000 Deferred gain Newstar (420, ,000) 210,000 Dec. 31, Year 1 Investment in Bearcat 72,000 Equity earnings 72,000 Dividend receivable 30,000 Investment in Bearcat 30,000 Deferred gain Newstar 10,500 Gain on transfer to Newstar 10,500 (210,000 / 20 years)

15 (b) The accounts Investment in Bearcat, Dividends receivable, and Equity earnings would be eliminated in the preparation of the consolidated financial statements. Deferred (contra) gain Amco would be deducted from plant and equipment in the preparation of the consolidated balance sheet as follows: Plant and equipment (40% 1,000,000) 400,000 Less: deferred (contra) gain 280, ,000 The balance left is Amco's share of the carrying value of the asset transferred to venture 40% 300,000 = 120,000 Gain on transfer to Newstar would appear in the consolidated income statement. Deferred gain Newstar would appear as a deferred credit in the consolidated balance sheet.

16 Chapter 11, Problem 12 (a) (i) June 2, Year 4 Due from bank (R) 146,000 Payable to bank 146,000 (R200, ) June 30, Year 4 Other comprehensive income - exchange gains and losses 1,000 Due from bank (R) 1,000 (R200,000 [ ]) August 1, Year 4 Inventory 142,000 Accounts payable (R) 142,000 (R200, ) Due from bank (R) 1,600 Other comprehensive income - exchange gains and losses 1,600 (R200,000 [ ]) Other comprehensive income - exchange gains and losses 600 Inventory 600 To clear other comprehensive income (1,600 1,000) September 30, Year 4 Exchange gains and losses 6,000 Accounts payable (R) 6,000 (R200,000 [ ]) Due from bank (R) 1,400 Exchange gains and losses 1,400 (R200,000 [ ])

17 Payable to bank 146,000 Cash 146,000 Cash (R) 148,000 Due from bank (R) 148,000 (R200, ) Accounts payable (R) 148,000 Cash (R) 148,000 (a) (ii) Partial trial balance June 30, Year 4 DR CR Other comprehensive income - exchange gains and losses * 1,000 Due from bank ** (R) 145,000 Payable to bank** 146, , ,000 * Other comprehensive income is shown after net income on the statement of comprehensive income. Cumulative other comprehensive income is shown as a separate component of shareholders equity. ** A net amount of $1,000 would be shown in the liability section on the balance sheet as a forward contract. (b) August 1, Year 4 Inventory (200,000.71) 142,000 Accounts payable 142,000 September 30, Year 4 Exchange gains and losses 6,000 Accounts payable (R) 6,000 (R200,000 [ ]) Accounts payable (R) 148,000 Cash (R) 148,000

18 Chapter 12, Problem 7 (a) Using the temporal method and FIFO: Cost of goods sold 1,312,000 francs 350,000 francs $1 = FF , ,000 francs 1 = FF3.1 66, ,000 francs 1 = FF , ,000 francs 1 = FF4.3 39,302 1,312, ,372 Inventory 1,150,000 francs 547,000 francs $1 = FF5.5 99, ,000 francs 1 = FF4.8 75, ,000 francs 1 = FF4.3 56,047 1,150, ,919 Market value 1,300,000 $1 = FF ,115 Financial statements would show: Balance sheet Inventory (cost of 230,919) 213,115 Income statement Loss (230, ,115) 17,804 Cost of goods sold 418, ,176

19 (b) If the subsidiary was self-sustaining, the current rate method would be used. Inventory (at cost) 1,150,000 francs $1 = 6.1 francs 188,525 Cost of goods sold 1,312,000 francs $1 = 4.0 francs 328,000 (c) Accounting exposure is the risk attributed to changes in foreign exchange rates. Items translated at the current rate are exposed to foreign currency risk because the translated amount changes every time there is a change in exchange rates. Items translated at the historical rate are not exposed because the translated amount is based on the historical rate, which does not change when there is a change in exchange rates. The exchange gains/losses are different for the two translation methods because the current rate is applied to different balance sheet accounts under the two methods.

20 Problem 8 (a) DM Rate C$ Accounts receivable 197,000 / ,250 Inventory 255,000 / ,785 Equipment 250,000 / , ,000 / ,857 Accumulated amortization 100,000 (1/8 2) 25,000 / ,714 (420,000 25,000) 395,000 / ,333 Common shares 600,000 / ,000,000 (b) DM Rate C$ Cost of goods sold 1,200,000 / ,578,947 Amortization expense 130,000 / ,053 Inventory 255,000 / ,750 Common shares 600,000 / ,000,000 (c) Shareholders equity, beginning of year 900,000 / ,285,714 Net income 450,000 / ,105 Dividends paid (300,000) / 0.70 (428,571) Shareholders equity, end of year 1,449,248 Actual shareholders equity, end of year 1,050,000 / ,312,500 Exchange adjustment to be reported in other comprehensive income 136,748 (d) The temporal method uses the Canadian dollar as the unit of measure. It translates assets and liabilities in a manner that retains their bases of measurement in terms of the Canadian dollar. For assets and liabilities normally valued at historical cost, the historical rate is applied to the historical cost of the item in DM to give the historical cost in dollars. For assets and liabilities normally valued at market value, the current rate is applied to the current value of the item in DM to give the current value in dollars.

21 Problem 9 (a) Tars Exchange Canadian rate dollars Cash 100,000) $1 = 4.1 Tz 24,390) Accounts receivable 200,000) $1 = ,780) Inventory 400,000) * 129,032) Land 500,000) $1 = 2 250,000) Building #1 300,000) $1 = 2 150,000) #2 500,000) $1 = ,250) Accumulated depreciation #1 (100,000) $1 = 2 (50,000) #2 (200,000) $1 = 3.2 (62,500) 1,700,000) 645,952) Accounts payable 250,000) $1 = ,976) Notes payable 400,000) $1 = ,561) Common shares 300,000) $1 = 2 150,000) Retained earnings 600,000) Given 181,818) Net income 150,000) 155,597) 1,700,000) 645,952) Sales 1,000,000) $1 = ,410) Cost of sales 600,000) ** (157,716) Gross profit 400,000) 98,694) Depreciation (80,000) *** (30,625) Other expenses (170,000) $1 = 3.9 (43,590) Net income before exch. gain 150,000) 24,479) Exchange gain (See note below) 131,118) Net income 155,597)

22 Cost of sales and inventory LIFO Opening 500,000 $1 = ,290 Purchases 150,000 Given 35, ,000 $1 = ,744 Goods available 1,000, ,748 * Closing inventory 400,000 $1 = ,032 ** Cost of sales 350,000 $1 = , ,000 Given 35, ,000 $1 = , , ,716 *** Depreciation 30,000/2 = 15,000 50,000/3.2 = 15,625 30,625 Note: Since in this problem the opening monetary position is not available, the gain on the income statement must be derived from other information. Specifically, once the balance sheet is completed except for net income, the income figure is "plugged" to make it balance. (b) Closing inventory Cost 400,000 /?3.1 = 129,032 Market 350,000?/ 2.4 = 145,833 The dollar amount of inventory on the balance sheet would not change since the cost in dollars is lower than the market value in dollars.

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