Modern Advanced Accounting in Canada 9Th Edition By Darrel -Test Bank

Modern Advanced Accounting in Canada 9Th Edition By Darrel -Test Bank

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Sample Questions Are Posted Below

Chapter 05

Consolidation Subsequent to Acquisition Date

Multiple Choice Questions

Intangible assets with definite useful lives should be amortized:
A.over their useful lives.
B. over the time periods provided under IAS 36 Impairment of Assets which prescribes amortization periods for different classes of assets.
C. under the applicable capital cost allowance rates provided by the Canada Revenue Agency.
D. over two years.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill.
Topic: 05-03 Testing Goodwill and other Assets for Impairment
Topic: 05-04 Property, Plant, Equipment, and Intangible Assets with Definite Useful Lives

Testing intangible assets with indefinite useful lives for impairment:
A.occurs every year.
B. occurs when only there has been an indication of an impairment in the value of the asset such as a reduction in cash flow generation, idle assets, etc.
C. never occurs because the asset has an indefinite useful life.
D. occurs whenever required by the company’s auditors.

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill.
Topic: 05-03 Testing Goodwill and other Assets for Impairment
Topic: 05-05 Intangible Assets with Indefinite Useful Lives

Which of the following statements best describes the accounting treatment of Intangible Assets with indefinite lives?
A.All intangible assets are written down when their carrying values exceed their fair market values.
B. With the exception of Goodwill, all intangible assets are written down when their carrying values exceed their fair market values.
C. All intangible assets are written down when their carrying values exceed their undiscounted future cash flows.
D. The recoverable amount is determined and compared to the carrying amount. If the recoverable amount is greater than the carrying amount than no impairment exists; otherwise, there is an impairment and the asset is written down to its recoverable amount.

The rationale behind allocating goodwill across a subsidiary’s various cash-generating units is:
A.that doing so will result in more accurate asset valuations.
B. that it is necessary to comply with IASB requirements.
C. that doing so would facilitate comparisons between operating segments.
D. that the cash-generating units will benefit from the synergies of the combination.

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill.
Topic: 05-03 Testing Goodwill and other Assets for Impairment
Topic: 05-08 Disclosure Requirements

An impairment loss can be reversed when:
A.there is no indication that the impairment loss no longer exists or has been reduced and there has not been a change in the estimates used to determine the assets recoverable amount.
B. with the exception of goodwill, all intangible assets carrying values exceed their fair market values.
C. the intangible assets carrying values exceed their undiscounted future cash flows.
D. with the exception of goodwill, the recoverable amount is determined and compared to the carrying amount. If the recoverable amount is greater than the carrying amount then the impairment loss previously recorded is reversed.

Under the Cost Method, which of the following statements is TRUE?
A.The parent’s investment in the subsidiary is recorded at cost, and only changed thereafter if there has been a permanent impairment in the value of the investment.
B. The parent records its pro rata share of the subsidiary’s post-acquisition income as an increase to the investment account and reduces the investment account with its share of the dividends declared by the subsidiary.
C. The parent records its pro rata share of the subsidiary’s cumulative earnings as an increase to the investment account and reduces the investment account with its share of the dividends declared by the subsidiary.
D. The parent’s investment in the subsidiary is recorded at cost and reduced by any excess dividends received from the subsidiary.

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill.
Topic: 05-01 Methods of Accounting for an Investment in a Subsidiary

Under the Equity Method, which of the following statements is TRUE?
A.The parent’s investment in the subsidiary is recorded at cost, and only changed thereafter if there has been a permanent impairment in the value of the investment.
B. The parent records its pro rata share of the subsidiary’s post-acquisition income as an increase to the investment account and reduces the investment account with its share of the dividends declared by the subsidiary.
C. The parent records its pro rata share of the subsidiary’s cumulative earnings as an increase to the investment account and reduces the investment account with its share of the dividends declared by the subsidiary.
D. The parent’s investment in the subsidiary is recorded at cost and reduced by any excess dividends received from the subsidiary.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill.
Topic: 05-01 Methods of Accounting for an Investment in a Subsidiary

Consolidated Net Income would be:
A.higher if the parent chooses to use Equity Method rather than the Cost Method.
B. higher if the parent chooses to use the Equity Method rather than the Cost Method, provided that the subsidiary showed a profit.
C. lower if the parent chooses to use Equity Method rather than the Cost Method.
D. the same under both the Cost and Equity Methods.

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill.
Topic: 05-01 Methods of Accounting for an Investment in a Subsidiary

Consolidated Net Income is equal to:
A.the sum of the net incomes of both the parent and its subsidiaries.
B. the sum of the net incomes of both the parent and its subsidiaries less any inter-company dividends.
C. the parent’s net income excluding any income arising from its investment in the subsidiary.
D. the parent’s net income excluding any income arising from its investment in the Subsidiary, plus the net income of the subsidiary less the amortization of the acquisition differential and the impairment of goodwill.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill.
Topic: 05-02 Consolidated Income and Retained Earnings Statements

Errant Inc. purchased 100% of the outstanding voting shares of Grub Inc. for $200,000 on January 1, 2019. On that date, Grub Inc. had common shares and retained earnings worth $100,000 and $60,000, respectively. Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Grub’s fair market values on the date of acquisition are disclosed below:

	Errant Inc.	Grub Inc.	Grub Inc.
	(carrying value)	(carrying value)	(fair value)
Cash	$120,000	$76,000	$76,000
Accounts Receivable	$80,000	$40,000	$40,000
Inventory	$60,000	$34,000	$50,000
Equipment (net)	$400,000	$80,000	$70,000
Trademark		$70,000	$84,000
Total Assets	$660,000	$300,000
Current Liabilities	$180,000	$80,000	$80,000
Bonds Payable	$320,000	$60,000	$64,000
Common Shares	$90,000	$100,000
Retained Earnings	$70,000	$60,000
Total Liabilities and Equity	$660,000	$300,000

The net incomes for Errant and Grub for the year ended December 31, 2019 were $160,000 and $90,000 respectively. Grub paid $9,000 in dividends to Errant during the year. There were no other inter-company transactions during the year. Moreover, an impairment test conducted on December 31, 2019 revealed that the Goodwill should actually have a value of $20,000. Both companies use a FIFO system, and most of Grub’s inventory on the date of acquisition was sold during the year. Errant did not declare any dividends during the year.

Assume that any difference between the fair values and book values of the equipment, trademark and bonds payable would all be amortized over 10 years.

Assume that Errant Inc. uses the equity method unless stated otherwise.

The amount of goodwill arising from this business combination is:
A. Nil.
B. $(24,000).
C. $12,000.
D. $24,000.

Acquisition cost for 100%		$200,000
Less: Carrying value of net identifiable assets of subsidiary
Common shares	$100,000
Retained earnings	$60,000	160,000
Acquisition differential		$40,000
Allocation:	(FV-CV)
Inventory		$16,000
Equipment (net)		(10,000)
Trademark		14,000
Bonds payable		(4,000)
Goodwill		$24,000

Errant Inc. purchased 100% of the outstanding voting shares of Grub Inc. for $200,000 on January 1, 2019. On that date, Grub Inc. had common shares and retained earnings worth $100,000 and $60,000, respectively. Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Grub’s fair market values on the date of acquisition are disclosed below:

	Errant Inc.	Grub Inc.	Grub Inc.
	(carrying value)	(carrying value)	(fair value)
Cash	$120,000	$76,000	$76,000
Accounts Receivable	$80,000	$40,000	$40,000
Inventory	$60,000	$34,000	$50,000
Equipment (net)	$400,000	$80,000	$70,000
Trademark		$70,000	$84,000
Total Assets	$660,000	$300,000
Current Liabilities	$180,000	$80,000	$80,000
Bonds Payable	$320,000	$60,000	$64,000
Common Shares	$90,000	$100,000
Retained Earnings	$70,000	$60,000
Total Liabilities and Equity	$660,000	$300,000

Assume that any difference between the fair values and book values of the equipment, trademark and bonds payable would all be amortized over 10 years.

Assume that Errant Inc. uses the equity method unless stated otherwise.

How much Goodwill will be carried on Grub’s balance sheet on December 31, 2019?
A. Nil
B. $(24,000)
C. $20,000
D. $24,000

On Grub’s separate entity financial statement balance sheet, there would be no goodwill (the goodwill is recorded on the consolidated balance sheet).

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-20 Equity Method of Recording

Errant Inc. purchased 100% of the outstanding voting shares of Grub Inc. for $200,000 on January 1, 2019. On that date, Grub Inc. had common shares and retained earnings worth $100,000 and $60,000, respectively. Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Grub’s fair market values on the date of acquisition are disclosed below:

	Errant Inc.	Grub Inc.	Grub Inc.
	(carrying value)	(carrying value)	(fair value)
Cash	$120,000	$76,000	$76,000
Accounts Receivable	$80,000	$40,000	$40,000
Inventory	$60,000	$34,000	$50,000
Equipment (net)	$400,000	$80,000	$70,000
Trademark		$70,000	$84,000
Total Assets	$660,000	$300,000
Current Liabilities	$180,000	$80,000	$80,000
Bonds Payable	$320,000	$60,000	$64,000
Common Shares	$90,000	$100,000
Retained Earnings	$70,000	$60,000
Total Liabilities and Equity	$660,000	$300,000

Assume that any difference between the fair values and book values of the equipment, trademark and bonds payable would all be amortized over 10 years.

Assume that Errant Inc. uses the equity method unless stated otherwise.

Which of the following journal entries would be required on December 31, 2019 to record the impairment of the goodwill?
A. No entry is required.
B.

	Debit	Credit
Equity method income	$4,000
Investment in Grub		$4,000

	Debit	Credit
Investment in Grub	$4,000
Equity method income		$4,000

	Debit	Credit
Goodwill impairment loss	$4,000
Goodwill		$4,000

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-20 Equity Method of Recording

Errant Inc. purchased 100% of the outstanding voting shares of Grub Inc. for $200,000 on January 1, 2019. On that date, Grub Inc. had common shares and retained earnings worth $100,000 and $60,000, respectively. Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Grub’s fair market values on the date of acquisition are disclosed below:

	Errant Inc.	Grub Inc.	Grub Inc.
	(carrying value)	(carrying value)	(fair value)
Cash	$120,000	$76,000	$76,000
Accounts Receivable	$80,000	$40,000	$40,000
Inventory	$60,000	$34,000	$50,000
Equipment (net)	$400,000	$80,000	$70,000
Trademark		$70,000	$84,000
Total Assets	$660,000	$300,000
Current Liabilities	$180,000	$80,000	$80,000
Bonds Payable	$320,000	$60,000	$64,000
Common Shares	$90,000	$100,000
Retained Earnings	$70,000	$60,000
Total Liabilities and Equity	$660,000	$300,000

Assume that any difference between the fair values and book values of the equipment, trademark and bonds payable would all be amortized over 10 years.

Assume that Errant Inc. uses the equity method unless stated otherwise.

What would be the journal entry to record the dividends received by Errant during the year?
A.

	Debit	Credit
Cash	$9,000
Investment in Grub		$9,000

	Debit	Credit
Cash	$9,000
Equity method income		$9,000

	Debit	Credit
Cash	$9,000
Acquisition Differential		$9,000

	Debit	Credit
Cash	$9,000
Goodwill		$9,000

Under the equity method, dividends received are a reduction to the Investment in Subsidiary account.

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-20 Equity Method of Recording

Errant Inc. purchased 100% of the outstanding voting shares of Grub Inc. for $200,000 on January 1, 2019. On that date, Grub Inc. had common shares and retained earnings worth $100,000 and $60,000, respectively. Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Grub’s fair market values on the date of acquisition are disclosed below:

	Errant Inc.	Grub Inc.	Grub Inc.
	(carrying value)	(carrying value)	(fair value)
Cash	$120,000	$76,000	$76,000
Accounts Receivable	$80,000	$40,000	$40,000
Inventory	$60,000	$34,000	$50,000
Equipment (net)	$400,000	$80,000	$70,000
Trademark		$70,000	$84,000
Total Assets	$660,000	$300,000
Current Liabilities	$180,000	$80,000	$80,000
Bonds Payable	$320,000	$60,000	$64,000
Common Shares	$90,000	$100,000
Retained Earnings	$70,000	$60,000
Total Liabilities and Equity	$660,000	$300,000

Assume that any difference between the fair values and book values of the equipment, trademark and bonds payable would all be amortized over 10 years.

Assuming that Errant uses the cost method, what would be the journal entry to record the dividends received by Errant during the year?
A.

	Debit	Credit
Cash	$9,000
Investment in Grub		$9,000

	Debit	Credit
Cash	$9,000
Dividend Income		$9,000

	Debit	Credit
Cash	$9,000
Acquisition Income		$9,000

	Debit	Credit
Cash	$9,000
Goodwill		$9,000

Under the cost method, dividends received are recorded in the income statement as revenue.

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-02 Prepare schedules to allocate and show changes to the acquisition differential on both an annual and a cumulative basis.
Topic: 05-09 Consolidation of a 100%-Owned Subsidiary

Errant Inc. purchased 100% of the outstanding voting shares of Grub Inc. for $200,000 on January 1, 2019. On that date, Grub Inc. had common shares and retained earnings worth $100,000 and $60,000, respectively. Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Grub’s fair market values on the date of acquisition are disclosed below:

	Errant Inc.	Grub Inc.	Grub Inc.
	(carrying value)	(carrying value)	(fair value)
Cash	$120,000	$76,000	$76,000
Accounts Receivable	$80,000	$40,000	$40,000
Inventory	$60,000	$34,000	$50,000
Equipment (net)	$400,000	$80,000	$70,000
Trademark		$70,000	$84,000
Total Assets	$660,000	$300,000

Current Liabilities	$180,000	$80,000	$80,000
Bonds Payable	$320,000	$60,000	$64,000
Common Shares	$90,000	$100,000
Retained Earnings	$70,000	$60,000
Total Liabilities and Equity	$660,000	$300,000

Assume that any difference between the fair values and book values of the equipment, trademark and bonds payable would all be amortized over 10 years.

Assume that Errant Inc. uses the equity method unless stated otherwise.

What would be Errant’s journal entry to record the amortization of the acquisition differential (excluding any goodwill impairment) on December 31, 2019?
A.

	Debit	Credit
Equity method income	$18,800
Investment in Grub		$18,800

	Debit	Credit
Equity method income	$16,000
Investment in Grub		$16,000

	Debit	Credit
Investment in Grub	$18,800
Equity method income		$18,800

	Debit	Credit
Investment in Grub	$16,000
Equity method income		$16,000

Schedule of amortization and impairment of acquisition differential:

	Unamortized Jan. 1, 2019	2019 amortization	Unamortized Dec. 31, 2019
Inventory	$16,000	$16,000	$0
Equipment (net) (10 years)	$(10,000)	($1,000)	$(9,000)
Trademarks (10 years)	$14,000	$1,400	$12,600
Bonds Payable (10 years)	$(4,000)	($400)	$(3,600)
Goodwill	$24,000	ignored	$24,000
	$40,000	$16,000	$24,000

Errant Inc. purchased 100% of the outstanding voting shares of Grub Inc. for $200,000 on January 1, 2019. On that date, Grub Inc. had common shares and retained earnings worth $100,000 and $60,000, respectively. Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Grub’s fair market values on the date of acquisition are disclosed below:

	Errant Inc.	Grub Inc.	Grub Inc.
	(carrying value)	(carrying value)	(fair value)
Cash	$120,000	$76,000	$76,000
Accounts Receivable	$80,000	$40,000	$40,000
Inventory	$60,000	$34,000	$50,000
Equipment (net)	$400,000	$80,000	$70,000
Trademark		$70,000	$84,000
Total Assets	$660,000	$300,000
Current Liabilities	$180,000	$80,000	$80,000
Bonds Payable	$320,000	$60,000	$64,000
Common Shares	$90,000	$100,000
Retained Earnings	$70,000	$60,000
Total Liabilities and Equity	$660,000	$300,000

Assume that any difference between the fair values and book values of the equipment, trademark and bonds payable would all be amortized over 10 years.

Assume that Errant Inc. uses the equity method unless stated otherwise.

What would be Errant’s journal entry to record Grub’s net income for 2019?

	Debit	Credit
Investment in Grub	$81,000
Equity method income		$81,000

	Debit	Credit
Equity method income	$90,000
Investment in Grub		$90,000

	Debit	Credit
Investment in Grub	$90,000
Equity method income		$90,000

No entry is required.

Under the equity method, the subsidiary’s net income is recorded as an increase to the investment asset account and as revenue in the income statement.

Errant Inc. purchased 100% of the outstanding voting shares of Grub Inc. for $200,000 on January 1, 2019. On that date, Grub Inc. had common shares and retained earnings worth $100,000 and $60,000, respectively. Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Grub’s fair market values on the date of acquisition are disclosed below:

	Errant Inc.	Grub Inc.	Grub Inc.
	(carrying value)	(carrying value)	(fair value)
Cash	$120,000	$76,000	$76,000
Accounts Receivable	$80,000	$40,000	$40,000
Inventory	$60,000	$34,000	$50,000
Equipment (net)	$400,000	$80,000	$70,000
Trademark		$70,000	$84,000
Total Assets	$660,000	$300,000
Current Liabilities	$180,000	$80,000	$80,000
Bonds Payable	$320,000	$60,000	$64,000
Common Shares	$90,000	$100,000
Retained Earnings	$70,000	$60,000
Total Liabilities and Equity	$660,000	$300,000

Assume that any difference between the fair values and book values of the equipment, trademark and bonds payable would all be amortized over 10 years.

If Errant used the equity method to account for its investment in Grub and had net income of $160,000 from its own operations (before making any entries to reflect its investment in Grub), what consolidated net income would Errant report in its consolidated income statement for the year ended December 31, 2019?
A. $90,000
B. $160,000
C. $230,000
D. $250,000

Equity method (The parent’s separate-entity net income should be equal to consolidated net income attributable to shareholders of the parent):

Errant’s net income		$160,000
Grub’s net income	$90,000
Less: amortization of acquisition differential	$(16,000)
•goodwill impairment loss ($24,000 CV – $20,000 recoverable amount)	$(4,000)	$70,000
Errant’s consolidated net income using the equity method		$230,000

Errant Inc. purchased 100% of the outstanding voting shares of Grub Inc. for $200,000 on January 1, 2019. On that date, Grub Inc. had common shares and retained earnings worth $100,000 and $60,000, respectively. Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Grub’s fair market values on the date of acquisition are disclosed below:

	Errant Inc.	Grub Inc.	Grub Inc.
	(carrying value)	(carrying value)	(fair value)
Cash	$120,000	$76,000	$76,000
Accounts Receivable	$80,000	$40,000	$40,000
Inventory	$60,000	$34,000	$50,000
Equipment (net)	$400,000	$80,000	$70,000
Trademark		$70,000	$84,000
Total Assets	$660,000	$300,000
Current Liabilities	$180,000	$80,000	$80,000
Bonds Payable	$320,000	$60,000	$64,000
Common Shares	$90,000	$100,000
Retained Earnings	$70,000	$60,000
Total Liabilities and Equity	$660,000	$300,000

Assume that any difference between the fair values and book values of the equipment, trademark and bonds payable would all be amortized over 10 years.

Assume that Errant Inc. uses the equity method unless stated otherwise.

The amount of Retained Earnings appearing on the consolidated balance sheet as at January 1, 2019 would be:
A. $60,000.
B. $70,000.
C. $130,000.
D. $160,000.

$70,000. The retained earnings on the consolidated financial statements is equal to the parent’s retained earnings on the date of acquisition.

Errant Inc. purchased 100% of the outstanding voting shares of Grub Inc. for $200,000 on January 1, 2019. On that date, Grub Inc. had common shares and retained earnings worth $100,000 and $60,000, respectively. Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Grub’s fair market values on the date of acquisition are disclosed below:

	Errant Inc.	Grub Inc.	Grub Inc.
	(carrying value)	(carrying value)	(fair value)
Cash	$120,000	$76,000	$76,000
Accounts Receivable	$80,000	$40,000	$40,000
Inventory	$60,000	$34,000	$50,000
Equipment (net)	$400,000	$80,000	$70,000
Trademark		$70,000	$84,000
Total Assets	$660,000	$300,000
Current Liabilities	$180,000	$80,000	$80,000
Bonds Payable	$320,000	$60,000	$64,000
Common Shares	$90,000	$100,000
Retained Earnings	$70,000	$60,000
Total Liabilities and Equity	$660,000	$300,000

Assume that any difference between the fair values and book values of the equipment, trademark and bonds payable would all be amortized over 10 years.

If Errant used the equity method to account for its investment in Grub and had net income of $160,000 from its own operations (before making any entries to reflect its investment in Grub) and paid no dividends in 2019, what amount of consolidated retained earnings would appear on Errant’s consolidated balance sheet as at December 31, 2019?
A. $60,000.
B. $130,000.
C. $160,000.
D. $300,000.

Consolidated retained earnings = $300,000 = opening retained earnings of parent $70,000 + parent’s separate entity net income excluding any investment income from subsidiary $160,000 + subsidiary’s net income flowed to the parent $70,000 (= $90,000 net income – $16,000 amortization of acquisition differential – $4,000 goodwill acquisition differential impairment loss).

Consolidated retained earnings include:
A.consolidated net income less any dividends declared by either the parent or the subsidiary.
B. consolidated net income less any dividends declared by the parent only.
C. the parent’s net income plus its share of the subsidiary’s income less any dividends declared by either the parent or the subsidiary.
D. the parent’s share of consolidated net income less any dividends declared by the parent.

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-03 Prepare consolidated financial statements using the fair value enterprise method subsequent to the date of acquisition.
Topic: 05-12 Consolidation of an 80%-Owned Subsidiary-Direct Approach

If the parent company uses the equity method to record its investment in a subsidiary in its internal accounting records, which of the following statements is FALSE?
A.The parent’s net income equals consolidated net income.
B. The parent’s retained earnings will be equal to consolidated retained earnings.
C. Only the parent’s share of the subsidiary’s income, dividends and amortization of acquisition differential are recorded in the investor’s records.
D. The parent’s net income equals consolidated net income attributable to the shareholders of the parent.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-21 Analysis and Interpretation of Financial Statements

Which of the following adjustments (if any) to Retained Earnings is necessary for the preparation of the consolidated balance sheet?
A.Under both the Cost and Equity methods, the parent must record its share of its Subsidiary’s income.
B. Under both the Cost and Equity methods, the parent must record its share of its Subsidiary’s income less any dividends received from the subsidiary.
C. No adjustment is required under either the Cost or the Equity methods.
D. No adjustment is required if the parent has been using the Equity Method.

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-03 Prepare consolidated financial statements using the fair value enterprise method subsequent to the date of acquisition.
Topic: 05-12 Consolidation of an 80%-Owned Subsidiary-Direct Approach

Any excess of fair value over book value attributable to land on the date of acquisition is to be:
A.allocated to other identifiable assets.
B. capitalized and amortized.
C. charged to Retained Earnings on the date of acquisition.
D. taken into income when the Land is sold.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill.
Topic: 05-02 Consolidated Income and Retained Earnings Statements

Consolidated shareholders’ equity:
A.does not include any non-controlling Interest.
B. is equal to the sum of the Shareholders’ Equity Sections of the parent and the subsidiary.
C. is equal to that of the parent company under the Equity Method.
D. is higher under the Equity Method when the subsidiary does not declare dividends.

If the parent company used the equity method to account for its investment and the subsidiary company showed a profit for the past year, the consolidation elimination entry required to remove a subsidiary’s income from the parent’s books prior to the preparation of consolidated financial statements would be:
A.

	Debit	Credit
Equity method income—Parent	$$$
Retained Earnings—Parent		$$$

	Debit	Credit
Equity method income—Parent	$$$
Investment in Subsidiary		$$$

	Debit	Credit
Equity method income—Parent	$$$
Acquisition Differential		$$$

	Debit	Credit
Investment Income—Subsidiary	$$$
Equity method income—Parent		$$$

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Hard
Learning Objective: 05-08 (Appendix 5B) Prepare consolidated financial statements subsequent to date of acquisition using the working paper approach.
Topic: 05-23 Appendix 5B Working Paper Approach for Consolidations Subsequent to Acquisition

The consolidation elimination entry required to remove any dividends received from a subsidiary prior to the preparation of consolidated financial statements (assuming that the parent uses the cost method to record its investment in the subsidiary) would be:
A.

	Debit	Credit
Equity method income—Parent	$$$
Retained Earnings—Parent		$$$

	Debit	Credit
Dividend Income—Subsidiary	$$$
Investment in Subsidiary		$$$

	Debit	Credit
Dividend Income—Parent	$$$
Dividends—Subsidiary		$$$

	Debit	Credit
Equity method income—Subsidiary	$$$
Equity method income—Parent		$$$

GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000 and paid dividends of $10,000.
Assuming that GNR Inc. uses the Equity Method, what effect would the above information have on GNR’s investment in NMX account?
A.An increase of $10,000.
B. An increase of $30,000.
C. An increase of $40,000.
D. No effect.

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-20 Equity Method of Recording

GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000 and paid dividends of $10,000.
Assuming that GNR Inc. uses the cost method, what effect would the above information have on GNR’s investment in NMX account?
A.An increase of $10,000
B. An increase of $30,000
C. An increase of $40,000
D. No effect.

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-02 Prepare schedules to allocate and show changes to the acquisition differential on both an annual and a cumulative basis.
Topic: 05-09 Consolidation of a 100%-Owned Subsidiary

GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000 and paid dividends of $10,000.
Assuming that GNR owned 80% of NXR instead of 100%, what would be the effect on GNR’s investment in NMX account under the Equity Method?
A.An increase of $24,000.
B. An increase of $30,000.
C. An increase of $40,000.
D. No effect.

GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000 and paid dividends of $10,000.
Assuming that GNR owned 80% of NMX instead of 100%, what would be the effect on GNR’s investment in NMX account under the cost method?
A.An increase of $24,000
B. An increase of $30,000
C. An increase of $40,000
D. No effect

GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000 and paid dividends of $10,000.
Assuming that GNR owned 80% of NXR instead of 100%, what would be the effect on GNR’s investment in NMX account under the cost method if GNR received $9,000 in dividends from NMX?
A.An increase of $23,000
B. An increase of $1,000
C. No effect
D. A decrease of $1,000

Big Guy Inc. purchased 80% of the outstanding voting shares of Humble Corp. for $360,000 on July 1, 2017. On that date, Humble Corp. had common shares and retained earnings worth $180,000 and $90,000, respectively. The equipment had a remaining useful life of 5 years from the date of acquisition. Humble’s bonds mature on July 1, 2027. Both companies use straight line amortization, and no salvage value is assumed for assets. The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Humble’s fair market values on the date of acquisition are disclosed below:

	Big Guy	Humble	Humble
	(carrying value)	(carrying value)	(fair value)
Cash	$800,000	$245,000	$245,000
Accounts Receivable	$240,000	$40,000	$40,000
Inventory	$60,000	$45,000	$50,000
Equipment (net)	$900,000	$80,000	$72,000
Trademark		$90,000	$193,000
Total Assets	$2,000,000	$500,000
Current Liabilities	$200,000	$160,000	$160,000
Bonds Payable	$260,000	$70,000	$40,000
Common Shares	$900,000	$180,000
Retained Earnings	$640,000	$90,000
Total Liabilities and Equity	$2,000,000	$500,000

The following are the financial statements for both companies for the fiscal year ended June 30, 2020:

Income Statements:

	Big Guy	Humble
Sales	$640,000	$240,000
Investment Revenue	$8,480
Less: Expenses:
Cost of Goods Sold	$300,000	$160,000
Depreciation	$81,000	$34,000
Interest Expense	$34,000	$26,000
Other Expenses	$5,000	$8,000
Net Income	$228,480	$12,000

Retained Earnings Statements

	Big Guy	Humble
Balance, July 1, 2019	$960,560	$48,000
Net Income	$228,480	$12,000
Dividends	$20,000	$2,000
Balance, June 30, 2020	$1,169,040	$58,000

Balance Sheets

	Big Guy	Humble
Cash	$1,200,000	$365,000
Accounts Receivable	$270,000	$55,000
Investment in Humble	$319,040
Inventory	$70,000	$70,000
Equipment (net)	$820,000	$65,000
Trademark		$85,000
Total Assets	$2,679,040	$640,000
Current Liabilities	$350,000	$332,000
Bonds Payable	$260,000	$70,000
Common Shares	$900,000	$180,000
Retained Earnings	$1,169,040	$58,000
Total Liabilities and Equity	$2,679,040	$640,000

An impairment test conducted in September 2018 on Big Guy’s goodwill resulted in an impairment loss of $10,000 being recorded. Both companies use a FIFO system, and Humble’s entire inventory on the date of acquisition was sold during the following year. During 2020, Humble Inc. borrowed $20,000 in cash from Big Guy Inc. interest free to finance its operations. Big Guy uses the Equity Method to account for its investment in Humble Corp. Assume that the fair value enterprise (FVE) method applies.

The amount of goodwill arising from this business combination is:
A. nil.
B. $(40,000).
C. $50,000.
D. $64,000.

Calculation and allocation of acquisition differential:

Acquisition cost for 80%		$360,000
Implied acquisition cost for 100%	($360,000/0.80)	$450,000
Less: Carrying value of net identifiable assets of subsidiary	($180,000 common shares + $90,000 retained earnings)	$270,000
Acquisition differential		$180,000
Allocation:	(FV–CV)
Inventory	$5,000
Equipment (net)	$(8,000)
Trademark	$103,000
Bonds Payable	$30,000
Goodwill	$50,000
	$180,000
Verify:
Implied acquisition cost for 100%:		$450,000
Less: FV NIA	($245k + $40k + $50k + $72k + $193k – $160k – $40k)	$400,000
Goodwill		$50,000

Big Guy Inc. purchased 80% of the outstanding voting shares of Humble Corp. for $360,000 on July 1, 2017. On that date, Humble Corp. had common shares and retained earnings worth $180,000 and $90,000, respectively. The equipment had a remaining useful life of 5 years from the date of acquisition. Humble’s bonds mature on July 1, 2027. Both companies use straight line amortization, and no salvage value is assumed for assets. The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Humble’s fair market values on the date of acquisition are disclosed below:

	Big Guy	Humble	Humble
	(carrying value)	(carrying value)	(fair value)
Cash	$800,000	$245,000	$245,000
Accounts Receivable	$240,000	$40,000	$40,000
Inventory	$60,000	$45,000	$50,000
Equipment (net)	$900,000	$80,000	$72,000
Trademark		$90,000	$193,000
Total Assets	$2,000,000	$500,000
Current Liabilities	$200,000	$160,000	$160,000
Bonds Payable	$260,000	$70,000	$40,000
Common Shares	$900,000	$180,000
Retained Earnings	$640,000	$90,000
Total Liabilities and Equity	$2,000,000	$500,000

The following are the financial statements for both companies for the fiscal year ended June 30, 2020:

Income Statements:

	Big Guy	Humble
Sales	$640,000	$240,000
Investment Revenue	$8,480
Less: Expenses:
Cost of Goods Sold	$300,000	$160,000
Depreciation	$81,000	$34,000
Interest Expense	$34,000	$26,000
Other Expenses	$5,000	$8,000
Net Income	$228,480	$12,000

Retained Earnings Statements

	Big Guy	Humble
Balance, July 1, 2019	$960,560	$48,000
Net Income	$228,480	$12,000
Dividends	$20,000	$2,000
Balance, June 30, 2020	$1,169,040	$58,000

Balance Sheets

	Big Guy	Humble
Cash	$1,200,000	$365,000
Accounts Receivable	$270,000	$55,000
Investment in Humble	$319,040
Inventory	$70,000	$70,000
Equipment (net)	$820,000	$65,000
Trademark		$85,000
Total Assets	$2,679,040	$640,000
Current Liabilities	$350,000	$332,000
Bonds Payable	$260,000	$70,000
Common Shares	$900,000	$180,000
Retained Earnings	$1,169,040	$58,000
Total Liabilities and Equity	$2,679,040	$640,000

The amount of non-controlling interest on Big Guy’s consolidated balance sheet on July 1, 2017 would be:
A. $0.
B. $88,000.
C. $90,000.
D. $270,000.

Acquisition cost for 80% = $360,000. Implied acquisition cost for 100% = $450,000 = $360,000/0.80. NCI = $450,000 ´ 20% = $90,000.

Big Guy Inc. purchased 80% of the outstanding voting shares of Humble Corp. for $360,000 on July 1, 2017. On that date, Humble Corp. had common shares and retained earnings worth $180,000 and $90,000, respectively. The equipment had a remaining useful life of 5 years from the date of acquisition. Humble’s bonds mature on July 1, 2027. Both companies use straight line amortization, and no salvage value is assumed for assets. The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Humble’s fair market values on the date of acquisition are disclosed below:

	Big Guy	Humble	Humble
	(carrying value)	(carrying value)	(fair value)
Cash	$800,000	$245,000	$245,000
Accounts Receivable	$240,000	$40,000	$40,000
Inventory	$60,000	$45,000	$50,000
Equipment (net)	$900,000	$80,000	$72,000
Trademark		$90,000	$193,000
Total Assets	$2,000,000	$500,000
Current Liabilities	$200,000	$160,000	$160,000
Bonds Payable	$260,000	$70,000	$40,000
Common Shares	$900,000	$180,000
Retained Earnings	$640,000	$90,000
Total Liabilities and Equity	$2,000,000	$500,000

The following are the financial statements for both companies for the fiscal year ended June 30, 2020:

Income Statements:

	Big Guy	Humble
Sales	$640,000	$240,000
Investment Revenue	$8,480
Less: Expenses:
Cost of Goods Sold	$300,000	$160,000
Depreciation	$81,000	$34,000
Interest Expense	$34,000	$26,000
Other Expenses	$5,000	$8,000
Net Income	$228,480	$12,000

Retained Earnings Statements

	Big Guy	Humble
Balance, July 1, 2019	$960,560	$48,000
Net Income	$228,480	$12,000
Dividends	$20,000	$2,000
Balance, June 30, 2020	$1,169,040	$58,000

Balance Sheets

	Big Guy	Humble
Cash	$1,200,000	$365,000
Accounts Receivable	$270,000	$55,000
Investment in Humble	$319,040
Inventory	$70,000	$70,000
Equipment (net)	$820,000	$65,000
Trademark		$85,000
Total Assets	$2,679,040	$640,000
Current Liabilities	$350,000	$332,000
Bonds Payable	$260,000	$70,000
Common Shares	$900,000	$180,000
Retained Earnings	$1,169,040	$58,000
Total Liabilities and Equity	$2,679,040	$640,000

The amount of depreciation expense appearing on Big Guy’s June 30, 2020 consolidated income statement would be:
A. $113,400.
B. $113,720.
C. $115,000.
D. $116,280.

Depreciation expense on consolidated income statement = $113,400.

Big Guy (parent) depreciation		$81,000
Humble (sub) depreciation		$34,000
Amortization of acquisition differential on Equipment (net)	($- 8,000/5 years)	$(1,600)
Consolidated depreciation expense		$113,400

Big Guy Inc. purchased 80% of the outstanding voting shares of Humble Corp. for $360,000 on July 1, 2017. On that date, Humble Corp. had common shares and retained earnings worth $180,000 and $90,000, respectively. The equipment had a remaining useful life of 5 years from the date of acquisition. Humble’s bonds mature on July 1, 2027. Both companies use straight line amortization, and no salvage value is assumed for assets. The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Humble’s fair market values on the date of acquisition are disclosed below:

	Big Guy	Humble	Humble
	(carrying value)	(carrying value)	(fair value)
Cash	$800,000	$245,000	$245,000
Accounts Receivable	$240,000	$40,000	$40,000
Inventory	$60,000	$45,000	$50,000
Equipment (net)	$900,000	$80,000	$72,000
Trademark		$90,000	$193,000
Total Assets	$2,000,000	$500,000

Current Liabilities	$200,000	$160,000	$160,000
Bonds Payable	$260,000	$70,000	$40,000
Common Shares	$900,000	$180,000
Retained Earnings	$640,000	$90,000
Total Liabilities and Equity	$2,000,000	$500,000

The following are the financial statements for both companies for the fiscal year ended June 30, 2020:

Income Statements:

	Big Guy	Humble
Sales	$640,000	$240,000
Investment Revenue	$8,480
Less: Expenses:
Cost of Goods Sold	$300,000	$160,000
Depreciation	$81,000	$34,000
Interest Expense	$34,000	$26,000
Other Expenses	$5,000	$8,000
Net Income	$228,480	$12,000

Retained Earnings Statements

	Big Guy	Humble
Balance, July 1, 2019	$960,560	$48,000
Net Income	$228,480	$12,000
Dividends	$20,000	$2,000
Balance, June 30, 2020	$1,169,040	$58,000

Balance Sheets

	Big Guy	Humble
Cash	$1,200,000	$365,000
Accounts Receivable	$270,000	$55,000
Investment in Humble	$319,040
Inventory	$70,000	$70,000
Equipment (net)	$820,000	$65,000
Trademark		$85,000
Total Assets	$2,679,040	$640,000
Current Liabilities	$350,000	$332,000
Bonds Payable	$260,000	$70,000
Common Shares	$900,000	$180,000
Retained Earnings	$1,169,040	$58,000
Total Liabilities and Equity	$2,679,040	$640,000

The amount of interest expense appearing on Big Guy’s June 30, 2020 consolidated income statement would be:
A. $36,000.
B. $57,600.
C. $62,400.
D. $63,000.

Interest expense on consolidated income statement = $63,000.

Big Guy (parent) interest expense		$34,000
Humble (sub) interest expense		$26,000
Amortization of acquisition differential on Bonds Payable	($30,000/10 years)	$3,000
Consolidated interest expense		$63,000

Big Guy Inc. purchased 80% of the outstanding voting shares of Humble Corp. for $360,000 on July 1, 2017. On that date, Humble Corp. had common shares and retained earnings worth $180,000 and $90,000, respectively. The equipment had a remaining useful life of 5 years from the date of acquisition. Humble’s bonds mature on July 1, 2027. Both companies use straight line amortization, and no salvage value is assumed for assets. The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Humble’s fair market values on the date of acquisition are disclosed below:

	Big Guy	Humble	Humble
	(carrying value)	(carrying value)	(fair value)
Cash	$800,000	$245,000	$245,000
Accounts Receivable	$240,000	$40,000	$40,000
Inventory	$60,000	$45,000	$50,000
Equipment (net)	$900,000	$80,000	$72,000
Trademark		$90,000	$193,000
Total Assets	$2,000,000	$500,000
Current Liabilities	$200,000	$160,000	$160,000
Bonds Payable	$260,000	$70,000	$40,000
Common Shares	$900,000	$180,000
Retained Earnings	$640,000	$90,000
Total Liabilities and Equity	$2,000,000	$500,000

The following are the financial statements for both companies for the fiscal year ended June 30, 2020:

Income Statements:

	Big Guy	Humble
Sales	$640,000	$240,000
Investment Revenue	$8,480
Less: Expenses:
Cost of Goods Sold	$300,000	$160,000
Depreciation	$81,000	$34,000
Interest Expense	$34,000	$26,000
Other Expenses	$5,000	$8,000
Net Income	$228,480	$12,000

Retained Earnings Statements

	Big Guy	Humble
Balance, July 1, 2019	$960,560	$48,000
Net Income	$228,480	$12,000
Dividends	$20,000	$2,000
Balance, June 30, 2020	$1,169,040	$58,000

Balance Sheets

	Big Guy	Humble
Cash	$1,200,000	$365,000
Accounts Receivable	$270,000	$55,000
Investment in Humble	$319,040
Inventory	$70,000	$70,000
Equipment (net)	$820,000	$65,000
Trademark		$85,000
Total Assets	$2,679,040	$640,000
Current Liabilities	$350,000	$332,000
Bonds Payable	$260,000	$70,000
Common Shares	$900,000	$180,000
Retained Earnings	$1,169,040	$58,000
Total Liabilities and Equity	$2,679,040	$640,000

The amount of other expenses appearing on Big Guy’s June 30, 2020 consolidated income statement would be:
A. $11,600.
B. $12,000.
C. $13,000.
D. $13,400.

Other expenses on consolidated income statement = $13,000.

Big Guy (parent) other expenses		$5,000
Humble (sub) other expenses		$8,000
Amortization of acquisition differential	(none relating to other expenses)	$0
Consolidated other expenses		$13,000

Big Guy Inc. purchased 80% of the outstanding voting shares of Humble Corp. for $360,000 on July 1, 2017. On that date, Humble Corp. had common shares and retained earnings worth $180,000 and $90,000, respectively. The equipment had a remaining useful life of 5 years from the date of acquisition. Humble’s bonds mature on July 1, 2027. Both companies use straight line amortization, and no salvage value is assumed for assets. The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Humble’s fair market values on the date of acquisition are disclosed below:

	Big Guy	Humble	Humble
	(carrying value)	(carrying value)	(fair value)
Cash	$800,000	$245,000	$245,000
Accounts Receivable	$240,000	$40,000	$40,000
Inventory	$60,000	$45,000	$50,000
Equipment (net)	$900,000	$80,000	$72,000
Trademark		$90,000	$193,000
Total Assets	$2,000,000	$500,000
Current Liabilities	$200,000	$160,000	$160,000
Bonds Payable	$260,000	$70,000	$40,000
Common Shares	$900,000	$180,000
Retained Earnings	$640,000	$90,000
Total Liabilities and Equity	$2,000,000	$500,000

The following are the financial statements for both companies for the fiscal year ended June 30, 2020:

Income Statements:

	Big Guy	Humble
Sales	$640,000	$240,000
Investment Revenue	$8,480
Less: Expenses:
Cost of Goods Sold	$300,000	$160,000
Depreciation	$81,000	$34,000
Interest Expense	$34,000	$26,000
Other Expenses	$5,000	$8,000
Net Income	$228,480	$12,000

Retained Earnings Statements

	Big Guy	Humble
Balance, July 1, 2019	$960,560	$48,000
Net Income	$228,480	$12,000
Dividends	$20,000	$2,000
Balance, June 30, 2020	$1,169,040	$58,000

Balance Sheets

	Big Guy	Humble
Cash	$1,200,000	$365,000
Accounts Receivable	$270,000	$55,000
Investment in Humble	$319,040
Inventory	$70,000	$70,000
Equipment (net)	$820,000	$65,000
Trademark		$85,000
Total Assets	$2,679,040	$640,000
Current Liabilities	$350,000	$332,000
Bonds Payable	$260,000	$70,000
Common Shares	$900,000	$180,000
Retained Earnings	$1,169,040	$58,000
Total Liabilities and Equity	$2,679,040	$640,000

The amount of non-controlling interest appearing on Big Guy’s June 30, 2020 consolidated income statement would be:
A. nil.
B. $2,000.
C. $2,120.
D. $3,600.

Calculation of consolidated net income:

		TOTAL	Parent’s portion (CI)	NCI portion 20%
Parent’s net income		$228,480
Less: equity method earnings from sub		$8,480
Parent’s adjusted net income		$220,000	$220,000	$0
Sub’s net income	$12,000
Less: amortization of acquisition differential 2019/2020	$(1,400)
		$10,600	$8,480	$2,120
Consolidated net income		$230,600	$228,480	$2,120

Consolidated Net Income Attributable to NCI = $10,600 ´ 20% = $2,120.

Big Guy Inc. purchased 80% of the outstanding voting shares of Humble Corp. for $360,000 on July 1, 2017. On that date, Humble Corp. had common shares and retained earnings worth $180,000 and $90,000, respectively. The equipment had a remaining useful life of 5 years from the date of acquisition. Humble’s bonds mature on July 1, 2027. Both companies use straight line amortization, and no salvage value is assumed for assets. The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Humble’s fair market values on the date of acquisition are disclosed below:

	Big Guy	Humble	Humble
	(carrying value)	(carrying value)	(fair value)
Cash	$800,000	$245,000	$245,000
Accounts Receivable	$240,000	$40,000	$40,000
Inventory	$60,000	$45,000	$50,000
Equipment (net)	$900,000	$80,000	$72,000
Trademark		$90,000	$193,000
Total Assets	$2,000,000	$500,000
Current Liabilities	$200,000	$160,000	$160,000
Bonds Payable	$260,000	$70,000	$40,000
Common Shares	$900,000	$180,000
Retained Earnings	$640,000	$90,000
Total Liabilities and Equity	$2,000,000	$500,000

The following are the financial statements for both companies for the fiscal year ended June 30, 2020:

Income Statements:

	Big Guy	Humble
Sales	$640,000	$240,000
Investment Revenue	$8,480
Less: Expenses:
Cost of Goods Sold	$300,000	$160,000
Depreciation	$81,000	$34,000
Interest Expense	$34,000	$26,000
Other Expenses	$5,000	$8,000
Net Income	$228,480	$12,000

Retained Earnings Statements

	Big Guy	Humble
Balance, July 1, 2019	$960,560	$48,000
Net Income	$228,480	$12,000
Dividends	$20,000	$2,000
Balance, June 30, 2020	$1,169,040	$58,000

Balance Sheets

	Big Guy	Humble
Cash	$1,200,000	$365,000
Accounts Receivable	$270,000	$55,000
Investment in Humble	$319,040
Inventory	$70,000	$70,000
Equipment (net)	$820,000	$65,000
Trademark		$85,000
Total Assets	$2,679,040	$640,000
Current Liabilities	$350,000	$332,000
Bonds Payable	$260,000	$70,000
Common Shares	$900,000	$180,000
Retained Earnings	$1,169,040	$58,000
Total Liabilities and Equity	$2,679,040	$640,000

The consolidated net income attributable to the shareholders of Big Guy appearing on Big Guy’s consolidated income statement on June 30, 2020 would be:
A. $216,080.
B. $218,480.
C. $228,480.
D. $279,600.

Calculation of consolidated net income:

		TOTAL	Parent’s portion (CI)	NCI portion 20%
Parent’s net income		$228,480
Less: equity method earnings from sub		$8,480
Parent’s adjusted net income		$220,000	$220,000	$0
Sub’s net income	$12,000
Less: amortization of acquisition differential 2019/2020	$(1,400)
		$10,600	$8,480	$2,120
Consolidated net income		$230,600	$228,480	$2,120

Big Guy Inc. purchased 80% of the outstanding voting shares of Humble Corp. for $360,000 on July 1, 2017. On that date, Humble Corp. had common shares and retained earnings worth $180,000 and $90,000, respectively. The equipment had a remaining useful life of 5 years from the date of acquisition. Humble’s bonds mature on July 1, 2027. Both companies use straight line amortization, and no salvage value is assumed for assets. The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Humble’s fair market values on the date of acquisition are disclosed below:

	Big Guy	Humble	Humble
	(carrying value)	(carrying value)	(fair value)
Cash	$800,000	$245,000	$245,000
Accounts Receivable	$240,000	$40,000	$40,000
Inventory	$60,000	$45,000	$50,000
Equipment (net)	$900,000	$80,000	$72,000
Trademark		$90,000	$193,000
Total Assets	$2,000,000	$500,000
Current Liabilities	$200,000	$160,000	$160,000
Bonds Payable	$260,000	$70,000	$40,000
Common Shares	$900,000	$180,000
Retained Earnings	$640,000	$90,000
Total Liabilities and Equity	$2,000,000	$500,000

The following are the financial statements for both companies for the fiscal year ended June 30, 2020:

Income Statements:

	Big Guy	Humble
Sales	$640,000	$240,000
Investment Revenue	$8,480
Less: Expenses:
Cost of Goods Sold	$300,000	$160,000
Depreciation	$81,000	$34,000
Interest Expense	$34,000	$26,000
Other Expenses	$5,000	$8,000
Net Income	$228,480	$12,000

Retained Earnings Statements

	Big Guy	Humble
Balance, July 1, 2019	$960,560	$48,000
Net Income	$228,480	$12,000
Dividends	$20,000	$2,000
Balance, June 30, 2020	$1,169,040	$58,000

Balance Sheets

	Big Guy	Humble
Cash	$1,200,000	$365,000
Accounts Receivable	$270,000	$55,000
Investment in Humble	$319,040
Inventory	$70,000	$70,000
Equipment (net)	$820,000	$65,000
Trademark		$85,000
Total Assets	$2,679,040	$640,000
Current Liabilities	$350,000	$332,000
Bonds Payable	$260,000	$70,000
Common Shares	$900,000	$180,000
Retained Earnings	$1,169,040	$58,000
Total Liabilities and Equity	$2,679,040	$640,000

What amount of dividends would appear on Big Guy’s consolidated statement of retained earnings as at June 30, 2020?
A. $2,000.
B. $20,000.
C. $21,600.
D. $22,000.

Dividends on consolidated retained earnings = dividends paid by Big Guy (parent) to parent’s shareholders = $20,000.

Big Guy Inc. purchased 80% of the outstanding voting shares of Humble Corp. for $360,000 on July 1, 2017. On that date, Humble Corp. had common shares and retained earnings worth $180,000 and $90,000, respectively. The equipment had a remaining useful life of 5 years from the date of acquisition. Humble’s bonds mature on July 1, 2027. Both companies use straight line amortization, and no salvage value is assumed for assets. The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Humble’s fair market values on the date of acquisition are disclosed below:

	Big Guy	Humble	Humble
	(carrying value)	(carrying value)	(fair value)
Cash	$800,000	$245,000	$245,000
Accounts Receivable	$240,000	$40,000	$40,000
Inventory	$60,000	$45,000	$50,000
Equipment (net)	$900,000	$80,000	$72,000
Trademark		$90,000	$193,000
Total Assets	$2,000,000	$500,000
Current Liabilities	$200,000	$160,000	$160,000
Bonds Payable	$260,000	$70,000	$40,000
Common Shares	$900,000	$180,000
Retained Earnings	$640,000	$90,000
Total Liabilities and Equity	$2,000,000	$500,000

The following are the financial statements for both companies for the fiscal year ended June 30, 2020:

Income Statements:

	Big Guy	Humble
Sales	$640,000	$240,000
Investment Revenue	$8,480
Less: Expenses:
Cost of Goods Sold	$300,000	$160,000
Depreciation	$81,000	$34,000
Interest Expense	$34,000	$26,000
Other Expenses	$5,000	$8,000
Net Income	$228,480	$12,000

Retained Earnings Statements

	Big Guy	Humble
Balance, July 1, 2019	$960,560	$48,000
Net Income	$228,480	$12,000
Dividends	$20,000	$2,000
Balance, June 30, 2020	$1,169,040	$58,000

Balance Sheets

	Big Guy	Humble
Cash	$1,200,000	$365,000
Accounts Receivable	$270,000	$55,000
Investment in Humble	$319,040
Inventory	$70,000	$70,000
Equipment (net)	$820,000	$65,000
Trademark		$85,000
Total Assets	$2,679,040	$640,000
Current Liabilities	$350,000	$332,000
Bonds Payable	$260,000	$70,000
Common Shares	$900,000	$180,000
Retained Earnings	$1,169,040	$58,000
Total Liabilities and Equity	$2,679,040	$640,000

Big Guy’s consolidated retained earnings as at June 30, 2020 would be:
A. $1,169,040.
B. $1,486,400.
C. $1,500,000.
D. $1,508,000.

Under the equity method, consolidated retained earnings are equal to the retained earnings of the parent = $1,169,040.

Big Guy Inc. purchased 80% of the outstanding voting shares of Humble Corp. for $360,000 on July 1, 2017. On that date, Humble Corp. had common shares and retained earnings worth $180,000 and $90,000, respectively. The equipment had a remaining useful life of 5 years from the date of acquisition. Humble’s bonds mature on July 1, 2027. Both companies use straight line amortization, and no salvage value is assumed for assets. The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Humble’s fair market values on the date of acquisition are disclosed below:

	Big Guy	Humble	Humble
	(carrying value)	(carrying value)	(fair value)
Cash	$800,000	$245,000	$245,000
Accounts Receivable	$240,000	$40,000	$40,000
Inventory	$60,000	$45,000	$50,000
Equipment (net)	$900,000	$80,000	$72,000
Trademark		$90,000	$193,000
Total Assets	$2,000,000	$500,000
Current Liabilities	$200,000	$160,000	$160,000
Bonds Payable	$260,000	$70,000	$40,000
Common Shares	$900,000	$180,000
Retained Earnings	$640,000	$90,000
Total Liabilities and Equity	$2,000,000	$500,000

The following are the financial statements for both companies for the fiscal year ended June 30, 2020:

Income Statements:

	Big Guy	Humble
Sales	$640,000	$240,000
Investment Revenue	$8,480
Less: Expenses:
Cost of Goods Sold	$300,000	$160,000
Depreciation	$81,000	$34,000
Interest Expense	$34,000	$26,000
Other Expenses	$5,000	$8,000
Net Income	$228,480	$12,000

Retained Earnings Statements

	Big Guy	Humble
Balance, July 1, 2019	$960,560	$48,000
Net Income	$228,480	$12,000
Dividends	$20,000	$2,000
Balance, June 30, 2020	$1,169,040	$58,000

Balance Sheets

	Big Guy	Humble
Cash	$1,200,000	$365,000
Accounts Receivable	$270,000	$55,000
Investment in Humble	$319,040
Inventory	$70,000	$70,000
Equipment (net)	$820,000	$65,000
Trademark		$85,000
Total Assets	$2,679,040	$640,000
Current Liabilities	$350,000	$332,000
Bonds Payable	$260,000	$70,000
Common Shares	$900,000	$180,000
Retained Earnings	$1,169,040	$58,000
Total Liabilities and Equity	$2,679,040	$640,000

The amount of non-controlling interest appearing on Big Guy’s consolidated balance sheet as at June 30, 2020 would be:
A. $79,760.
B. $83,600.
C. $90,000.
D. $226,400.

on consolidated balance sheet = $79,760.

Shareholders’ equity of subsidiary (on current year end date)	(common shares $180,000 + retained earnings $58,000)	$238,000
Unamortized acquisition differential (on current year end date)*		$160,800
		$398,800
NCI ownership		× 20%
		$79,760
*NOTE:
at June.30, 2020 the unamortized acquisition differential is:
Inventory	$0
Equipment (net) (5 years)	$(3,200)
Trademark (indefinite life)	$103,000
Bonds Payable (10 years)	$21,000
Goodwill	$40,000
	$160,800

Big Guy Inc. purchased 80% of the outstanding voting shares of Humble Corp. for $360,000 on July 1, 2017. On that date, Humble Corp. had common shares and retained earnings worth $180,000 and $90,000, respectively. The equipment had a remaining useful life of 5 years from the date of acquisition. Humble’s bonds mature on July 1, 2027. Both companies use straight line amortization, and no salvage value is assumed for assets. The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Humble’s fair market values on the date of acquisition are disclosed below:

	Big Guy	Humble	Humble
	(carrying value)	(carrying value)	(fair value)
Cash	$800,000	$245,000	$245,000
Accounts Receivable	$240,000	$40,000	$40,000
Inventory	$60,000	$45,000	$50,000
Equipment (net)	$900,000	$80,000	$72,000
Trademark		$90,000	$193,000
Total Assets	$2,000,000	$500,000
Current Liabilities	$200,000	$160,000	$160,000
Bonds Payable	$260,000	$70,000	$40,000
Common Shares	$900,000	$180,000
Retained Earnings	$640,000	$90,000
Total Liabilities and Equity	$2,000,000	$500,000

The following are the financial statements for both companies for the fiscal year ended June 30, 2020:

Income Statements:

	Big Guy	Humble
Sales	$640,000	$240,000
Investment Revenue	$8,480
Less: Expenses:
Cost of Goods Sold	$300,000	$160,000
Depreciation	$81,000	$34,000
Interest Expense	$34,000	$26,000
Other Expenses	$5,000	$8,000
Net Income	$228,480	$12,000

Retained Earnings Statements

	Big Guy	Humble
Balance, July 1, 2019	$960,560	$48,000
Net Income	$228,480	$12,000
Dividends	$20,000	$2,000
Balance, June 30, 2020	$1,169,040	$58,000

Balance Sheets

	Big Guy	Humble
Cash	$1,200,000	$365,000
Accounts Receivable	$270,000	$55,000
Investment in Humble	$319,040
Inventory	$70,000	$70,000
Equipment (net)	$820,000	$65,000
Trademark		$85,000
Total Assets	$2,679,040	$640,000
Current Liabilities	$350,000	$332,000
Bonds Payable	$260,000	$70,000
Common Shares	$900,000	$180,000
Retained Earnings	$1,169,040	$58,000
Total Liabilities and Equity	$2,679,040	$640,000

What amount would appear as Big Guy’s investment in Humble Corp. on its June 30, 2020 consolidated balance sheet?
A. $9,600.
B. $12,000.
C. $360,000.
D. The Investment in Humble Account would not appear on the consolidated balance sheet.

Big Guy Inc. purchased 80% of the outstanding voting shares of Humble Corp. for $360,000 on July 1, 2017. On that date, Humble Corp. had common shares and retained earnings worth $180,000 and $90,000, respectively. The equipment had a remaining useful life of 5 years from the date of acquisition. Humble’s bonds mature on July 1, 2027. Both companies use straight line amortization, and no salvage value is assumed for assets. The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Humble’s fair market values on the date of acquisition are disclosed below:

	Big Guy	Humble	Humble
	(carrying value)	(carrying value)	(fair value)
Cash	$800,000	$245,000	$245,000
Accounts Receivable	$240,000	$40,000	$40,000
Inventory	$60,000	$45,000	$50,000
Equipment (net)	$900,000	$80,000	$72,000
Trademark		$90,000	$193,000
Total Assets	$2,000,000	$500,000
Current Liabilities	$200,000	$160,000	$160,000
Bonds Payable	$260,000	$70,000	$40,000
Common Shares	$900,000	$180,000
Retained Earnings	$640,000	$90,000
Total Liabilities and Equity	$2,000,000	$500,000

The following are the financial statements for both companies for the fiscal year ended June 30, 2020:

Income Statements:

	Big Guy	Humble
Sales	$640,000	$240,000
Investment Revenue	$8,480
Less: Expenses:
Cost of Goods Sold	$300,000	$160,000
Depreciation	$81,000	$34,000
Interest Expense	$34,000	$26,000
Other Expenses	$5,000	$8,000
Net Income	$228,480	$12,000

Retained Earnings Statements

	Big Guy	Humble
Balance, July 1, 2019	$960,560	$48,000
Net Income	$228,480	$12,000
Dividends	$20,000	$2,000
Balance, June 30, 2020	$1,169,040	$58,000

Balance Sheets

	Big Guy	Humble
Cash	$1,200,000	$365,000
Accounts Receivable	$270,000	$55,000
Investment in Humble	$319,040
Inventory	$70,000	$70,000
Equipment (net)	$820,000	$65,000
Trademark		$85,000
Total Assets	$2,679,040	$640,000
Current Liabilities	$350,000	$332,000
Bonds Payable	$260,000	$70,000
Common Shares	$900,000	$180,000
Retained Earnings	$1,169,040	$58,000
Total Liabilities and Equity	$2,679,040	$640,000

The amount of goodwill appearing on Big Guy’s consolidated balance sheet as at June 30, 2020 would be:
A. Nil.
B. $30,000.
C. $40,000.
D. $50,000.

Consolidated goodwill = $40,000 = $50,000 goodwill on original business combination – $10,000 impairment loss.

Big Guy Inc. purchased 80% of the outstanding voting shares of Humble Corp. for $360,000 on July 1, 2017. On that date, Humble Corp. had common shares and retained earnings worth $180,000 and $90,000, respectively. The equipment had a remaining useful life of 5 years from the date of acquisition. Humble’s bonds mature on July 1, 2027. Both companies use straight line amortization, and no salvage value is assumed for assets. The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Humble’s fair market values on the date of acquisition are disclosed below:

	Big Guy	Humble	Humble
	(carrying value)	(carrying value)	(fair value)
Cash	$800,000	$245,000	$245,000
Accounts Receivable	$240,000	$40,000	$40,000
Inventory	$60,000	$45,000	$50,000
Equipment (net)	$900,000	$80,000	$72,000
Trademark		$90,000	$193,000
Total Assets	$2,000,000	$500,000
Current Liabilities	$200,000	$160,000	$160,000
Bonds Payable	$260,000	$70,000	$40,000
Common Shares	$900,000	$180,000
Retained Earnings	$640,000	$90,000
Total Liabilities and Equity	$2,000,000	$500,000

The following are the financial statements for both companies for the fiscal year ended June 30, 2020:

Income Statements:

	Big Guy	Humble
Sales	$640,000	$240,000
Investment Revenue	$8,480
Less: Expenses:
Cost of Goods Sold	$300,000	$160,000
Depreciation	$81,000	$34,000
Interest Expense	$34,000	$26,000
Other Expenses	$5,000	$8,000
Net Income	$228,480	$12,000

Retained Earnings Statements

	Big Guy	Humble
Balance, July 1, 2019	$960,560	$48,000
Net Income	$228,480	$12,000
Dividends	$20,000	$2,000
Balance, June 30, 2020	$1,169,040	$58,000

Balance Sheets

	Big Guy	Humble
Cash	$1,200,000	$365,000
Accounts Receivable	$270,000	$55,000
Investment in Humble	$319,040
Inventory	$70,000	$70,000
Equipment (net)	$820,000	$65,000
Trademark		$85,000
Total Assets	$2,679,040	$640,000
Current Liabilities	$350,000	$332,000
Bonds Payable	$260,000	$70,000
Common Shares	$900,000	$180,000
Retained Earnings	$1,169,040	$58,000
Total Liabilities and Equity	$2,679,040	$640,000

The net amount appearing on Big Guy’s consolidated balance sheet for Equipment as at June 30, 2020 would be:
A. $872,000.
B. $878,600.
C. $881,800.
D. $885,000.

Equipment (net) on consolidated balance sheet = $881,800.

Big Guy (parent) Equipment		$820,000
Humble (sub) Equipment		$65,000
Unamortized acquisition differential on Equipment (net) (5 years)	($8,000 – ($1,600 × 3 years))	$(3,200)
Consolidated Equipment (net)		$881,800

Big Guy Inc. purchased 80% of the outstanding voting shares of Humble Corp. for $360,000 on July 1, 2017. On that date, Humble Corp. had common shares and retained earnings worth $180,000 and $90,000, respectively. The equipment had a remaining useful life of 5 years from the date of acquisition. Humble’s bonds mature on July 1, 2027. Both companies use straight line amortization, and no salvage value is assumed for assets. The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Humble’s fair market values on the date of acquisition are disclosed below:

	Big Guy	Humble	Humble
	(carrying value)	(carrying value)	(fair value)
Cash	$800,000	$245,000	$245,000
Accounts Receivable	$240,000	$40,000	$40,000
Inventory	$60,000	$45,000	$50,000
Equipment (net)	$900,000	$80,000	$72,000
Trademark		$90,000	$193,000
Total Assets	$2,000,000	$500,000
Current Liabilities	$200,000	$160,000	$160,000
Bonds Payable	$260,000	$70,000	$40,000
Common Shares	$900,000	$180,000
Retained Earnings	$640,000	$90,000
Total Liabilities and Equity	$2,000,000	$500,000

The following are the financial statements for both companies for the fiscal year ended June 30, 2020:

Income Statements:

	Big Guy	Humble
Sales	$640,000	$240,000
Investment Revenue	$8,480
Less: Expenses:
Cost of Goods Sold	$300,000	$160,000
Depreciation	$81,000	$34,000
Interest Expense	$34,000	$26,000
Other Expenses	$5,000	$8,000
Net Income	$228,480	$12,000

Retained Earnings Statements

	Big Guy	Humble
Balance, July 1, 2019	$960,560	$48,000
Net Income	$228,480	$12,000
Dividends	$20,000	$2,000
Balance, June 30, 2020	$1,169,040	$58,000

Balance Sheets

	Big Guy	Humble
Cash	$1,200,000	$365,000
Accounts Receivable	$270,000	$55,000
Investment in Humble	$319,040
Inventory	$70,000	$70,000
Equipment (net)	$820,000	$65,000
Trademark		$85,000
Total Assets	$2,679,040	$640,000
Current Liabilities	$350,000	$332,000
Bonds Payable	$260,000	$70,000
Common Shares	$900,000	$180,000
Retained Earnings	$1,169,040	$58,000
Total Liabilities and Equity	$2,679,040	$640,000

The amount of Current Liabilities appearing on Big Guy’s consolidated balance sheet as at June 30, 2020 would be:
A. $350,000.
B. $630,000.
C. $662,000.
D. $682,000.

Current Liabilities on consolidated balance sheet = $662,000.

Big Guy (parent) Current Liabilities	$350,000
Humble (sub) Current Liabilities	$332,000
Elimination of intercompany A/R and A/P	$(20,000)
Consolidated Current Liabilities	$662,000

Big Guy Inc. purchased 80% of the outstanding voting shares of Humble Corp. for $360,000 on July 1, 2017. On that date, Humble Corp. had common shares and retained earnings worth $180,000 and $90,000, respectively. The equipment had a remaining useful life of 5 years from the date of acquisition. Humble’s bonds mature on July 1, 2027. Both companies use straight line amortization, and no salvage value is assumed for assets. The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Humble’s fair market values on the date of acquisition are disclosed below:

	Big Guy	Humble	Humble
	(carrying value)	(carrying value)	(fair value)
Cash	$800,000	$245,000	$245,000
Accounts Receivable	$240,000	$40,000	$40,000
Inventory	$60,000	$45,000	$50,000
Equipment (net)	$900,000	$80,000	$72,000
Trademark		$90,000	$193,000
Total Assets	$2,000,000	$500,000
Current Liabilities	$200,000	$160,000	$160,000
Bonds Payable	$260,000	$70,000	$40,000
Common Shares	$900,000	$180,000
Retained Earnings	$640,000	$90,000
Total Liabilities and Equity	$2,000,000	$500,000

The following are the financial statements for both companies for the fiscal year ended June 30, 2020:

Income Statements:

	Big Guy	Humble
Sales	$640,000	$240,000
Investment Revenue	$8,480
Less: Expenses:
Cost of Goods Sold	$300,000	$160,000
Depreciation	$81,000	$34,000
Interest Expense	$34,000	$26,000
Other Expenses	$5,000	$8,000
Net Income	$228,480	$12,000

Retained Earnings Statements

	Big Guy	Humble
Balance, July 1, 2019	$960,560	$48,000
Net Income	$228,480	$12,000
Dividends	$20,000	$2,000
Balance, June 30, 2020	$1,169,040	$58,000

Balance Sheets

	Big Guy	Humble
Cash	$1,200,000	$365,000
Accounts Receivable	$270,000	$55,000
Investment in Humble	$319,040
Inventory	$70,000	$70,000
Equipment (net)	$820,000	$65,000
Trademark		$85,000
Total Assets	$2,679,040	$640,000
Current Liabilities	$350,000	$332,000
Bonds Payable	$260,000	$70,000
Common Shares	$900,000	$180,000
Retained Earnings	$1,169,040	$58,000
Total Liabilities and Equity	$2,679,040	$640,000

The amount of Accounts Receivable appearing on Big Guy’s consolidated balance sheet as at June 30, 2020 would be:
A. $270,000.
B. $305,000.
C. $314,000.
D. $325,000.

Accounts Receivable on consolidated balance sheet = $305,000.

Big Guy (parent) Accounts Receivable	$270,000
Humble (sub) Accounts Receivable	$55,000
Elimination of intercompany A/R and A/P	$(20,000)
Consolidated Accounts Receivable	$305,000

Big Guy Inc. purchased 80% of the outstanding voting shares of Humble Corp. for $360,000 on July 1, 2017. On that date, Humble Corp. had common shares and retained earnings worth $180,000 and $90,000, respectively. The equipment had a remaining useful life of 5 years from the date of acquisition. Humble’s bonds mature on July 1, 2027. Both companies use straight line amortization, and no salvage value is assumed for assets. The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Humble’s fair market values on the date of acquisition are disclosed below:

	Big Guy	Humble	Humble
	(carrying value)	(carrying value)	(fair value)
Cash	$800,000	$245,000	$245,000
Accounts Receivable	$240,000	$40,000	$40,000
Inventory	$60,000	$45,000	$50,000
Equipment (net)	$900,000	$80,000	$72,000
Trademark		$90,000	$193,000
Total Assets	$2,000,000	$500,000
Current Liabilities	$200,000	$160,000	$160,000
Bonds Payable	$260,000	$70,000	$40,000
Common Shares	$900,000	$180,000
Retained Earnings	$640,000	$90,000
Total Liabilities and Equity	$2,000,000	$500,000

The following are the financial statements for both companies for the fiscal year ended June 30, 2020:

Income Statements:

	Big Guy	Humble
Sales	$640,000	$240,000
Investment Revenue	$8,480
Less: Expenses:
Cost of Goods Sold	$300,000	$160,000
Depreciation	$81,000	$34,000
Interest Expense	$34,000	$26,000
Other Expenses	$5,000	$8,000
Net Income	$228,480	$12,000

Retained Earnings Statements

	Big Guy	Humble
Balance, July 1, 2019	$960,560	$48,000
Net Income	$228,480	$12,000
Dividends	$20,000	$2,000
Balance, June 30, 2020	$1,169,040	$58,000

Balance Sheets

	Big Guy	Humble
Cash	$1,200,000	$365,000
Accounts Receivable	$270,000	$55,000
Investment in Humble	$319,040
Inventory	$70,000	$70,000
Equipment (net)	$820,000	$65,000
Trademark		$85,000
Total Assets	$2,679,040	$640,000
Current Liabilities	$350,000	$332,000
Bonds Payable	$260,000	$70,000
Common Shares	$900,000	$180,000
Retained Earnings	$1,169,040	$58,000
Total Liabilities and Equity	$2,679,040	$640,000

The amount of Cash on Big Guy’s consolidated balance sheet on June 30, 2020 would be:
A. $1,200,000.
B. $1,545,000.
C. $1,565,000.
D. $1,585,000.

Cash on consolidated balance sheet = $1,565,000.

Big Guy (parent) Cash	$1,200,000
Humble (sub) Cash	$365,000
Consolidated Cash	$1,565,000

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-03 Prepare consolidated financial statements using the fair value enterprise method subsequent to the date of acquisition.
Topic: 05-12 Consolidation of an 80%-Owned Subsidiary-Direct Approach

Big Guy Inc. purchased 80% of the outstanding voting shares of Humble Corp. for $360,000 on July 1, 2017. On that date, Humble Corp. had common shares and retained earnings worth $180,000 and $90,000, respectively. The equipment had a remaining useful life of 5 years from the date of acquisition. Humble’s bonds mature on July 1, 2027. Both companies use straight line amortization, and no salvage value is assumed for assets. The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Humble’s fair market values on the date of acquisition are disclosed below:

	Big Guy	Humble	Humble
	(carrying value)	(carrying value)	(fair value)
Cash	$800,000	$245,000	$245,000
Accounts Receivable	$240,000	$40,000	$40,000
Inventory	$60,000	$45,000	$50,000
Equipment (net)	$900,000	$80,000	$72,000
Trademark		$90,000	$193,000
Total Assets	$2,000,000	$500,000
Current Liabilities	$200,000	$160,000	$160,000
Bonds Payable	$260,000	$70,000	$40,000
Common Shares	$900,000	$180,000
Retained Earnings	$640,000	$90,000
Total Liabilities and Equity	$2,000,000	$500,000

The following are the financial statements for both companies for the fiscal year ended June 30, 2020:

Income Statements:

	Big Guy	Humble
Sales	$640,000	$240,000
Investment Revenue	$8,480
Less: Expenses:
Cost of Goods Sold	$300,000	$160,000
Depreciation	$81,000	$34,000
Interest Expense	$34,000	$26,000
Other Expenses	$5,000	$8,000
Net Income	$228,480	$12,000

Retained Earnings Statements

	Big Guy	Humble
Balance, July 1, 2019	$960,560	$48,000
Net Income	$228,480	$12,000
Dividends	$20,000	$2,000
Balance, June 30, 2020	$1,169,040	$58,000

Balance Sheets

	Big Guy	Humble
Cash	$1,200,000	$365,000
Accounts Receivable	$270,000	$55,000
Investment in Humble	$319,040
Inventory	$70,000	$70,000
Equipment (net)	$820,000	$65,000
Trademark		$85,000
Total Assets	$2,679,040	$640,000
Current Liabilities	$350,000	$332,000
Bonds Payable	$260,000	$70,000
Common Shares	$900,000	$180,000
Retained Earnings	$1,169,040	$58,000
Total Liabilities and Equity	$2,679,040	$640,000

The value of Common Shares appearing on Big Guy’s consolidated balance sheet on June 30, 2020 would be:
A. $900,000.
B. $1,044,000.
C. $1,080,000.
D. $1,800,000.

Common Shares on consolidated balance sheet = Common Shares on Big Guy (parent) balance sheet = $900,000.

Big Guy Inc. purchased 80% of the outstanding voting shares of Humble Corp. for $360,000 on July 1, 2017. On that date, Humble Corp. had common shares and retained earnings worth $180,000 and $90,000, respectively. The equipment had a remaining useful life of 5 years from the date of acquisition. Humble’s bonds mature on July 1, 2027. Both companies use straight line amortization, and no salvage value is assumed for assets. The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Humble’s fair market values on the date of acquisition are disclosed below:

	Big Guy	Humble	Humble
	(carrying value)	(carrying value)	(fair value)
Cash	$800,000	$245,000	$245,000
Accounts Receivable	$240,000	$40,000	$40,000
Inventory	$60,000	$45,000	$50,000
Equipment (net)	$900,000	$80,000	$72,000
Trademark		$90,000	$193,000
Total Assets	$2,000,000	$500,000

Current Liabilities	$200,000	$160,000	$160,000
Bonds Payable	$260,000	$70,000	$40,000
Common Shares	$900,000	$180,000
Retained Earnings	$640,000	$90,000
Total Liabilities and Equity	$2,000,000	$500,000

The following are the financial statements for both companies for the fiscal year ended June 30, 2020:

Income Statements:

	Big Guy	Humble
Sales	$640,000	$240,000
Investment Revenue	$8,480
Less: Expenses:
Cost of Goods Sold	$300,000	$160,000
Depreciation	$81,000	$34,000
Interest Expense	$34,000	$26,000
Other Expenses	$5,000	$8,000
Net Income	$228,480	$12,000

Retained Earnings Statements

	Big Guy	Humble
Balance, July 1, 2019	$960,560	$48,000
Net Income	$228,480	$12,000
Dividends	$20,000	$2,000
Balance, June 30, 2020	$1,169,040	$58,000

Balance Sheets

	Big Guy	Humble
Cash	$1,200,000	$365,000
Accounts Receivable	$270,000	$55,000
Investment in Humble	$319,040
Inventory	$70,000	$70,000
Equipment (net)	$820,000	$65,000
Trademark		$85,000
Total Assets	$2,679,040	$640,000
Current Liabilities	$350,000	$332,000
Bonds Payable	$260,000	$70,000
Common Shares	$900,000	$180,000
Retained Earnings	$1,169,040	$58,000
Total Liabilities and Equity	$2,679,040	$640,000

The amount of bonds payable appearing on Big Guy’s consolidated balance sheet on June 30, 2020 would be:
A. $309,000.
B. $317,800.
C. $318,000.
D. $330,000.

Bonds Payable on consolidated balance sheet = $309,000.

Big Guy (parent) Bonds Payable		$260,000
Humble (sub) Bonds Payable		$70,000
Unamortized acquisition differential on Bonds Payable (10 years)	($30,000 – ($3,000 × 3 years))	$(21,000)
Consolidated Bonds Payable		$309,000

Short Answer Questions

Davis Inc. purchased a controlling interest in Martin Inc. on January 1, 2019, when Martin’s common shares and retained earnings were carried at $180,000 and $60,000 respectively. On that date, Martin’s book values approximated its fair values, with the exception of the company’s inventories and a Patent held by Martin. The patent, which had an estimated remaining useful life of ten years, had a fair value which was $20,000 higher than its book value. Martin’s Inventories on January 1, 2019 were estimated to have a fair value that was $16,000 higher than their book value.
It was predicted that Martin’s goodwill impairment test, which was to be conducted on December 31, 2020, would result in a loss equal to 10% of the goodwill (regardless of the amount) at the date of acquisition being recorded. During 2019, Martin reported a net income of $60,000 and paid $12,000 in dividends. Martin’s 2020 net income and dividends were $72,000 and $15,000, respectively. Martin uses straight-line amortization for all of its assets.

Assuming that Davis purchases 100% of Martin for $300,000, answer the following:

Required:

a) Prepare Davis’ Equity Method journal entries for 2019 and 2020.

b) Compute the following as at December 31, 2020:

i. Investment in Martin Inc.
ii. Goodwill
iii. The amount of unamortized acquisition differential.
a) Equity Method Journal Entries

2019:	Debit	Credit
Investment in Martin Inc.	$300,000
Cash		$300,000
Investment in Martin Inc.	$60,000
Investment Income		$60,000
Investment Income	$18,000
Investment in Martin Inc.		$18,000
Cash	$12,000
Investment in Martin Inc.		$12,000
2020:	Debit	Credit
Investment in Martin Inc.	$72,000
Investment Income		$72,000
Investment Income	$4,400
Investment in Martin Inc.		$4,400
Cash	$15,000
Investment in Martin Inc.		$15,000

b) i) Investment in Martin :

Cost:	$300,000
Add: 2019 Income:	$60,000
Less: 2019 Dividends	($12,000)
Less: 2019 Acquisition Differential Amortization:	($18,000)
Add: 2020 Income:	$72,000
Less: 2020 Dividends	($15,000)
Less: 2020 Acquisition Differential Amortization:	($4,400)
Investment in Martin Inc., December 31, 2020:	$382,600

ii) Goodwill:

Purchase Price of Martin:	$300,000
Less: book value of Martin’s net identifiable assets	($240,000)
Acquisition differential	$60,000
Less: Excess of fair value over book values:
Inventories	($20,000)
Patent	($16,000)
Goodwill at date of acquisition	$24,000
Less: Impairment Loss (10%)	($2,400)
Goodwill	$21,600

iii) The only unamortized acquisition differential remaining would be 8/10 of the excess fair value of the patent, which would be $16,000 plus the goodwill of $21,600 for a total of $37,600.

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-03 Prepare consolidated financial statements using the fair value enterprise method subsequent to the date of acquisition.
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-12 Consolidation of an 80%-Owned Subsidiary-Direct Approach
Topic: 05-20 Equity Method of Recording

Davis Inc. purchased a controlling interest in Martin Inc. on January 1, 2019, when Martin’s common shares and retained earnings were carried at $180,000 and $60,000 respectively. On that date, Martin’s book values approximated its fair values, with the exception of the company’s inventories and a Patent held by Martin. The patent, which had an estimated remaining useful life of ten years, had a fair value which was $20,000 higher than its book value. Martin’s Inventories on January 1, 2019 were estimated to have a fair value that was $16,000 higher than their book value.
It was predicted that Martin’s goodwill impairment test, which was to be conducted on December 31, 2020, would result in a loss equal to 10% of the goodwill (regardless of the amount) at the date of acquisition being recorded. During 2019, Martin reported a net income of $60,000 and declared and paid $12,000 in dividends. Martin’s 2020 net income and declared and paid dividends were $72,000 and $15,000, respectively. Martin uses straight-line amortization for all of its assets.

Davis uses the Fair Value Enterprise Method.

Assuming that Davis purchases 80% of Martin for $300,000, answer the following:

Required:

a) Prepare Davis’ Equity Method journal entries for 2019 and 2020.
b) Compute the following as at December 31, 2020:

i. Investment in Martin Inc.
ii. Goodwill
iii. The amount of unamortized acquisition differential.
a) Equity Method Journal Entries

2019:	Debit	Credit
Investment in Martin Inc.	$300,000
Cash		$300,000
Investment in Martin Inc.	$48,000
Investment Income		$48,000
Investment Income	$14,400
Investment in Martin Inc.		$14,400
Cash	$9,600
Investment in Martin Inc.		$9,600
2020:	Debit	Credit
Investment in Martin Inc.	$57,600
Investment Income		$57,600
Investment Income	$9,520
Investment in Martin Inc.		$9,520
Cash	$12,000
Investment in Martin Inc.		$12,000

b) i) Investment in Martin :

Cost:	$300,000
Add: 2019 Income:	$48,000
Less: 2019 Dividends	($9,600)
Less: 2019 Acquisition Differential Amortization:	($14,400)
Add: 2020 Income:	$57,600
Less: 2020 Dividends	($12,000)
Less: 2020 Acquisition Differential Amortization:	($9,520)
Investment in Martin Inc., December 31, 2020:	$360,080

ii) Goodwill

Purchase Price of Martin: 80%	$300,000
Imputed value at 100%	$375,000
Less: book value of Martin’s net identifiable assets	$240,000
Acquisition differential	$135,000
Less: excess of fair value over book values:
Inventories	($20,000)
Patent	($16,000)
Goodwill at date of acquisition	$99,000
Less: impairment loss (10%)	($9,900)
Goodwill	$89,100

iii) The only unamortized acquisition differential remaining would be 8/10 of the excess fair value of the patent, which would be $16,000 plus the goodwill of $89,100 for a total of $105,100.

Linton Inc. purchased 75% of Marsh Inc. on January 1, 2019 for $1,000,000. Marsh’s common shares and retained earnings were worth $400,000 each on that date. The acquisition differential was allocated as follows:

Trademark	$15,000 (which had not been previously recorded)
Inventory	$8,000 (fair value in excess of book value)

The balance was allocated to goodwill. The trademark had an estimated remaining useful life of 10 years from the date of acquisition. Marsh Inc. uses straight line amortization.

In 2019, Marsh’s net income was $40,000. Marsh declared and paid $5,000 in dividends to shareholders on record as at December 31, 2019. In 2020, Marsh reported a net income of $8,000 and declared and paid $1,000 in dividends.

Required:

a) Prepare the equity method journal entries for Linton for 2019 and 2020.
b) Calculate the value of Marsh’s trademark as at December 31, 2020.
c) Prepare a statement that shows the changes in Linton’s non-controlling interest in 2020.

a) Equity Method Journal Entries

2019:	Debit	Credit
Investment in Marsh Inc.	$1,000,000
Cash		$1,000,000
Investment in Marsh Inc.	$30,000
Investment Income		$30,000
Investment Income	$7,125
Investment in Marsh Inc.		$7,125
Cash	$3,750
Investment in Marsh Inc.		$3,750
2020:	Debit	Credit
Investment in Marsh Inc.	$6,000
Investment Income		$6,000
Investment Income	$1,125
Investment in Marsh Inc.		$1,125
Cash	$750
Investment in Marsh Inc.		$750

b) Trademark: $15,000 – ($1,500 ´ 2) = $12,000
c) Changes in Non-Controlling Interest:

Non-Controlling Interest, January 1, 2019:
($1,333,333 × 25 %)	$333,333
2019 Net Income (Non-Controlling Share)
($40,000 × 25%) – ($8,000 + $1,500) × 25%	$7,625
Less: 2019 Dividends (Non-Controlling Share)
($5,000 × 25%)	($1,250)
2020 Net Income (Non-Controlling Share)
($8,000 × 25%) – ($1,500 × 25%)	$1,625
Less: 2020 Dividends (Non-Controlling Share)
($1,000 × 25%)	($250)
Non-Controlling Interest, December 31, 2020	$341,083

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-02 Prepare schedules to allocate and show changes to the acquisition differential on both an annual and a cumulative basis.
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-09 Consolidation of a 100%-Owned Subsidiary
Topic: 05-20 Equity Method of Recording

Selectron Inc. acquired 60% of Insor Inc. on January 1, 2019 for $180,000, when Insor’s Common Shares and Retained Earnings were worth $60,000 and $180,000 respectively. Insor’s fair values approximated their book values on that date. Selectron currently uses the Equity Method to account for its investment in Insor.
During 2019, investment income in the amount of $12,000 and dividends in the amount of $1,200 were recorded in Selectron’s Investment in Insor account. During 2020, investment income in the amount of $24,000 and dividends in the amount of $2,400 were recorded in Selectron’s Investment in Insor account. Insor declares dividends in the amount of 10% of its earnings.

Required:

a) Compute Insor’s net income for 2019 and 2020.
b) Compute the amount of dividends declared by Insor in each year.
c) Compute the balance in the non-controlling interest account as at December 31, 2020.
a) Insor’s Net Income for 2019 and 2020 had to be $20,000 and $40,000 respectively.
Insor’s Net Income for 2019 is calculated as follows:

2019 Net Income flowing through investment account = $12,000;

$12,000/60% = $20,000

Insor’s 2020 net income would be calculated in the same manner, and would be $40,000.
b) Dividends, 2019 = $20,000 ´ 10 % = $2,000 (or $1,200/60%) Dividends, 2020 = $4,000.
c) Non-Controlling Interest:

Fair value of Insor at date of acquisition:	$300,000
Add: 2019 Net Income	$20,000
Less: 2019 Dividends	($2,000)
Add: 2020 Net Income	$40,000
Less: 2020 Dividends	($4,000)
Book value of Insor, December 31, 2020	$354,000
Non-Controlling Interest (40%)	$141,600

Brand X Inc. purchased a controlling interest in Brand Y Inc. on January 1, 2020. On that date, Brand Y Inc. had common shares and retained earnings worth $180,000 and $20,000, respectively. Goodwill is tested annually for impairment. At the date of acquisition, Brand Y’s assets and liabilities were assessed for fair value as follows:

Inventory	$5,000 less than book value
Equipment	$30,000 less than book value
Patent	$24,000 greater than book value
Bonds Payable	$5,000 less than book value

The balance sheets of both companies, as at December 31, 2020 are disclosed below:

	Brand X Inc.	Brand Y Inc.
Cash	$200,000	$45,000
Accounts Receivable	$100,000	$40,000
Inventory	$80,000	$55,000
Equipment (net)	$220,000	$100,000
Patent		$60,000
Investment in Brand Y	$348,000
Total Assets	$948,000	$300,000
Current Liabilities	$480,000	$53,000
Bonds Payable	$270,000	$50,000
Common Shares	$100,000	$180,000
Retained Earnings	$98,000	$19,000
Total Liabilities and Equity	$948,000	$300,000

The net incomes for Brand X and Brand Y for the year ended December 31, 2020 were $1,000 and $50,000 respectively. Brand X did not declare any dividends during the year. However, Brand Y paid $51,000 in dividends to make up for several years in which the company had never paid any dividends.

An impairment test conducted on December 31, 2020 revealed that the Goodwill should actually have a value $2,000 lower than the amount calculated on the date of acquisition.

Both companies use a FIFO system, and Brand Y’s inventory on the date of acquisition was sold during the year. Brand Y’s equipment and patent have useful lives of 10 years and 6 years respectively from the date of acquisition. All bonds payable mature on January 1, 2025.
Prepare Brand X’s consolidated balance sheet as at December 31, 2020, assuming that Brand X purchased 100% of Brand Y for $350,000 and accounts for its investment using the equity method.

Brand X Inc.
Consolidated Balance Sheet
As at December 31, 2020

Cash		$245,000
Accounts Receivable		$140,000
Inventory	(80 + 55 – 5 + 5)	$135,000
Equipment (net)	(220 + 100 – 30 + 3)	$293,000
Patent	(60 + 24 – 4)	$80,000
Goodwill	* see below	$154,000
Total Assets		$1,047,000
Current Liabilities		$533,000
Bonds Payable	(270 + 50 – 5 + 1)	$316,000
Common Shares		$100,000
Retained Earnings		$98,000
Total Liabilities and Equity		$1,047,000

Note: Consolidated Retained Earnings are the same as the parent’s retained earnings under the Equity Method.

The following explanation may help students understand how some of these figures were derived:

Goodwill:

Purchase Price	$350,000
Less: NBV of net assets	200,000
AD	$150,000
Allocated
Inventory	(5,000)
Equipment	(30,000)
Patent	24,000
Bonds payable	5,000
Goodwill	$156,000
Less: Impairment loss	($2,000)
Goodwill–Dec. 31/20	$154,000

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-02 Prepare schedules to allocate and show changes to the acquisition differential on both an annual and a cumulative basis.
Learning Objective: 05-03 Prepare consolidated financial statements using the fair value enterprise method subsequent to the date of acquisition.
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-09 Consolidation of a 100%-Owned Subsidiary
Topic: 05-20 Equity Method of Recording

Brand X Inc. purchased a controlling interest in Brand Y Inc. on January 1, 2020. On that date, Brand Y Inc. had common shares and retained earnings worth $180,000 and $20,000, respectively. Goodwill is tested annually for impairment. At the date of acquisition, Brand Y’s assets and liabilities were assessed for fair value as follows:

Inventory	$5,000 less than book value
Equipment	$30,000 less than book value
Patent	$24,000 greater than book value
Bonds Payable	$5,000 less than book value

The balance sheets of both companies, as at December 31, 2020 are disclosed below:

	Brand X Inc.	Brand Y Inc.
Cash	$200,000	$45,000
Accounts Receivable	$100,000	$40,000
Inventory	$80,000	$55,000
Equipment (net)	$220,000	$100,000
Patent		$60,000
Investment in Brand Y	$348,000
Total Assets	$948,000	$300,000
Current Liabilities	$480,000	$53,000
Bonds Payable	$270,000	$50,000
Common Shares	$100,000	$180,000
Retained Earnings	$98,000	$19,000
Total Liabilities and Equity	$948,000	$300,000

The net incomes for Brand X and Brand Y for the year ended December 31, 2020 were $1,000 and $50,000 respectively. Brand X did not declare any dividends during the year. However, Brand Y paid and declared $51,000 in dividends in 2020 to make up for several years in which the company had never declared any dividends.

An impairment test conducted on December 31, 2020 revealed that the Goodwill should actually have a value $2,000 lower than the amount calculated on the date of acquisition.

Brand X uses the Fair Value Enterprise Method to value the non-controlling interest in Brand Y on the acquisition date.

Prepare Brand X’s consolidated balance sheet as at December 31, 2020, assuming that Brand X purchased 80% of Brand Y for $350,000 and accounts for its investment using the equity method.

Brand X Inc.
Consolidated Balance Sheet
As at December 31, 2020

Cash		$245,000
Accounts Receivable		$140,000
Inventory	(80 + 55 + 5 – 5)	$135,000
Equipment (net)	(220 + 100 – 30 + 3)	$293,000
Patent	(60 + 24 – 4)	$80,000
Goodwill	* see below	$241,500
Total Assets		$1,134,500
Current Liabilities		$533,000
Bonds Payable	(270 + 50 – 5 + 1)	$316,000
Non-Controlling Interest		$87,500
Common Shares		$100,000
Retained Earnings		$98,000
Total Liabilities and Equity		$1,134,500

The following explanations may help students understand how some of the figures were derived:

Non-Controlling Interest:

NCI at acquisition – $437,500 × 20%	$87,500
Income ($50,000 × .2)	10,000
Dividends ($51,000 × .2)	(10,200)
Inventory 5,000 × 20%	1,000
Equipment (30,000/10) × 20%	600
Patent (24,000)/6 = (4,000) × 20%	(800)
Bond (5,000)/5 = (1,000) × 20%	(200)
Goodwill 2,000 × 20%	(400)
	$87,50

Goodwill:

Purchase Price	$350,000
Implied value (100%) 350,000/.80	$437,500
Less: NBV of net assets	200,000
AD	$237,500
Allocated
Inventory	(5,000)
Equipment	(30,000)
Patent	24,000
Bonds payable	5,000
Goodwill	$243,500
Less: Impairment loss	($2,000)
Goodwill–Dec. 31/20	$241,500

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-02 Prepare schedules to allocate and show changes to the acquisition differential on both an annual and a cumulative basis.
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-12 Consolidation of an 80%-Owned Subsidiary-Direct Approach
Topic: 05-20 Equity Method of Recording

Par Inc. purchased 70% of the outstanding voting shares of Sub Inc. for $700000 on July 1, 2020. On that date, Sub Inc. had common shares and retained earnings worth $410,000 and $170,000, respectively. The Equipment had a remaining useful life of 5 years from the date of acquisition. Sub’s bonds mature on July 1, 2025. The inventory was sold in the year following the acquisition. Both companies use straight line amortization, and no salvage value is assumed for assets. Par Inc. and Sub Inc. declared and paid $10,000 and $5,000 in dividends, respectively during the year.
Par Inc. uses the Fair Value Enterprise Method to value the non-controlling interest in Sub Inc. on the acquisition date.

The balance sheets of both companies, as well as Sub’s fair values immediately following the acquisition are shown below:

	Par Inc.	Sub Inc.	Sub Inc.
	(carrying value)	(carrying value)	(fair value)
Cash	$600,000	$515,000	$515,000
Accounts Receivable	$140,000	$85,000	$85,000
Inventory	$60,000	$45,000	$60,000
Investment in Sub Inc.	$700,000
Equipment (net)	$50,000	$180,000	$185,000
Land		$115,000	$200,000
Total Assets	$1,550,000	$940,000
Current Liabilities	$100,000	$280,000	$280,000
Bonds Payable	$160,000	$80,000	$60,000
Common Shares	$800,000	$410,000
Retained Earnings	$490,000	$170,000
Total Liabilities and Equity	$1,550,000	$940,000

The following are the financial statements for both companies for the fiscal year ended June 30, 2021:

Income Statements

Sales	$800,000	$300,000
Investment Revenue	$21,000
Less: Expenses:
Cost of Goods Sold	$240,000	$180,000
Depreciation	$10,000	$20,000
Interest Expense	$12,000	$40,000
Other Expenses	$8,000	$10,000
Net Income	$551,000	$50,000

Retained Earnings Statements

Balance, July 1, 2020	$490,000	$170,000
Net Income	$551,000	$50,000
Dividends	$(10,000)	$(5,000)
Balance, June 30, 2021	$1,031,000	$215,000

Balance Sheets

	Par Inc.	Sub Inc.
Cash	$647,500	$665,000
Accounts Receivable	$250,000	$35,000
Investment in Sub	$717,500
Inventory	$90,000	$45,000
Equipment (net)	$750,000	$170,000
Land		$115,000
Total Assets	$2,455,000	$1,030,000
Current Liabilities	$464,000	$325,000
Bonds Payable	$160,000	$80,000
Common Shares	$800,000	$410,000
Retained Earnings	$1,031,000	$215,000
Total Liabilities and Equity	$2,455,000	$1,030,000

Both companies use a FIFO system, and Sub’s entire inventory on the date of acquisition was sold during the following year. During 2020, Sub Inc. borrowed $10,000 in cash from Par Inc. interest free to finance its operations. The amount remains unpaid as of June 30, 2021. The Par uses the Equity Method to account for its investment in Sub Inc. Corp.

Prepare Par’s consolidated balance sheet as at the date of acquisition.

Par Inc.
Consolidated Balance Sheet
As at July 1, 2020

Cash	$1,115,000
Accounts Receivable	$225,000
Inventory	$120,000
Equipment (net)	$135,000
Land	$200,000
Goodwill*	$295,000
Total Assets	$2,190,000
Current Liabilities	$380,000
Bonds Payable	$220,000
Non-Controlling Interest	$300,000
Common Shares	$800,000
Retained Earnings	$490,000
Total Liabilities and Equity	$2,190,000
*Purchase Price for 70%	$700,000
Implied value of 100% interest	$1,000,000
Less: Fair value of net identifiable assets acquired	$705,000
Goodwill	$295,000

Par Inc. purchased 70% of the outstanding voting shares of Sub Inc. for $700000 on July 1, 2020. On that date, Sub Inc. had common shares and retained earnings worth $410,000 and $170,000, respectively. The Equipment had a remaining useful life of 5 years from the date of acquisition. Sub’s bonds mature on July 1, 2025. The inventory was sold in the year following the acquisition. Both companies use straight line amortization, and no salvage value is assumed for assets. Par Inc. and Sub Inc. declared and paid $10,000 and $5,000 in dividends, respectively during the year.
Par Inc. uses the Fair Value Enterprise Method to value the non-controlling interest in Sub Inc. on the acquisition date.

The balance sheets of both companies, as well as Sub’s fair values immediately following the acquisition are shown below:

	Par Inc.	Sub Inc.	Sub Inc.
	(carrying value)	(carrying value)	(fair value)
Cash	$600,000	$515,000	$515,000
Accounts Receivable	$140,000	$85,000	$85,000
Inventory	$60,000	$45,000	$60,000
Investment in Sub Inc.	$700,000
Equipment (net)	$50,000	$180,000	$185,000
Land		$115,000	$200,000
Total Assets	$1,550,000	$940,000
Current Liabilities	$100,000	$280,000	$280,000
Bonds Payable	$160,000	$80,000	$60,000
Common Shares	$800,000	$410,000
Retained Earnings	$490,000	$170,000
Total Liabilities and Equity	$1,550,000	$940,000

The following are the financial statements for both companies for the fiscal year ended June 30, 2021:

Income Statements

Sales	$800,000	$300,000
Investment Revenue	$21,000
Less: Expenses:
Cost of Goods Sold	$240,000	$180,000
Depreciation	$10,000	$20,000
Interest Expense	$12,000	$40,000
Other Expenses	$8,000	$10,000
Net Income	$551,000	$50,000

Retained Earnings Statements

Balance, July 1, 2020	$490,000	$170,000
Net Income	$551,000	$50,000
Dividends	$(10,000)	$(5,000)
Balance, June 30, 2021	$1,031,000	$215,000

Balance Sheets

	Par Inc.	Sub Inc.
Cash	$647,500	$665,000
Accounts Receivable	$250,000	$35,000
Investment in Sub	$717,500
Inventory	$90,000	$45,000
Equipment (net)	$750,000	$170,000
Land		$115,000
Total Assets	$2,455,000	$1,030,000
Current Liabilities	$464,000	$325,000
Bonds Payable	$160,000	$80,000
Common Shares	$800,000	$410,000
Retained Earnings	$1,031,000	$215,000
Total Liabilities and Equity	$2,455,000	$1,030,000

Prepare Par’s consolidated income statement for the year ended June 30, 2021. Show the allocation of consolidated net income between the controlling and non-controlling interests.

Par Inc.
Consolidated Income Statement
for the Year ended June 30, 2021

Sales	$1,100,000
Less: Expenses:
Cost of Goods Sold:	$435,000	($240,000 + $180,000) + $15,000
Depreciation	$31,000	($10,000 + $20,000) + $1,000
Interest Expense	$56,000	($12,000 + $40,000) + $4,000
Other Expenses	$18,000
Consolidated Net Income	$560,000
Less: Non-Controlling Interest	($9,000)	($50,000 – $15,000 – $1,000 – $4,000) × 30%
Parent’s Share of CNI	$551,000

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-02 Prepare schedules to allocate and show changes to the acquisition differential on both an annual and a cumulative basis.
Learning Objective: 05-03 Prepare consolidated financial statements using the fair value enterprise method subsequent to the date of acquisition.
Topic: 05-12 Consolidation of an 80%-Owned Subsidiary-Direct Approach
Topic: 05-20 Equity Method of Recording

Par Inc. purchased 70% of the outstanding voting shares of Sub Inc. for $700000 on July 1, 2020. On that date, Sub Inc. had common shares and retained earnings worth $410,000 and $170,000, respectively. The Equipment had a remaining useful life of 5 years from the date of acquisition. Sub’s bonds mature on July 1, 2025. The inventory was sold in the year following the acquisition. Both companies use straight line amortization, and no salvage value is assumed for assets. Par Inc. and Sub Inc. declared and paid $10,000 and $5,000 in dividends, respectively during the year.
Par Inc. uses the Fair Value Enterprise Method to value the non-controlling interest in Sub Inc. on the acquisition date.

The balance sheets of both companies, as well as Sub’s fair values immediately following the acquisition are shown below:

	Par Inc.	Sub Inc.	Sub Inc.
	(carrying value)	(carrying value)	(fair value)
Cash	$600,000	$515,000	$515,000
Accounts Receivable	$140,000	$85,000	$85,000
Inventory	$60,000	$45,000	$60,000
Investment in Sub Inc.	$700,000
Equipment (net)	$50,000	$180,000	$185,000
Land		$115,000	$200,000
Total Assets	$1,550,000	$940,000
Current Liabilities	$100,000	$280,000	$280,000
Bonds Payable	$160,000	$80,000	$60,000
Common Shares	$800,000	$410,000
Retained Earnings	$490,000	$170,000
Total Liabilities and Equity	$1,550,000	$940,000

The following are the financial statements for both companies for the fiscal year ended June 30, 2021:

Income Statements

Sales	$800,000	$300,000
Investment Revenue	$21,000
Less: Expenses:
Cost of Goods Sold	$240,000	$180,000
Depreciation	$10,000	$20,000
Interest Expense	$12,000	$40,000
Other Expenses	$8,000	$10,000
Net Income	$551,000	$50,000

Retained Earnings Statements

Balance, July 1, 2020	$490,000	$170,000
Net Income	$551,000	$50,000
Dividends	$(10,000)	$(5,000)
Balance, June 30, 2021	$1,031,000	$215,000

Balance Sheets

	Par Inc.	Sub Inc.
Cash	$647,500	$665,000
Accounts Receivable	$250,000	$35,000
Investment in Sub	$717,500
Inventory	$90,000	$45,000
Equipment (net)	$750,000	$170,000
Land		$115,000
Total Assets	$2,455,000	$1,030,000
Current Liabilities	$464,000	$325,000
Bonds Payable	$160,000	$80,000
Common Shares	$800,000	$410,000
Retained Earnings	$1,031,000	$215,000
Total Liabilities and Equity	$2,455,000	$1,030,000

Prepare Par’s statement of consolidated retained earnings for the year ended June 30, 2021.

Par Inc.
Statement of Consolidated Retained Earnings
for the year Ended June 30, 2021

Beginning Retained Earnings:	$490,000
Add: Parent’s share of Consolidated Net Income:	$551,000
Less: Dividends:	($10,000)
Ending Consolidated Retained Earnings:	$1,031,000

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-02 Prepare schedules to allocate and show changes to the acquisition differential on both an annual and a cumulative basis.
Learning Objective: 05-03 Prepare consolidated financial statements using the fair value enterprise method subsequent to the date of acquisition.
Topic: 05-12 Consolidation of an 80%-Owned Subsidiary-Direct Approach
Topic: 05-20 Equity Method of Recording

Par Inc. purchased 70% of the outstanding voting shares of Sub Inc. for $700000 on July 1, 2020. On that date, Sub Inc. had common shares and retained earnings worth $410,000 and $170,000, respectively. The Equipment had a remaining useful life of 5 years from the date of acquisition. Sub’s bonds mature on July 1, 2025. The inventory was sold in the year following the acquisition. Both companies use straight line amortization, and no salvage value is assumed for assets. Par Inc. and Sub Inc. declared and paid $10,000 and $5,000 in dividends, respectively during the year.
Par Inc. uses the Fair Value Enterprise Method to value the non-controlling interest in Sub Inc. on the acquisition date.

The balance sheets of both companies, as well as Sub’s fair values immediately following the acquisition are shown below:

	Par Inc.	Sub Inc.	Sub Inc.
	(carrying value)	(carrying value)	(fair value)
Cash	$600,000	$515,000	$515,000
Accounts Receivable	$140,000	$85,000	$85,000
Inventory	$60,000	$45,000	$60,000
Investment in Sub Inc.	$700,000
Equipment (net)	$50,000	$180,000	$185,000
Land		$115,000	$200,000
Total Assets	$1,550,000	$940,000
Current Liabilities	$100,000	$280,000	$280,000
Bonds Payable	$160,000	$80,000	$60,000
Common Shares	$800,000	$410,000
Retained Earnings	$490,000	$170,000
Total Liabilities and Equity	$1,550,000	$940,000

The following are the financial statements for both companies for the fiscal year ended June 30, 2021:

Income Statements

Sales	$800,000	$300,000
Investment Revenue	$21,000
Less: Expenses:
Cost of Goods Sold	$240,000	$180,000
Depreciation	$10,000	$20,000
Interest Expense	$12,000	$40,000
Other Expenses	$8,000	$10,000
Net Income	$551,000	$50,000

Retained Earnings Statements

Balance, July 1, 2020	$490,000	$170,000
Net Income	$551,000	$50,000
Dividends	$(10,000)	$(5,000)
Balance, June 30, 2021	$1,031,000	$215,000

Balance Sheets

	Par Inc.	Sub Inc.
Cash	$647,500	$665,000
Accounts Receivable	$250,000	$35,000
Investment in Sub	$717,500
Inventory	$90,000	$45,000
Equipment (net)	$750,000	$170,000
Land		$115,000
Total Assets	$2,455,000	$1,030,000
Current Liabilities	$464,000	$325,000
Bonds Payable	$160,000	$80,000
Common Shares	$800,000	$410,000
Retained Earnings	$1,031,000	$215,000
Total Liabilities and Equity	$2,455,000	$1,030,000

Prepare a statement of changes in Non-Controlling Interest for the year ended June 30, 2021.

Par Inc.
Statement of Changes in Non-Controlling Interest
for the year ended June 30, 2021

Non-controlling interest, July 1, 2020 ($700,000/.70) × 30%)	$300,000
NCI share of consolidated net income ($50,000 – $15,000 – $1,000 – $4,000) × 30%	$9,000
NCI share of dividends ($5,000 × 30%)	($1,500)
Non-controlling interest, June 30, 2021	$307,500
The ending balance can be calculated as follows:
Subsidiary’s share capital	$410,000
Subsidiary’s retained earnings	$215,000
Unamortized acquisition differential (see below)	$400,000
Total	$1,025,000
Noncontrolling interest at 30%	$307,500

Changes to Acquisition Differential Schedule

	Balance July 1, 2020	Changes in 2020	Balance June 30, 2021
Inventory	$15,000	$15,000	$0
Equipment	5,000	1,000	4,000
Land	85,000	——–	85,000
Bonds Payable	20,000	4,000	16,000
Goodwill	295,000	——–	295,000
			$400,000

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-02 Prepare schedules to allocate and show changes to the acquisition differential on both an annual and a cumulative basis.
Learning Objective: 05-03 Prepare consolidated financial statements using the fair value enterprise method subsequent to the date of acquisition.
Topic: 05-12 Consolidation of an 80%-Owned Subsidiary-Direct Approach

Prepare a consolidated balance sheet for Par Inc. as at June 30, 2021.

Par Inc.
Consolidated Balance Sheet
As at June 30, 2021

Cash	(647.5 + 665)	$1,312,500
Accounts Receivable	(250 + 35 – 10)	$275,000
Inventory	(90 + 45)	$135,000
Equipment (net)	(750 + 170 + 4)	$924,000
Land	(0 + 115 + 85)	$200,000
Goodwill		$295,000
Total Assets		$3,141,500
Current Liabilities	(464 + 325 – 10)	$779,000
Bonds Payable	(160 + 80 – 16)	$224,000
Non-Controlling Interest		$307,500
Common Shares		$800,000
Retained Earnings		$1,031,000
Total Liabilities and Equity		$3,141,500

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-02 Prepare schedules to allocate and show changes to the acquisition differential on both an annual and a cumulative basis.
Learning Objective: 05-03 Prepare consolidated financial statements using the fair value enterprise method subsequent to the date of acquisition.
Topic: 05-12 Consolidation of an 80%-Owned Subsidiary-Direct Approach
Topic: 05-13 Consolidated Statements, End of Year 5
Topic: 05-18 Intercompany Receivables and Payables

Remburn Inc. Inc. purchased 90% of the outstanding voting shares of Stanton Inc. for $90,000 on January 1, 2019. On that date, Stanton Inc. had common shares and retained earnings worth $30,000 and $20,000, respectively. The equipment had a remaining useful life of 10 years from the date of acquisition. Stanton’s trademark is estimated to have a remaining life of 5 years from the date of acquisition. Stanton’s bonds mature on January 1, 2039. The inventory was sold in the year following the acquisition. Both companies use straight line amortization, and no salvage value is assumed for assets. Remburn Inc. and Stanton Inc. declared and paid $12,000 and $4,000 in dividends, respectively during the year.
The balance sheets of both companies, as well as Stanton’s fair values on the date of acquisition are shown below:

	Remburn Inc.	Stanton Inc.	Stanton Inc.
	(carrying value)	(carrying value)	(fair value)
Cash	$400,000	$5,000	$5,000
Accounts Receivable	$240,000	$30,000	$30,000
Inventory	$60,000	$30,000	$50,000
Investment in Stanton Inc.	$90,000
Equipment (net)	$160,000	$25,000	$20,000
Land		$20,000	$30,000
Trademark		$10,000	$15,000
Total Assets	$950,000	$120,000
Current Liabilities	$500,000	$50,000	$50,000
Bonds Payable	$120,000	$20,000	$30,000
Common Shares	$200,000	$30,000
Retained Earnings	$130,000	$20,000
Total Liabilities and Equity	$950,000	$120,000

The following are the financial statements for both companies for the fiscal year ended December 31, 2019:

Income Statements

Sales	$295,750	$125,000
Dividend income	$3,600
Less: Expenses:
Cost of Goods Sold	$200,000	$19,000
Depreciation	$10,000	$25,000
Interest Expense	$16,000	$36,000
Other Expenses	$5,000	$28,000
Gain on Sale of Land	$-	$(8,000)
Net Income	$68,350	$25,000

Retained Earnings Statements

Balance, January 1, 2019	$130,000	$20,000
Net Income	$68,350	$25,000
Dividends	$(12,000)	$(4,000)
Balance, December 31, 2019	$186,350	$41,000

Balance Sheets

	Remburn Inc.	Stanton Inc.
Cash	$190,950	$156,000
Accounts Receivable	$200,000	$150,000
Investment in Stanton Inc.	$90,000
Inventory	$100,000	$30,000
Equipment (net)	$350,000	$25,000
Trademark		$10,000
Total Assets	$930,950	$371,000
Current Liabilities	$424,600	$280,000
Bonds Payable	$120,000	$20,000
Common Shares	$200,000	$30,000
Retained Earnings	$186,350	$41,000
Total Liabilities and Equity	$930,950	$371,000

Both companies use a FIFO system, and Stanton’s entire inventory on the date of acquisition was sold during the following year. During 2019, Stanton Inc. borrowed $20,000 in cash from Remburn Inc. interest free to finance its operations. Remburn uses the Cost Method to account for its investment in Stanton Inc. Moreover, Stanton sold all of its land during the year for $28,000. Goodwill impairment for 2019 was determined to be $7,000.

Remburn has chosen to value the non-controlling interest in Stanton on the acquisition date at the fair value of the subsidiary’s identifiable net assets (identifiable net assets method).

Prepare Remburn’s consolidated income statement for the year ended December 31, 2019 and show the allocation of the consolidated net income between the controlling and non-controlling interests.

Answer: Remburn Inc.
Consolidated Income Statement
For the Year ended December 31, 2019

Sales		$420,750
Less: Expenses:
Cost of Goods Sold	(200,000 + 19,000 + 20,000)	$239,000
Depreciation	(10,000 + 25,000 – 500)	$34,500
Interest Expense	(16,000 + 36,000 – 500)	$51,500
Other Expenses	(5,000 + 28,000 + 1,000)	$34,000
Loss on Sale of Land	(- 8,000 + 10000)	$2,000
Goodwill impairment		$7,000
Consolidated Net Income		$52,750
Less: Non-Controlling Interest 25,000 × 10% = 2,500 – (30,000 × 10%) = (500)		(500)
Parent’s share of Consolidated Net Income		$53,250

Changes to Acquisition Differential Schedule

	Balance January 1, 2019	Changes in 2019	Balance December 31, 2019
Inventory	$20,000	$20,000	$0
Equipment	(5,000)	(500)	(4,500)
Land	10,000	10,000	0
Trademark	5,000	1,000	4,000
Bonds Payable	(10,000)	(500)	(9,500)
Total		30,000
Goodwill	27,000	7,000	20,000

*Purchase Price (90%)	$90,000
Value assigned to NCI	$7,000	(10% of $70,000 fair value of identifiable net assets)
	$97,000
Less: Book value of net identifiable assets acquired	$50,000
	$47,000
Allocated:
Inventory $20,000
Equipment (5,000)
Land 10,000
Trademark 5,000
Bonds payable (10,000)	$20,000
Goodwill (parent’s share)	$27,000

Remburn Inc. Inc. purchased 90% of the outstanding voting shares of Stanton Inc. for $90,000 on January 1, 2019. On that date, Stanton Inc. had common shares and retained earnings worth $30,000 and $20,000, respectively. The equipment had a remaining useful life of 10 years from the date of acquisition. Stanton’s trademark is estimated to have a remaining life of 5 years from the date of acquisition. Stanton’s bonds mature on January 1, 2039. The inventory was sold in the year following the acquisition. Both companies use straight line amortization, and no salvage value is assumed for assets. Remburn Inc. and Stanton Inc. declared and paid $12,000 and $4,000 in dividends, respectively during the year.
The balance sheets of both companies, as well as Stanton’s fair values on the date of acquisition are shown below:

	Remburn Inc.	Stanton Inc.	Stanton Inc.
	(carrying value)	(carrying value)	(fair value)
Cash	$400,000	$5,000	$5,000
Accounts Receivable	$240,000	$30,000	$30,000
Inventory	$60,000	$30,000	$50,000
Investment in Stanton Inc.	$90,000
Equipment (net)	$160,000	$25,000	$20,000
Land		$20,000	$30,000
Trademark		$10,000	$15,000
Total Assets	$950,000	$120,000
Current Liabilities	$500,000	$50,000	$50,000
Bonds Payable	$120,000	$20,000	$30,000
Common Shares	$200,000	$30,000
Retained Earnings	$130,000	$20,000
Total Liabilities and Equity	$950,000	$120,000

The following are the financial statements for both companies for the fiscal year ended December 31, 2019:

Income Statements

Sales	$295,750	$125,000
Dividend income	$3,600
Less: Expenses:
Cost of Goods Sold	$200,000	$19,000
Depreciation	$10,000	$25,000
Interest Expense	$16,000	$36,000
Other Expenses	$5,000	$28,000
Gain on Sale of Land	$-	$(8,000)
Net Income	$68,350	$25,000

Retained Earnings Statements

Balance, January 1, 2019	$130,000	$20,000
Net Income	$68,350	$25,000
Dividends	$(12,000)	$(4,000)
Balance, December 31, 2019	$186,350	$41,000

Balance Sheets

	Remburn Inc.	Stanton Inc.
Cash	$190,950	$156,000
Accounts Receivable	$200,000	$150,000
Investment in Stanton Inc.	$90,000
Inventory	$100,000	$30,000
Equipment (net)	$350,000	$25,000
Trademark		$10,000
Total Assets	$930,950	$371,000
Current Liabilities	$424,600	$280,000
Bonds Payable	$120,000	$20,000
Common Shares	$200,000	$30,000
Retained Earnings	$186,350	$41,000
Total Liabilities and Equity	$930,950	$371,000

Remburn has chosen to value the non-controlling interest in Stanton on the acquisition date at the fair value of the subsidiary’s identifiable net assets (identifiable net assets method).

Prepare Remburn’s statement of consolidated retained earnings as at December 31, 2019.

Remburn Inc.
Statement of Retained Earnings
As at December 31, 2019

Beginning Retained Earnings:	$130,000
Add: Parent’s share of Consolidated Net Income:	$53,250
Less: Dividends:	($12,000)
Ending Consolidated Retained Earnings:	$171,250

Remburn Inc. Inc. purchased 90% of the outstanding voting shares of Stanton Inc. for $90,000 on January 1, 2019. On that date, Stanton Inc. had common shares and retained earnings worth $30,000 and $20,000, respectively. The equipment had a remaining useful life of 10 years from the date of acquisition. Stanton’s trademark is estimated to have a remaining life of 5 years from the date of acquisition. Stanton’s bonds mature on January 1, 2039. The inventory was sold in the year following the acquisition. Both companies use straight line amortization, and no salvage value is assumed for assets. Remburn Inc. and Stanton Inc. declared and paid $12,000 and $4,000 in dividends, respectively during the year.
The balance sheets of both companies, as well as Stanton’s fair values on the date of acquisition are shown below:

	Remburn Inc.	Stanton Inc.	Stanton Inc.
	(carrying value)	(carrying value)	(fair value)
Cash	$400,000	$5,000	$5,000
Accounts Receivable	$240,000	$30,000	$30,000
Inventory	$60,000	$30,000	$50,000
Investment in Stanton Inc.	$90,000
Equipment (net)	$160,000	$25,000	$20,000
Land		$20,000	$30,000
Trademark		$10,000	$15,000
Total Assets	$950,000	$120,000
Current Liabilities	$500,000	$50,000	$50,000
Bonds Payable	$120,000	$20,000	$30,000
Common Shares	$200,000	$30,000
Retained Earnings	$130,000	$20,000
Total Liabilities and Equity	$950,000	$120,000

The following are the financial statements for both companies for the fiscal year ended December 31, 2019:

Income Statements

Sales	$295,750	$125,000
Dividend income	$3,600
Less: Expenses:
Cost of Goods Sold	$200,000	$19,000
Depreciation	$10,000	$25,000
Interest Expense	$16,000	$36,000
Other Expenses	$5,000	$28,000
Gain on Sale of Land	$-	$(8,000)
Net Income	$68,350	$25,000

Retained Earnings Statements

Balance, January 1, 2019	$130,000	$20,000
Net Income	$68,350	$25,000
Dividends	$(12,000)	$(4,000)
Balance, December 31, 2019	$186,350	$41,000

Balance Sheets

	Remburn Inc.	Stanton Inc.
Cash	$190,950	$156,000
Accounts Receivable	$200,000	$150,000
Investment in Stanton Inc.	$90,000
Inventory	$100,000	$30,000
Equipment (net)	$350,000	$25,000
Trademark		$10,000
Total Assets	$930,950	$371,000
Current Liabilities	$424,600	$280,000
Bonds Payable	$120,000	$20,000
Common Shares	$200,000	$30,000
Retained Earnings	$186,350	$41,000
Total Liabilities and Equity	$930,950	$371,000

Remburn has chosen to value the non-controlling interest in Stanton on the acquisition date at the fair value of the subsidiary’s identifiable net assets (identifiable net assets method).

Prepare a statement of changes in Non-Controlling Interest for the year ended December 31, 2019.

Remburn Inc.
Statement of Non-Controlling Interest
For the year ended December 31, 2019

Non-Controlling interest at acquisition	$7,000
NCI share of consolidated net income	$(500)
NCI share of dividends	($400)
Non-Controlling Interest:	$6,100

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-04 Prepare consolidated financial statements using the identifiable net assets method subsequent to the date of acquisition.
Topic: 05-16 Identifiable Net Assets Method
Topic: 05-17 Acquisition Differential Assigned to Liabilities
Topic: 05-18 Intercompany Receivables and Payables
Topic: 05-19 Subsidiary Acquired during the Year

Remburn Inc. Inc. purchased 90% of the outstanding voting shares of Stanton Inc. for $90,000 on January 1, 2019. On that date, Stanton Inc. had common shares and retained earnings worth $30,000 and $20,000, respectively. The equipment had a remaining useful life of 10 years from the date of acquisition. Stanton’s trademark is estimated to have a remaining life of 5 years from the date of acquisition. Stanton’s bonds mature on January 1, 2039. The inventory was sold in the year following the acquisition. Both companies use straight line amortization, and no salvage value is assumed for assets. Remburn Inc. and Stanton Inc. declared and paid $12,000 and $4,000 in dividends, respectively during the year.
The balance sheets of both companies, as well as Stanton’s fair values on the date of acquisition are shown below:

	Remburn Inc.	Stanton Inc.	Stanton Inc.
	(carrying value)	(carrying value)	(fair value)
Cash	$400,000	$5,000	$5,000
Accounts Receivable	$240,000	$30,000	$30,000
Inventory	$60,000	$30,000	$50,000
Investment in Stanton Inc.	$90,000
Equipment (net)	$160,000	$25,000	$20,000
Land		$20,000	$30,000
Trademark		$10,000	$15,000
Total Assets	$950,000	$120,000
Current Liabilities	$500,000	$50,000	$50,000
Bonds Payable	$120,000	$20,000	$30,000
Common Shares	$200,000	$30,000
Retained Earnings	$130,000	$20,000
Total Liabilities and Equity	$950,000	$120,000

The following are the financial statements for both companies for the fiscal year ended December 31, 2019:

Income Statements

Sales	$295,750	$125,000
Dividend income	$3,600
Less: Expenses:
Cost of Goods Sold	$200,000	$19,000
Depreciation	$10,000	$25,000
Interest Expense	$16,000	$36,000
Other Expenses	$5,000	$28,000
Gain on Sale of Land	$-	$(8,000)
Net Income	$68,350	$25,000

Retained Earnings Statements

Balance, January 1, 2019	$130,000	$20,000
Net Income	$68,350	$25,000
Dividends	$(12,000)	$(4,000)
Balance, December 31, 2019	$186,350	$41,000

Balance Sheets

	Remburn Inc.	Stanton Inc.
Cash	$190,950	$156,000
Accounts Receivable	$200,000	$150,000
Investment in Stanton Inc.	$90,000
Inventory	$100,000	$30,000
Equipment (net)	$350,000	$25,000
Trademark		$10,000
Total Assets	$930,950	$371,000
Current Liabilities	$424,600	$280,000
Bonds Payable	$120,000	$20,000
Common Shares	$200,000	$30,000
Retained Earnings	$186,350	$41,000
Total Liabilities and Equity	$930,950	$371,000

Remburn has chosen to value the non-controlling interest in Stanton on the acquisition date at the fair value of the subsidiary’s identifiable net assets (identifiable net assets method).

Prepare a consolidated balance sheet for Remburn Inc. as at December 31, 2019.

Remburn Inc.
Consolidated Balance Sheet
As at December 31, 2019

Cash	(190,950 + 156,000)	$346,950
Accounts Receivable	(200,000 + 150,000 – 20,000)	$330,000
Inventory	(100,000 + 30,000)	$130,000
Equipment (net)	(350,000 + 25,000 – 4,500)	$370,500
Trademark	(0 + 10,000 + 4,000)	$14,000
Goodwill	* see below	$20,000
Total Assets		$1,211,450
Current Liabilities	(424,600 + 280,000 – 20,000)	$684,600
Bonds Payable	(120,000 + 20,000 + 9,500)	$149,500
Non-Controlling Interest		$6,100
Common Shares		$200,000
Retained Earnings		$171,250
Total Liabilities and Equity		$1,211,450

*Purchase Price (90%)	$90,000
Value assigned to NCI	$7,000	(10% of $70,000 fair value of identifiable net assets)
	$97,000
Less: Fair value of net identifiable assets acquired	$50,000
	$47,000
Allocated:
Inventory $20,000
Equipment (5,000)
Land 10,000
Trademark 5,000
Bonds payable (10,000)	$20,000
Goodwill (parent’s share)	$27,000

Changes to Acquisition Differential Schedule

	Balance January 1, 2019	Changes in 2019	Balance December 31, 2019
Inventory	$20,000	$20,000	$0
Equipment	(5,000)	(500)	(4,500)
Land	10,000	10,000	0
Trademark	5,000	1,000	4,000
Bonds Payable	(10,000)	(500)	(9,500)
Total		30,000
Goodwill	27,000	7,000	20,000

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-04 Prepare consolidated financial statements using the identifiable net assets method subsequent to the date of acquisition.
Topic: 05-16 Identifiable Net Assets Method
Topic: 05-17 Acquisition Differential Assigned to Liabilities
Topic: 05-18 Intercompany Receivables and Payables
Topic: 05-19 Subsidiary Acquired during the Year

Remburn Inc. Inc. purchased 90% of the outstanding voting shares of Stanton Inc. for $90,000 on January 1, 2019. On that date, Stanton Inc. had common shares and retained earnings worth $30,000 and $20,000, respectively. The equipment had a remaining useful life of 10 years from the date of acquisition. Stanton’s trademark is estimated to have a remaining life of 5 years from the date of acquisition. Stanton’s bonds mature on January 1, 2039. The inventory was sold in the year following the acquisition. Both companies use straight line amortization, and no salvage value is assumed for assets. Remburn Inc. and Stanton Inc. declared and paid $12,000 and $4,000 in dividends, respectively during the year.
The balance sheets of both companies, as well as Stanton’s fair values on the date of acquisition are shown below:

	Remburn Inc.	Stanton Inc.	Stanton Inc.
	(carrying value)	(carrying value)	(fair value)
Cash	$400,000	$5,000	$5,000
Accounts Receivable	$240,000	$30,000	$30,000
Inventory	$60,000	$30,000	$50,000
Investment in Stanton Inc.	$90,000
Equipment (net)	$160,000	$25,000	$20,000
Land		$20,000	$30,000
Trademark		$10,000	$15,000
Total Assets	$950,000	$120,000
Current Liabilities	$500,000	$50,000	$50,000
Bonds Payable	$120,000	$20,000	$30,000
Common Shares	$200,000	$30,000
Retained Earnings	$130,000	$20,000
Total Liabilities and Equity	$950,000	$120,000

The following are the financial statements for both companies for the fiscal year ended December 31, 2019:

Income Statements

Sales	$295,750	$125,000
Dividend income	$3,600
Less: Expenses:
Cost of Goods Sold	$200,000	$19,000
Depreciation	$10,000	$25,000
Interest Expense	$16,000	$36,000
Other Expenses	$5,000	$28,000
Gain on Sale of Land	$-	$(8,000)
Net Income	$68,350	$25,000

Retained Earnings Statements

Balance, January 1, 2019	$130,000	$20,000
Net Income	$68,350	$25,000
Dividends	$(12,000)	$(4,000)
Balance, December 31, 2019	$186,350	$41,000

Balance Sheets

	Remburn Inc.	Stanton Inc.
Cash	$190,950	$156,000
Accounts Receivable	$200,000	$150,000
Investment in Stanton Inc.	$90,000
Inventory	$100,000	$30,000
Equipment (net)	$350,000	$25,000
Trademark		$10,000
Total Assets	$930,950	$371,000
Current Liabilities	$424,600	$280,000
Bonds Payable	$120,000	$20,000
Common Shares	$200,000	$30,000
Retained Earnings	$186,350	$41,000
Total Liabilities and Equity	$930,950	$371,000

Remburn has chosen to value the non-controlling interest in Stanton on the acquisition date at the fair value of the subsidiary’s identifiable net assets (identifiable net assets method).

Assume that Stanton’s Equipment, Land and Trademark on the date of acquisition form part of a single asset group. Assume also that these assets are expected to generate future cash flows of $40,000. Does this mean that Stanton will have to recognize an impairment loss? Explain.

Not necessarily. Given the above information, Stanton has “failed” the first part of the required two-part impairment test required for long-lived assets since the expected future cash flows of this asset group of $40,000 falls well short of the carrying values of the assets within the group, which total $55,000. Given this information, the second part of the two-part impairment test must be applied.

The second part of the impairment test requires that an impairment loss be recognized if Stanton fails the first part of the impairment test and the fair values of the assets within the group are less than their total carrying values. However, since the fair values (recoverable amount) are higher than their carrying values ($65,000 vs. $55,000 respectively), there would be no impairment loss in this case.

Accessibility: Keyboard Navigation
Blooms: Apply
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill.
Topic: 05-03 Testing Goodwill and other Assets for Impairment
Topic: 05-04 Property, Plant, Equipment, and Intangible Assets with Definite Useful Lives

Remburn Inc. Inc. purchased 90% of the outstanding voting shares of Stanton Inc. for $90,000 on January 1, 2019. On that date, Stanton Inc. had common shares and retained earnings worth $30,000 and $20,000, respectively. The equipment had a remaining useful life of 10 years from the date of acquisition. Stanton’s trademark is estimated to have a remaining life of 5 years from the date of acquisition. Stanton’s bonds mature on January 1, 2039. The inventory was sold in the year following the acquisition. Both companies use straight line amortization, and no salvage value is assumed for assets. Remburn Inc. and Stanton Inc. declared and paid $12,000 and $4,000 in dividends, respectively during the year.
The balance sheets of both companies, as well as Stanton’s fair values on the date of acquisition are shown below:

	Remburn Inc.	Stanton Inc.	Stanton Inc.
	(carrying value)	(carrying value)	(fair value)
Cash	$400,000	$5,000	$5,000
Accounts Receivable	$240,000	$30,000	$30,000
Inventory	$60,000	$30,000	$50,000
Investment in Stanton Inc.	$90,000
Equipment (net)	$160,000	$25,000	$20,000
Land		$20,000	$30,000
Trademark		$10,000	$15,000
Total Assets	$950,000	$120,000
Current Liabilities	$500,000	$50,000	$50,000
Bonds Payable	$120,000	$20,000	$30,000
Common Shares	$200,000	$30,000
Retained Earnings	$130,000	$20,000
Total Liabilities and Equity	$950,000	$120,000

The following are the financial statements for both companies for the fiscal year ended December 31, 2019:

Income Statements

Sales	$295,750	$125,000
Dividend income	$3,600
Less: Expenses:
Cost of Goods Sold	$200,000	$19,000
Depreciation	$10,000	$25,000
Interest Expense	$16,000	$36,000
Other Expenses	$5,000	$28,000
Gain on Sale of Land	$-	$(8,000)
Net Income	$68,350	$25,000

Retained Earnings Statements

Balance, January 1, 2019	$130,000	$20,000
Net Income	$68,350	$25,000
Dividends	$(12,000)	$(4,000)
Balance, December 31, 2019	$186,350	$41,000

Balance Sheets

	Remburn Inc.	Stanton Inc.
Cash	$190,950	$156,000
Accounts Receivable	$200,000	$150,000
Investment in Stanton Inc.	$90,000
Inventory	$100,000	$30,000
Equipment (net)	$350,000	$25,000
Trademark		$10,000
Total Assets	$930,950	$371,000
Current Liabilities	$424,600	$280,000
Bonds Payable	$120,000	$20,000
Common Shares	$200,000	$30,000
Retained Earnings	$186,350	$41,000
Total Liabilities and Equity	$930,950	$371,000

Both companies use a FIFO system, and Stanton’s entire inventory on the date of acquisition was sold during the following year. During 2019, Stanton Inc. borrowed $20,000 in cash from Remburn Inc. interest free to finance its operations. Remburn uses the Cost Method to account for its investment in Stanton Inc. Moreover, Stanton sold all of its land during the year for $18,000. Goodwill impairment for 2019 was determined to be $7,000.

Remburn has chosen to value the non-controlling interest in Stanton on the acquisition date at the fair value of the subsidiary’s identifiable net assets (identifiable net assets method).

Assume that Stanton had other Intangible assets with indefinite lives on its books at the date of acquisition. How would the impairment test differ from that which would apply to its amortizable assets, if at all? A simple explanation is required. Please do not use any numbers to support your answer.

Only the second part of the two-part impairment test would be required. Thus, an impairment loss would have to be recognized only if the fair value of the relevant asset group were less than their carrying values.

Remburn Inc. Inc. purchased 90% of the outstanding voting shares of Stanton Inc. for $90,000 on January 1, 2019. On that date, Stanton Inc. had common shares and retained earnings worth $30,000 and $20,000, respectively. The equipment had a remaining useful life of 10 years from the date of acquisition. Stanton’s trademark is estimated to have a remaining life of 5 years from the date of acquisition. Stanton’s bonds mature on January 1, 2039. The inventory was sold in the year following the acquisition. Both companies use straight line amortization, and no salvage value is assumed for assets. Remburn Inc. and Stanton Inc. declared and paid $12,000 and $4,000 in dividends, respectively during the year.
The balance sheets of both companies, as well as Stanton’s fair values on the date of acquisition are shown below:

	Remburn Inc.	Stanton Inc.	Stanton Inc.
	(carrying value)	(carrying value)	(fair value)
Cash	$400,000	$5,000	$5,000
Accounts Receivable	$240,000	$30,000	$30,000
Inventory	$60,000	$30,000	$50,000
Investment in Stanton Inc.	$90,000
Equipment (net)	$160,000	$25,000	$20,000
Land		$20,000	$30,000
Trademark		$10,000	$15,000
Total Assets	$950,000	$120,000
Current Liabilities	$500,000	$50,000	$50,000
Bonds Payable	$120,000	$20,000	$30,000
Common Shares	$200,000	$30,000
Retained Earnings	$130,000	$20,000
Total Liabilities and Equity	$950,000	$120,000

The following are the financial statements for both companies for the fiscal year ended December 31, 2019:

Income Statements

Sales	$295,750	$125,000
Dividend income	$3,600
Less: Expenses:
Cost of Goods Sold	$200,000	$19,000
Depreciation	$10,000	$25,000
Interest Expense	$16,000	$36,000
Other Expenses	$5,000	$28,000
Gain on Sale of Land	$-	$(8,000)
Net Income	$68,350	$25,000

Retained Earnings Statements

Balance, January 1, 2019	$130,000	$20,000
Net Income	$68,350	$25,000
Dividends	$(12,000)	$(4,000)
Balance, December 31, 2019	$186,350	$41,000

Balance Sheets

	Remburn Inc.	Stanton Inc.
Cash	$190,950	$156,000
Accounts Receivable	$200,000	$150,000
Investment in Stanton Inc.	$90,000
Inventory	$100,000	$30,000
Equipment (net)	$350,000	$25,000
Trademark		$10,000
Total Assets	$930,950	$371,000
Current Liabilities	$424,600	$280,000
Bonds Payable	$120,000	$20,000
Common Shares	$200,000	$30,000
Retained Earnings	$186,350	$41,000
Total Liabilities and Equity	$930,950	$371,000

Remburn has chosen to value the non-controlling interest in Stanton on the acquisition date at the fair value of the subsidiary’s identifiable net assets (identifiable net assets method).

Disregard the above goodwill impairment loss provided in the question. Instead, assume that Stanton Inc. has only one cash-generating unit with goodwill and that Stanton Inc.’s common shares had a fair market value of $51,000 on December 31, 2019. Determine if an impairment loss has resulted. If yes, apply the impairment loss to determine the revised carrying amounts of the goodwill and identifiable assets.

Yes, an impairment loss has resulted and calculated as follows:

Carrying amount of Stanton’s–Dec. 31, 2019
Identifiable net assets	$71,000
Goodwill**	30,000
Total carrying amount	$101,000
Recoverable amount	51,000
Total impairment loss	50,000

The impairment loss is first applied to goodwill then to the identifiable assets. Since the calculation of impairment loss included a value for the NCI’s unrecognized shares of goodwill, part of the impairment loss will be allocated to the NCI as follows:

	Parent’s Goodwill	NCI’s Goodwill	Identifiable assets	Total
Carrying amount	$27,000	$3,000	$71,000	$101,000
Impairment loss	(27,000)	(3,000)	(20,000)	(50,000)
Carrying amount after impairment loss	0	0	$51,000	$51,000

** Goodwill will need to be grossed-up when the identifiable net assets method is used to account for NCI. The carrying amount of goodwill allocated to the unit will have to be grossed up to include the goodwill attributable to the non-controlling interest – $3,000. This adjusted carrying amount for goodwill ($30,000) is then compared with the recoverable amount of the unit to determine whether the cash-generating unit is impaired.

Accessibility: Keyboard Navigation
Blooms: Apply
Blooms: Understand
Difficulty: Hard
Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill.
Topic: 05-03 Testing Goodwill and other Assets for Impairment
Topic: 05-04 Property, Plant, Equipment, and Intangible Assets with Definite Useful Lives
Topic: 05-21 Analysis and Interpretation of Financial Statements

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