Year 2 Year 3

All the problems as discussed in the class.

Plus, the following problems

Chapter 5:

5-1, 5-2, 5-5

Chapter 6:

6-7, 6-11, 6-14

Chapter 7:

7-2, 7-3, 7-8

Solutions:

Problem 5-1

(a)

Net income Pill – Year 1 (cost method) 25, 000

Less: Dividends from Sill (85% ´ 9, 000) 7, 650

17, 350

Net income of Sill – Year 1 40, 000

Less: Goodwill impairment loss 1, 500

38, 500

85% 32, 725

Consolidated net income attributable to Pill’s shareholders – Year 1 50, 075

(b)

Consolidated net income attributable to non-controlling interests – Year 1

[15% ´ (40, 000 – 1, 500)] 5, 775

(c)

Investment in Sill – Dec. 31, Year 1 (cost method) 238, 000

Income from Sill 32, 725

270, 725

Less: Dividends from Sill 7, 650

Investment in Sill – Dec. 31, Year 1 - equity method 263, 075

Problem 5-2

Cost of 75% investment 600, 000

Implied cost of 100% investment 800, 000

Carrying amount of Small’s net assets = Carrying amount of Small’s shareholders’ equity

Ordinary shares 400, 000

Retained earnings 100, 000

500, 000

Acquisition differential – Jan. 1, Year 1 300, 000

Allocated:

Inventory 40, 000

Patents (70, 000)(30, 000)

Balance – goodwill 330, 000

Balance Balance

Jan. 1 Amortization Dec. 31

Year 1 Yr 1 & 2 Year 3 Year 3

Inventory 40, 000 40, 000

Patents (70, 000) (28, 000) (14, 000) (28, 000)

Goodwill 330, 000 019, 300310, 700

300, 00012, 0005, 300282, 700

PART A

Year 1 Year 2 Year 3

Investment in Small 600, 000

Cash 600, 000

Cash 18, 750 7, 500 30, 000

Dividend income 18, 750 7, 500 30, 000

PART B

(i) Goodwill 310, 700

(ii) Small’s ordinary shares 400, 000

Small’s retained earnings (100, 000+80, 000-25, 000-35, 000-10, 000+90, 000

-40, 000) 160, 000

560, 000

Unamortized acquisition differential 282, 700

842, 700

NCI’s share (25%) 210, 675

(iii) Large’s retained earnings 500, 000

Small’s retained earnings (100, 000+80, 000-25, 000-35, 000

-10, 000) 110, 000

Small’s retained earnings, date of acquisition 100, 000

Change since acquisition 10, 000

Less: cumulative amortization of acquisition differential 12, 000

Adjusted change since acquisition (2, 000)

Large’s share (75%) (1, 500)

Consolidated retained earnings 498, 500

(iv) Large’s profit 200, 000

Less: dividends from Small (40, 000 x75%) (30, 000)

170, 000

Small’s profit 90, 000

Less: amortization of acquisition differential 5, 300

84, 700

Large’s share (75%) 63, 525

Consolidated profit attributable to Large’s shareholders 233, 525

(v) NCI on income statement (84, 700 x 25%) 21, 175

PART C

(i) Year 1 Year 2 Year 3

Investment in Small 600, 000

Cash 600, 000

Investment in Small (75% x Small’s profit) 60, 000 (26, 250) 67, 500

Investment income 60, 000 (26, 250) 67, 500

Cash (75% x Small’s dividends) 18, 750 7, 500 30, 000

Investment in Small 18, 750 7, 500 30, 000

Investment income (75% x amortization of PD) 19, 500 (10, 500) 3, 975

Investment in Small 19, 500 (10, 500) 3, 975

(ii) Investment in Small under cost method 600, 000

Small’s retained earnings, end of year 160, 000

Small’s retained earnings, date of acquisition 100, 000

Change since acquisition 60, 000

Less: cumulative amortization of acquisition differential 17, 300

42, 700

Large’s share (75%) 32, 025

Investment in Small under equity method 632, 025

Problem 5-5

Cost of 85% investment 646, 000

Implied cost of 100% investment 760, 000

Carrying amount of Silk’s net assets = Carrying amount of Silk’s shareholders’ equity

Silk Common shares 500, 000

Retained earnings 100, 000

600, 000

Acquisition differential – Dec. 31, Year 1 160, 000

Allocated:

Inventory 70, 000

Balance – patents 90, 000

Non-controlling interest (15% x 760, 000) 114, 000 (a)

Balance Balance

Dec. 31 Amortization Dec. 31

Year 1 Year 2 Year 3 Year 3

Inventory 70, 000 70, 000

Patents 90, 000 9, 0009, 00072, 000

160, 00079, 0009, 00072, 000

(a)

Non-controlling interest in profit

Year 2 15% ´ (30, 000 – 79, 000) - 7, 350

Year 3 15% ´ (52, 000 – 9, 000) 6, 450

(b)

Year 2 Year 3

Profit (loss) Pen 28, 000 (45, 000)

Dividends from Silk

Year 2 0

Year 3 (85% ´ 15, 000) (12, 750)

28, 000 (57, 750)

Share of Silk’s profit

85% ´ (30, 000 – 79, 000) (41, 650)

85% ´ (52, 000 – 9, 000) _ 36, 550 _

Consolidated profit (loss) attributable to Pen’s shareholders (13, 650) (21, 200)

(c)

Retained earnings Pen – Dec. 31, Year 3 (cost method) 91, 000

Retained earnings Silk – Dec. 31, Year 3

(100, 000 + 30, 000 + 52, 000 – 15, 000) 167, 000

Acquisition retained earnings 100, 000

Increase since acquisition 67, 000

Less: acq. diff. amort. to date (79, 000 + 9, 000) 88, 000

Adjusted increase since acquisition - 21, 000 (a)

85% - 17, 850

Consolidated retained earnings – Dec. 31, Year 3 73, 150

(d)

Method 1:

Silk – Common shares 500, 000

Retained earnings Dec. 31, Year 3 167, 000

667, 000

Unamortized acquisition differential 72, 000

739, 000

15%

Non-controlling interest – Dec. 31, Year 3 110, 850

Method 2:

Non-controlling interest – date of acquisition (a) 114, 000

Retained earnings Silk – Dec. 31, Year 3

(100, 000 + 30, 000 + 52, 000 – 15, 000) 167, 000

Acquisition retained earnings 100, 000

Increase since acquisition 67, 000

Less: acq. diff. amort. to date (79, 000 + 9, 000) 88, 000

- 21, 000

NCI’s share 15% - 3, 150

Non-controlling interest – Dec. 31, Year 3 110, 850

(e)

Cost of investment 646, 000

Retained earnings Silk – Dec. 31, Year 3

(100, 000 + 30, 000 + 52, 000 – 15, 000) 167, 000

Acquisition retained earnings 100, 000

Increase since acquisition 67, 000

Less: acq. diff. amort. to date (79, 000 + 9, 000) 88, 000

- 21, 000

85% - 17, 850

Invest. account – equity method as at Dec. 31, Year 3 628, 150

(f)

See amortization schedule above.

Alternative calculation:

Invest. account – equity Dec. 31, Year 3 628, 150

Implied value of 100% (628, 150 / 85%) 739, 000

Silk – Common shares 500, 000

Retained earnings 167, 000

667, 000

Balance unamortized acq. diff. – Patents 72, 000

Problem 6-7