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Equities and Liabilities
Ordinary shares 10, 000, 000
Retained Earnings (See part c) 15, 210, 000
Non-controlling interests (See Below) 2, 710, 000
Long Term Liabilities (6.6 M + 1.1 M) 7, 700, 000
Deferred Income Taxes (200K+100K) 300, 000
Current Liabilities (700K + 300K – 200K advances) 800, 000
36, 720, 000
Non-controlling Interests: (Method 1)
Devine – Carrying amount December 31, Year 5 10, 500, 000 Unrealized Profits – Upstream: Land (240, 000) Inventory (120, 000) Unamortized acquisition differential 700, 000 10, 840, 000 25% Non-controlling interest 2, 710, 000
Calculation of non-controlling interests – December 31, Year 5 (Method 2) Non-controlling interests at date of acquisition (25% x [4, 800, 000 /.75) 1, 600, 000 Devine’s adjusted increase in retained earnings (a) 4, 440, 000 NCI’s share @ 25% 1, 110, 000 Non-controlling interest, December 31, Year 5 2, 710, 000
(e) Non-controlling interest – at date of acquisition - under implied value approach (25% x 6, 400, 000) 1, 600, 000 - using market value of Devine’s shares (20, 000 shares x $75) 1, 500, 000 Decrease in non-controlling interest 100, 000 Non-controlling interest, December 31, Year 3 - as previously calculated 2, 710, 000 - as per new calculation 2, 610, 000
Goodwill at December 31, Year 3 - as previously calculated 600, 000 - decrease due to change in non-controlling interest 100, 000 - as per new calculation 500, 000
Problem 7-2 Equipment gain Before Tax 40% tax After tax Year 2 sale – Sally selling 15, 000 * Depreciation Years 2 and 3 (3, 000 ´ 2) 6, 000 Balance December 31, Year 3 9, 000 3, 600 5, 400 Depreciation Year 4 3, 0001, 2001, 800 (a) Balance December 31, Year 4 6, 0002, 400 (b) 3, 600
* Assuming the sale took place at the beginning of Year 2
(a) Calculation of consolidated profit – Year 4
Profit of Peggy 185, 000 Profit of Sally 53, 000 Add: Equipment gain realized (a) 1, 800 Adjusted profit 54, 800 (c) Consolidated profit 239, 800 Attributable to: Shareholders of Peggy 226, 100 NCI (25% x 54, 800) 13, 700 239, 800 (b) Peggy Company Consolidated Income Statement Year 4
Revenues (580, 000 + 270, 000) $850, 000 Miscellaneous expense (110, 000 + 85, 000) 195, 000 Depreciation expense (162, 000 + 97, 000 - (a) 3, 000) 256, 000 Income tax expense (123, 000 + 35, 000 + (a) 1, 200) 159, 200 Total expenses 610, 200 Consolidated profit 239, 800 Attributable to: Shareholders of Peggy 226, 100 NCI (25% x 54, 800) 13, 700 239, 800
(c) Deferred income taxes - December 31, Year 4 (b) 2, 400
Problem 7-3 Intercompany profits – subsidiary selling
Before tax 40% tax After tax Equipment Sale, Sept. 30, Year 5 8, 000 3, 200 4, 800 Depreciation Year 5 (8, 000 / 5 ´ 3/12) 400 160 240 (a) Balance, Dec. 31, Year 5 7, 600 3, 040 4, 560 (b) Depreciation Year 6 (8, 000 / 5) 1, 600 640 960 (c) Balance, Dec. 31, Year 6 6, 000 2, 400 3, 600
Building Sale, Jan. 1, Year 6 42, 000 16, 800 25, 200 Depreciation Year 6 (42, 000 / 7) 6, 000 2, 400 3, 600 (d) Balance, Dec. 31, Year 6 36, 00014, 40021, 600 (e)
Intercompany Rent Year 5 (12, 000 ´ 3/12) 3, 000 (f)
Year 6 12, 000 (g)
Calculation of consolidated net income Year 5 Year 6 Incorrectly reported income 120, 000 142, 000 Add: incorrect amount for NCI 32, 5005, 160 Incorrect amount for consolidated net income 152, 500 147, 160 Less: Net unrealized profits Equipment (b) 4, 560 Building (e) 21, 600 Add: equipment profit realized (c) 960 (h) 4, 560 (i) 20, 640 Corrected consolidated net income 147, 940126, 520 Attributable to: Shareholders of Parent 116, 580 126, 520 NCI (32, 500 - 25% x (h) 4, 560) 31, 360 NCI (5, 160 - 25% x (i) 20, 640) 00, 000 147, 940126, 520
Parent Company Corrected Consolidated Income Statements Years 5 and 6
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