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Year 5 Year 6
Miscellaneous revenues $750, 000$825, 000 Miscellaneous expense 399, 800 492, 340 Rent expense (52, 700 – (f) 3, 000) 49, 700 (64, 300 – (g) 12, 000) 52, 300 Depreciation expense (75, 000 – (a) 400) 74, 600 (80, 700 – (c) 1, 600 – (d) 6, 000) 73, 100 Income tax expense (81, 000 – (b) 3, 040) 77, 960 (94, 500 + (c) 640 – (e) 14, 400) 80, 740 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 Problem 7-8 Calculation, allocation, and amortization of acquisition differential
Cost of 80% investment in Spruce Ltd., Jan. 2, Year 1 2, 000, 000 Implied value of 100% 2, 500, 000 Carrying amounts of Spruce's net assets: Common shares 500, 000 Retained earnings 1, 250, 000 Total shareholders' equity 1, 750, 000 Acquisition differential 750, 000 Allocation: FV – CA Mineral rights 750, 000 Balance 0
Balance Amortization Balance Jan. 1/1 Years 1 to 3 Year 4 Dec. 31/4
Mineral rights 750, 000 (a) 0 (b) 0750, 000 (c)
Intercompany sales and purchases 1, 000, 000 (d)
Unrealized intercompany profits
Before tax 40% tax After tax Equipment Jan. 2/2 – Spruce selling (500, 000 – 400, 000) 100, 000 (e) Depreciation Years 2 and 3 40, 000 Balance, Dec. 31, Year 3 60, 000 24, 000 36, 000 (f) Depreciation, Year 4 20, 000 8, 000 12, 000 (g) Balance, Dec. 31, Year 4 40, 00016, 000 24, 000 (h)
Inventory Jan. 1, Year 4 – Spruce selling 200, 00080, 000120, 000 (i)
Inventory Dec. 31, Year 4 – Spruce selling 120, 00048, 000 72, 000 (j) Intercompany bonds Before tax 40% tax After tax Cost of bonds Jan. 2, Year 4 242, 500 Carrying value of bonds purchased Par 500, 000 Issue premium (14, 000 – [14, 000 / 7 ´ 2]) 10, 000 510, 000 Intercompany portion 50% 255, 000 Gain to entity, Jan. 1, Year 4 12, 500 5, 000 7, 500 (k) Interest elimination loss, Year 4* 2, 5001, 0001, 500 Net gain to entity, Dec. 31, Year 4 10, 0004, 0006, 000 (l) Allocation: Cost 242, 500 Par value (500, 000 ´ 50%) 250, 000 Gain to Spruce, Jan. 1, Year 4 7, 500 3, 000 4, 500 Interest elimination loss, Year 4* 1, 500 600 900 Net gain to Spruce, Dec. 31, Year 4 6, 0002, 4003, 600 (m) Par value 250, 000 Carrying value 255, 000 Gain to Poplar, Jan. 1, Year 4 5, 000 2, 000 3, 000 Interest elimination loss, Year 4* 1, 000 400 600 Net gain to Poplar, Dec. 31, Year 4 4, 0001, 6002, 400 (n) * 5 years remaining to maturity. Spruce’s accumulated depreciation, date of acquisition 600, 000 (o) Deferred income tax – Dec. 31, Year 4
Equipment (h) 16, 000 Inventory (j) 48, 000 Deferred income tax asset 64, 000 Less: deferred tax liability – bonds (l) 4, 000 Net deferred income tax asset 60, 000 (p) Intercompany interest revenue and expense
Interest revenue – Spruce 8% ´ 250, 000 20, 000 Discount amortization (7, 500 / 5) 1, 500 21, 500
Interest expense – Poplar 8% ´ 500, 000 40, 000 Premium amortization (14, 000 / 7) 2, 000 38, 000 Intercompany portion 50% 19, 000 (q) Interest elimination loss – Year 4 (before tax) 2, 500
Calculation of consolidated net income – Year 4
Income of Poplar 1, 100, 000 Less: Dividend from Spruce (250, 000 ´ 80%) 200, 000 900, 000 Add: bond gain (net) (n) 2, 400 Adjusted net income 902, 400 Income of Spruce 521, 500 Less: Amortization of acquisition differential (b) 0 Closing inventory profit (j) 72, 000 449, 500
Add: Opening inventory profit (i) 120, 000 Equipment profit realized (g) 12, 000 Bond gain (net) (m) 3, 600135, 600 Adjusted net income 585, 100 (r) Consolidated net income 1, 487, 500 Attributable to: Shareholders of Poplar 1, 370, 480 NCI (20% x 585, 100) 117, 020 1, 487, 500 (a) (i) Poplar Ltd. Consolidated Income Statement Year 4
Sales (4, 900, 000 + 2, 000, 000 – 1, 000, 000 (d)) 5, 900, 000 Gain on bond retirement (k) 12, 500 Total revenues 5, 912, 500 Cost of goods sold (2, 400, 000 + 850, 000 – (d) 1, 000, 000 – (i) 200, 000 + (j) 120, 000) 2, 170, 000 Other expenses (962, 000 + 300, 000 – (g) 20, 000) 1, 242, 000
Interest expense (38, 000 – (q) 19, 000) 19, 000 Income tax expense (600, 000 + 350, 000 + (i) 80, 000 – (j) 48, 000 + (g) 8, 000 + (l) 4, 000) 994, 000 Total expenses 4, 425, 000 Net income 1, 487, 500 Attributable to: Shareholders of Poplar 1, 370, 480 NCI (20% x 585, 100) 117, 020 1, 487, 500
Calculation of consolidated retained earnings – Jan. 1, Year 4 Retained earnings of Poplar, Jan. 1, Year 4 10, 000, 000 Retained earnings of Spruce, Jan. 1, Year 4 2, 000, 000 At acquisition 1, 250, 000 Increase 750, 000 Less: Opening inventory profit (i) 120, 000 Net equipment profit (f) 36, 000 Adjusted increase 594, 000 (s) Poplar's ownership % 80% 475, 200 Consolidated retained earnings, Jan. 1 Year 4 10, 475, 200
(ii) Poplar Ltd.
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