Practice Comprehensive Consolidation Questions

Question 1 On December 31, 2011, Heat Limited purchased 80% of the outstanding ordinary shares of Snow Company for $7,200,000 in cash. On acquisition date, the shareholders’ equity of Snow consisted of $3,800,000 in common shares and $4,000,000 in retained earnings.

On this date, Snow had inventory with a fair value that was $ 60 ,000 less than its carrying value. In addition, Snow had equipment with a fair value that was $100,000 greater than its carrying value. The equipment had an estimated useful life of 8 years on December 31, 2007. Snow’s balance sheet on acquisition date also included goodwill at $750,000.

For the year ended December 31, 2015, the statements of profit or loss for Heat and Snow were as follows:

Heat Snow Sales $ 15,000,000 $ 9,000, Other Income 5,000,000 1,000, Total revenues 20,000,000 10,000, Cost of goods sold 9,000,000 4,950, Depreciation expense 3,400,000 1,800, Other expenses 4,200,000 1,600, Income tax expense 1,020,000 495, Total expenses 17,620,000 8,845, Net income $ 2,380,000 $ 1,155,

At December 31, 2015, the statements of financial position for the two companies were as follows:

Heat Snow Cash $ 2,000,000 $ 960, Accounts receivable 1,600,000 1,200, Inventory 3,460,000 1,842, Land 2,845,000 1,420, Buildings 5,180,000 3,456, Equipment 4,165,000 3,372, Intangible assets 1,200,000 600, Goodwill 1,500,000 750, Investment in Snow 7,200,000 - Total assets $29,150,000 $13,600, Current Liabilities $ 2,400,000 $ 840, Long term liabilities 12,000,000 4,000, Common shares 6,250,000 3,800, Retained earnings 8,500,000 4,960, Total liabilities and equity $29,150,000 $13,600,

Intercompany sales of goods are made to earn a margin of 40 %
Heat’s 2015 beginning inventory contained $100,000 of goods purchased from Snow. This was sold by Heat to third parties in 2015. During 2015, Snow sold merchandise to Heat for $400,000, of which Heat sold 70% to other parties.
In 2014, Heat sold merchandise to Snow for $300,000. Snow’s 2014 ending inventory contained 40% of this merchandise. During 2015, Heat sold goods worth $450,000 to Snow. Snow’s 2015 ending inventory contains 40% of this inventory.
Snow owes Heat $200,000 as of December 31, 2015.
In 2015 Heat charged royalty fees of $150,000 from Snow, of which 40% is still owed by Snow at the year-end
During 2015, Heat declared and paid dividends of $900,000. Snow declared dividends of $400,000, but this amount remains unpaid at year-end.
On January 1, 2012, Heat sold equipment to Snow for $260,000. Heat had acquired the equipment on December 31, 2008 for $240,000 and had estimated a useful life of 8 years. There were no changes made to the remaining useful life when Snow acquired the equipment.
In 2013 , Heat sold a piece of land to Snow at a profit of $120,000. In 2015, Snow sold one-third of this land to an unrelated third party at a gain of $150,000.
On April 1, 2015, Snow sold to Heat a building with a remaining useful life of 6 years. Snow recorded a gain of $180,000 on this transaction.
Both companies have an income tax rate of 30 %.

Required: a) Prepare Heat’s consolidated statement of profit or loss for the year ended and a statement of financial position as at December 31, 2015. Show all supporting calculations.

b) Assume Heat is also required to prepare 2015 unconsolidated financial statements; calculate the Investment in Snow account as at December 31, 2015 and 2015 Investment income from Snow using the equity method. Also prepare all relevant journal entries using the equity method for 2015.

Question 2 On October 1, 2010, Pretoria Ltd. acquired 90% of the shares of Havana Ltd. for $849,600. On that date, Havana’s statement of financial position showed share capital of $540,000 and retained earnings of $273,600. In addition, at the acquisition date, all of Havana’s identifiable assets and liabilities had carrying values that equaled their fair values. Pretoria and Havana’s financial statements for September 30, 2014 are presented below:

Statement of Financial Position As of September 30, 2014 Pretoria Ltd. Havana Ltd. Assets: Current assets: Cash $ 144,000 $ 131, Short-term investments 27,000 122, Accounts receivable 18,000 540, Inventory 302,400 64, 491,400 858, Non-current assets: Land 126,000 216, Equipment, net 75,600 27, Investment in Havana 849,600 - 1,051,200 243, 1,542,600 1,101,

The profit on these goods was $10,800. These goods were sold by December 31, 2013.  In 2011, Pretoria sold a tract of land to Havana for an accounting gain of $36,000. Havana plans to build a warehouse and office complex on the land in 2017.

Required: Prepare Pretoria’s consolidated financial statements for the year ended September 30, 2014. (Round numbers to the nearest dollar, and show all your calculations.)

Question 3 On January 1, 2015, Panama Ltd. issued shares worth $1,120,000 to Savanna Ltd. to acquire 80% of Savanna’s outstanding shares. On the acquisition date, Savanna’s statement of financial position shows share capital of $420,000 and retained earnings of $777,000. At the acquisition date, all of Savanna’s identifiable assets and liabilities equaled their fair values with the exception of the following:

Inventories (fair value exceeded book value by $14,000) Investments (book value exceeded fair value by $14,000) Equipment (fair value exceed net book value by $105,000)

At the acquisition date, Savanna’s accumulated amortization account for the equipment had a balance of $805,000. As of the acquisition date, Savanna’s equipment had a remaining useful life of 8 years.

Additional information:  Panama records its investments using the cost method and values NCI under the entity theory.  Both companies have a 40% income tax rate.  In 2017, Savanna sold all its investments for a gain of $ 50 ,000.  In 2018, Panama purchased equipment from Savanna for $120,000. At the sale date, Savanna’s net book value of the equipment was $90,000. Savanna had originally purchased the equipment for $140,000. After the purchase, Panama amortized the equipment at a rate of $ 20 ,000 per year for the remaining 6 years of its useful life, taking a full year of amortization in 2018.  During 2019, Savanna purchased goods from Panama. At the end of 2019, Savanna still had $120,000 of these goods in inventory. Panama had earned a gross margin of 40% on the sale. The goods were sold to external customers in 2020.  During 2019, Panama purchased goods from Savanna. At the end of 2019, Panama still had $140,000 of these goods in inventory. Savanna had earned a gross margin of 40% on the sale. The goods were sold to external customers in 2020.  During 2020, Panama sold goods of $440,000 to Savanna. Panama earned a gross profit of $156,000 on this sale. At the end of 2020, Savanna still had $156,000 worth of goods in inventory.  During 2020, Savanna sold goods of $ 60 0,000 to Panama at a gross margin of 40%. At the end of 2020, Panama still had 30% of the goods in inventory.  During 2020, Panama received $120,000 in royalties from Savanna. Between January 1, 2015 and December 31, 2019, Panama received $600,000 in royalties from Savanna.

The financial statements for Panama and Savanna for the year ended December 31, 2020 are presented below. Condensed Statement of Comprehensive Income For the year ended December 31, 2020

Panama Ltd. Savanna Ltd. Revenue: Sales $ 3,238,200 $ 2,276,4 00 Royalties 210,000 - Dividends 100,800 _- 3,549,000 2,276,4 00

Expenses: Cost of sales 1,680,000 1,260, Other 784,000 575, 2,464,000 1,835, Income before tax 1,085,000 441, Income tax expense 434,000 176, Net and comprehensive income $ 651,000 $ 264,

Statement of Financial Position As of December 31, 2020

Panama Ltd. Savanna Ltd. Assets: Current assets: Cash $ 70,000 $ 28, Accounts receivable 210,000 224, Inventory 252,000 140, 532,000 392, Noncurrent assets: Land 440,000 - Equipment 7,000,000 3,780, Accumulated amortization, equipment (2,478,000) (1,736,000) Investment in Savanna 1,120,000 _- 6,082,000 2,044, Total assets $ 6,614,000 $ 2,436,

Liabilities and shareholders’ equity: Current liabilities: Accounts payable $ 630,000 $ 280, Noncurrent liabilities: Loan payable 420,000 700, 1,050,000 980, Shareholders’ equity: Share capital 1,980,000 420, Retained earnings 3,584,000 1,036, 5,564,000 1,456, $ 6,614,000 $ 2,436,

Statement of Changes in Equity – Retained Earnings Section For the year ended December 31, 2020 Panama Ltd. Savanna Ltd. Retained earnings, beginning of the year $ 3,353,000 $ 897,4 00 Net income 651,000 264, Dividends declared (420,000) (126,000) Retained earnings, end of year $ 3,584,000 $ 1,036,