ADMS 4520 S2010 caseQ - Problem 1 This was done by Xu...

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Unformatted text preview: Problem 1: This was done by Xu Yvonne (the TA): She may provide you with the solution next week. If you have questions about this case, please email your questions to her at [email protected] Eirstfiurchase; On January 1, Year 1, Peter Company acquired 40,000 common shares (8% of the outstanding shares) of Sean Company for $500,000. The 8% voting interest does not give Peter control or significant influence. The investment is classified as fair value through profit and loss. On this date, the shareholders’ equity of Sean consisted of common shares of $ 3,000,000 and retained earnings of $1,900,000. As well, the value of Sean’s asset and liabilities was the same as their book value except equipment was undervalued by $200,000 and bonds, whose market value was $80,000 lower than its book. On the acquisition date, the equipment had remaining economic life of 8 years and was depreciated using the straight-line method. The bond is due on Dec 31, Year 8 and amortized on the straight-line basis. During Year 1, Sean reported a net income of $900,000 and paid dividends of $100,000. At the end of Year 1, Sean’s shares were traded at $14 each. Requirement: Prepare all accounting treatments and accounting entries that Peter Company should make on January 1 and December 31, Year 1 including calculation, allocation, and amortization of acquisition differential if there was any? Second Purchase; On January 1, Year 2, Peter Company acquired 135,000 common shares (27% of the outstanding shares) of Sean Company for $1,890,000. The 27% voting interest does not give Peter control, but it gives Peter significant influence over Sean. On the Jan 1, Year 2, the value of Sean’s asset and liabilities was the same as their book value except equipment was undervalued by $175,000 and bonds, whose market value was $70,000 lower than its book. On Jan 1, Year 2, the equipment had remaining economic life of 7 years and was depreciated using the straight-line method. The bond is due on Dec 31, Year 8 and amortized on the straight-line basis. During Year 2, Sean reported a net income of $1,000,000 and paid dividends of $150,000. At the end of Year 2, Sean’s shares were traded at $16 each. Requirement: Prepare all accounting treatments and accounting entries that Peter Company should make on January 1 and December 31, Year 2 including calculation, allocation, and amortization of acquisition differential if there was any? Third Purchase; On January 1, Year 3, Peter Company acquired 225,000 common shares (45% of the outstanding shares) of Sean Company for $3,600,000. The 80% voting interest does give Peter control over Sean. On Jan 1, Year 3, the value of Sean’s asset and liabilities was the same as their book value except equipment was undervalued by $150,000 and bonds, whose market value was $60,000 lower than its book. On Jan 1, Year 3, the equipment had remaining economic life of 6 years and was depreciated using the straight-line method. The bond is due on Dec 31, Year 8 and amortized on the straight—line basis. During Year 3, Sean reported a net income of $1,100,000 and paid dividends of $200,000. At the end of Year 3, Sean’s shares were traded at $20 each. Requirement: Prepare all accounting treatments and accounting entries that Peter Company should make on January 1 and December 31, Year 3 including calculation, allocation, and amortization of acquisition differential if there was any? Fourth Purchase: On January 1, Year 4, Peter Company acquired 50,000 common shares (10% of the outstanding shares) of Sean Company for $1,000,000. On Jan 1, Year 4, the value of Sean’s asset and liabilities was the same as their book value except equipment was undervalued by $135,000 and bonds, whose market value was $55,000 lower than its book. On Jan 1, Year 4, the equipment had remaining economic life of 5 years and was depreciated using the straight—line method. The bond is due on Dec 31, Year 8 and amortized on the straight-line basis. During Year 4, Sean reported a net income of $1,300,000 and paid dividends of $300,000. At the end of Year 4, Sean’s shares were traded at $25 each. Requirement: Prepare all accounting treatments and accounting entries that Peter Company should make on January 1 and December 31, Year 4 including calculation, allocation, and amortization of acquisition differential if there was any? subsidiary Issues Additional Shares to Public; On January 1, Year 5, Sean Company issued an additional 125,000 shares for $3,125,000, and Peter didn’t purchase any of the additional shares. During Year 5, Sean reported a net income of $1,500,000 and paid dividends of $350,000. A goodwill impairment test conducted on December 31, Year 5, indicated that an impairment loss of $ 40,000 had occurred. Requirement: Prepare all accounting treatments and accounting entries that Peter Company should make on January 1 and December 31, Year 5 including calculation, allocation, and amortization of acquisition differential if there was any? Preferred Shares: Let us assume the following about the third purchase: (1) on January 1, Year 3, Sean also had 7% cumulative preferred shares (4,000) with a carrying value of $500,000 and redeemable at $150. The preferred shares were issued on Jan 1, Year 1, and no dividend declared or paid for the last two years. (a) Requirement: (1) Acquisition differential (2) Goodwill (3) Non-controlling interest (b) Assuming preferred shares are not cumulative: (4) Acquisition differential (5) Goodwill (6) Non-controlling interest ...
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