Chapter 7 long example (2).docx - ACCT 4200 Chapter 7 Long Example On January 1 20X4 Pansy Company acquired 70 of the outstanding ordinary shares of

Chapter 7 long example (2).docx - ACCT 4200 Chapter 7 Long...

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ACCT 4200 Chapter 7 Long Example On January 1, 20X4, Pansy Company acquired 70% of the outstanding ordinary shares of Sunflower Ltd. (Sun) for $45,500 in cash. On that date, Sun had $20,000 in ordinary shares outstanding and $20,000 in retained earnings. At the time of the acquisition, the book value of each of Sun’s assets was equal to its fair value except for the following: Book value Fair value Inventory $20,000 $25,000 Buildings and equipment $60,000 $60,000 Accumulated depreciation ($10,000) The buildings and equipment had a remaining useful life of 10 years at January 1, 20X4, and the inventory on hand at the time of the purchase was sold in 20X4. Any excess paid over the fair value was for Sun’s good reputation in the flower industry, which Pansy set up as goodwill. Following are the financial statements for Pansy and Sun at December 31, 20X11. Separate Entity Balance Sheets at December 31, 20X11 PANSY SUN Assets Cash $ 29,500 $ 10,000 Accounts receivable (net) 60,000 20,000 Inventory 45,000 30,000 Investment in Sun (cost method) 45,500 Buildings and equipment 90,000 100,000 Accumulated depreciation (20,000 ) (50,000 ) $ 250,000 $ 110,000 Liabilities Current liabilities $ 40,000 $ 25,000 Deferred income taxes 10,000 5,000 $ 50,000 $ 30,000 Shareholders’ equity Ordinary shares $ 70,000 $ 20,000 Retained earnings 130,000 60,000 200,000 80,000 $ 250,000 $ 110,000
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Separate Entity Statements of Income and Retained Earnings for the year ended December 31, 20X11 PANSY SUN Sales $ 650,000 $ 225,000 Cost of goods sold (300,000 ) (112,500 ) 350,000 112,500 Depreciation expense 14,000 12,000 Other expenses 231,000 75,500 Income tax expense 42,000 10,000 287,000 97,500 Net income 63,000 15,000 Retained earnings — Beginning 67,000 45,000 Retained earnings — Ending $ 130,000 $ 60,000 During 20X10 and 20X11, Sun sold merchandise to Pansy at a price that provides it with a gross profit of 50% of the selling price. The 20X11 sales totaled $10,000. Pansy’s December 31, 20x11 inventory contained of $2,000 of purchases from Sun, while the December 31, 20X10, inventory contained $1,000 worth of intercompany merchandise. At the end of 20X11, Pansy owes Sun $500 for merchandise inventory purchased on account. This liability is non-interest bearing. On December 31, 20X8, Pansy sold equipment having a cost of $5,000 and accumulated depreciation of $1,000 to Sun for $5,000. This equipment had been purchased by Pansy subsequent to January 1, 20X4. The remaining useful life of the equipment at the time of the sale was 10 years;
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