AA_ch8_solutions

AA_ch8_solutions - Chapter 8 Class Solutions Problem 4 (a)...

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Chapter 8 Class Solutions Problem 4 (a) (in 000s) i) ii) iii) iv) NORD’s own income 200 200 200 200 HABS’s own income 500 500 Less: unrealized profit - 500 - 500 HABS’s adjusted income 0 0 NORD’s ownership 75% 75% NORD’s share of HABS’s income 0 0 Dividend income from HABS (75% x 100) 75 NORD’s total income 200 200 275 NORD’s consolidated net income 200 (b) (in 000s) i) ii) iii) iv) HABS’s own income 500 500 500 500 Less: unrealized profit - 500 - 500 HABS’s adjusted income 0 0 Dividend income from NORD (75% x 100) 75 NORD’s own income 200 200 HABS’s ownership 75% 75% HABS’s share of NORD’s income . 150 150 . HABS’s total income 500 150 575 HABS’s consolidated net income 150 (c) We can make the following observations about the income reported under the different reporting methods: 1. Net income under the equity method is equal to consolidated net income because the unrealized profit is eliminated in both situations. 2. The full amount of unrealized profit is eliminated regardless of whether the transaction is upstream as per part (a) or downstream as per part (b). 3. Unrealized profit is not eliminated under the cost method.
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4. Income under cost method will be higher than income under the equity method and consolidated net income when dividends received from the investee exceed the investor’s share of the investee’s adjusted net income. When the parent controls the subsidiary, the consolidated financial statements best reflect the financial position and results of operations of the combined entities. At the date of acquisition, the net assets of the subsidiary including goodwill are reported at fair values. The net assets of the parent at reported at their carrying values. Therefore, the consolidated financial statements do not reflect the fair value of all assets and liabilities. However, the assets and liabilities are reported at the values required by generally accepted accounting principles. Problem 13 (in 000s) Calculation and allocation of purchase discrepancy Cost of 60% investment in ENS $ 780 Implied value of 100% investment in ENS 1,300 Net book value of ENS: Common shares $500 Retained earnings 120 Total shareholders’ equity 620 Purchase discrepancy 680 Allocated: (FV – BV) Equipment - 30 Land 120 90 Balance — goodwill $ 590 Purchase discrepancy amortization and goodwill impairment schedule (in 000s) Balance Amortization/Impairment Balance Dec. 31, Yr1 Yr2- Yr4 Yr5 Dec. 31, Yr5 Equipment (6 years) $ (30) $ (15) $ (5) $ (10) (a) Land 120 - - 120 (b) Goodwill 590 490 25 75 (c) Total $ 680 $ 475 $ 20 $ 185 (d)
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Intercompany sales and cost of sales $600 (e) Intercompany other revenues and other expenses ($5 x 12) $60 (f) Intercompany inventory profits – ENS selling ENS’s gross margin % = (3,010 – 2,107) / 3,010 = 30% Before tax 40% tax After tax Closing inventory (30% x $200) $ 60 $ 24 $ 36 (g) Beginning inventory (30% x $250) $ 75 $ 30 $ 45 (h) Intercompany receivables and payables 150 (i) Intercompany depreciable assets profits
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This note was uploaded on 11/15/2009 for the course BA ADMN4836 taught by Professor C.barrie during the Spring '09 term at Laurentian.

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AA_ch8_solutions - Chapter 8 Class Solutions Problem 4 (a)...

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