Exam Review-Problem 2_solution

Exam Review-Problem 2_solution - Exam Review Problem 2...

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Exam Review: Problem 2 Solution Purchase price $640,000 Ownership percentage 80% Implied value of 100% 800,000 Book value of net assets Share capital (100,000) Retained earnings (465,000) Acquisition Differential 235,000 Allocated as follows: FV - BV Inventory ($50,000) Land 200,000 Equipment (50,000) Trademarks 100,000 200,000 Less: Long-term debt 50,000 150,000 Goodwill $85,000 Amortization schedule Original Amort. 20X3 - 20X6 Amort. 20X7 Unamortized Inventory ($50,000) ($50,000) $0 Land 200,000 200,000 Equipment (50,000) (21,875) ($6,250) (21,875) Trademarks 100,000 43,750 12,500 43,750 Long-term debt (50,000) (17,500) (5,000) (27,500) Goodwill 85,000 35,000 50,000 235,000 $ ($45,625) $36,250 $244,375
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Intercompany Profits Sale Profit Tax After-tax 80% Opening inventory - upstream $170,000 $68,000 $20,400 $47,600 $38,080 Closing inventory - upstream $350,000 $140,000 $42,000 $98,000 $78,400 Sale of equipment - upstream Before tax Tax After-tax 80% Sale price $150,000 Carrying value (120,000) Unrealized Gain - Jan 1, 20x6 $30,000 $9,000 $21,000 $16,800 Gain realized 20X6 (amortization) (5,000) (1,500) (3,500) (2,800) Unrealized gain - Jan 1 20x7 25,000 7,500 17,500 14,000 Gain realized 20X7 (amortization) (5,000) (1,500) (3,500) (2,800) Unrealized gain - Dec 31 20x7 $20,000 $6,000 $14,000 $11,200 Sale of land - upstream Before tax Tax After-tax 80% Sale price - 20X5 $375,000 Carrying value (300,000) Unrealized gain - Dec 31, 20x6 $75,000 $22,500 $52,500 $42,000 Unrealized gain - Dec 31, 20x7 $75,000 $22,500 $52,500 Intercompany sales & Purchases $2,500,000 Intercompany trade payables $160,000
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Requirement 1 Investment in Spice 344,000 Investment income 344,000 80% of Spice's net income $430,000 Cash 200,000
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