Exercise B2-1: Consolidated balance sheet, Post-acquisition, AAP, Upstream and Downstream Intercompany Transactions, p%<100%, Cost method
Paramour Corp. acquired 80 percent of the stock of Swain, Inc. on January 1, 2015, for $162,000. On this date, the balances of Swain's stockholders' equity accounts were Common Stock, $117,000, and Retained Earnings, $12,600. On January 1, 2015, the market value for the 20% of shares not purchased by Paramour was $39,600.
On January 1, 2015, Swain’s recorded book values were equal to fair values for all items except four: (1) accounts receivable had a book value of $27,000 and a fair value of $22,500, (2) property, plant & equipment, net had a book value of $45,000 and a fair value of $76,500, (3) trademarks had a book value of $31,500 and a fair value of $58,500, and (4) notes payable had a book value of $18,000 and a fair value of $12,600. Both companies use the FIFO inventory method and sell all of their inventories at least once per year. The year-end net balance of trade receivables are collected in the following year. On the acquisition date, Swain’s property, plant & equipment, net had a remaining useful life of 10 years, the trademarks had a remaining useful life of 6 years, and notes payable had a remaining term of 4 years.
On December 31, 2017, Paramour sold a building to Swain for $63,000. On this date, the building was carried on Swain's books (net of accumulated depreciation) at $45,000. Both companies estimated that the building has a remaining life of 5 years on the intercompany sale date, with no salvage value. Each company routinely sells merchandise to the other company, with a profit margin of 40 percent of selling price (regardless of the direction of the sale). During 2019, intercompany sales amount to $21,600, of which $14,400 of merchandise remains in the ending inventory of Swain. On December 31, 2019, $7,200 of these intercompany sales remained unpaid. Additionally, Paramour’s December 31, 2018 inventory includes $10,800 of merchandise purchased in the preceding year from Swain. During 2018, intercompany sales amount to $18,000, and on December 31, 2018, $6,075 of these intercompany sales remained unpaid.
Paramour accounts for its Equity Investment in Swain using the cost method. Unconfirmed profits are allocated pro rata.
The pre-consolidation financial statements for the two companies for the year ended December 31, 2019 are provided on the next page.
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Paramour
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Swain
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Income Statement
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Sales
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414,000
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180,000
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Cost of Goods Sold
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(216,000)
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(106,200)
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Gross Profit
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198,000
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73,800
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Depreciation & Amort Expense
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(10,800)
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(8,640)
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Operating Expenses
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(117,000)
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(23,670)
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Interest Expense
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(5,400)
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(1,890)
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Total expenses
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(133,200)
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(34,200)
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Income (loss) from Swain
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14,400
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-
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Net income
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79,200
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39,600
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Retained Earnings Statement
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BOY retained earnings
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196,470
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99,000
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Net income
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79,200
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39,600
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Dividends
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(54,000)
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(18,000)
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EOY retained earnings
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221,670
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120,600
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Balance Sheet
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Cash
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38,970
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13,500
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Accounts receivable
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48,600
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43,200
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Inventories
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117,000
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41,400
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PPE, net
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113,400
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99,000
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Other assets
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51,300
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90,000
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Trademarks
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-
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9,000
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Investment in Swain
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162,000
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|
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Total Assets
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531,270
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296,100
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Accounts Payable
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28,800
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16,200
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Notes Payable
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45,000
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18,900
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Other liabilities
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19,800
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23,400
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Common Stock
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216,000
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117,000
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Retained Earnings
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221,670
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120,600
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Total Liabilities and Equity
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531,270
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296,100
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Required:
1. Calculate the 100% AAP at the date of acquisition (January 1, 2015). Assign this AAP to the Controlling and Noncontrolling Interests.
2. Prepare an AAP amortization schedule for the Controlling and Noncontrolling interests.
3. Calculate the amounts of unconfirmed intercompany inventory profit (IIP) at December 31, 2018 and 2019. Specify whether these are associated with downstream or upstream sales.
4. Calculate the unconfirmed profit associated with the intercompany building sale at December 31, 2017. How much profit was confirmed during each year (2017, 2018 and 2019)? Was this profit the result of a downstream or upstream fixed asset sale?
Continued on the next page.
5. Independently compute the beginning and ending balances in the pre-consolidation “Investment in Swain” account. In addition, document the components of pre-consolidation “Income (loss) from Swain.”
6. In your own words, describe why Paramour’s pre-consolidation Net Income will not equal Paramour’s “Consolidated Net Income Attributable to the Controlling Interest.”
7. Independently compute (i.e., arithmetically, without consolidating entries) “Consolidated Net Income Attributable to the Controlling Interest,” starting with pre-consolidation net income of Paramour.
8. In your own words, describe why Paramour’s pre-consolidation Retained Earnings balance will not equal the Paramour’s consolidated Retained Earnings balance.
9. Independently compute both the beginning of year (i.e., January 1, 2019) and end of year (i.e., December 31, 2019) consolidated Retained Earnings starting with Paramour’s pre-consolidation Retained Earnings.
10. In your own words, describe the purpose of the [ADJ] consolidating entry.
11 Compute consolidated Sales for 2019.
12. Compute consolidated Cost of Goods Sold for 2019.
13. Compute consolidated Depreciation & Amortization Expense for 2019.
14. Compute the Income Attributable to the Noncontrolling Interest for 2019.
15. Compute consolidated balance for Accounts Receivable, net at December 31, 2019.
16. Compute consolidated balance for Inventories, net at December 31, 2019.
17. Compute consolidated balance for Property, Plant and Equipment, net at December 31, 2019.
18. Compute consolidated balance for Trademarks, net at December 31, 2019
19. Separately compute the Noncontrolling Interest balances shown on the consolidated balance sheets at December 31, 2018 and 2019. Identify the items that caused this balance to “change” during 2019.
20. COMPLETELY OPTIONAL (but suggested, and pedagogically important): Construct and complete a consolidated financial statement working paper for the year-ended December 31, 2019. (Note: I actually provide this in an Excel template in the Canvas Excel Files. Before looking at that template, it is in your best interest to attempt this requirement on your own.)
21. COMPLETELY OPTIONAL (but suggested, and pedagogically important): Prepare the consolidation entries in journal entry form. for the December 31, 2019 consolidated financial statement working paper.