The following table shows selected amounts from the separate financial statements of a parent company (unconsolidated) and one of its subsidiaries. Note that 1) the parent company owns 100% of the subsidiary; 2) During the year the parent company sold some inventory to the subsidiary for $1,000 in scenario I and for $1,700 in scenario II. It had cost the parent company $1,000. The subsidiary further sold the inventory to an unrelated party for $2,000. 3) Located in two different countries, the parent company and the subsidiary have different income tax rates. Specifically, the rate for the parent company is 25% and the rate for the subsidiary is 50%. 4) Companies do not pay tax if their income is equal to or less than zero.
Please calculate and fill the cells with question marks.
Scenario I
Scenario II
Parent Company ($)
Subsidiary ($)
Parent Company ($)
Subsidiary ($)
Sales
1,000
2,000
1,700
2,000
Cost of goods sold
1,000
1,000
1,000
1,700
Gross profit
?
?
?
?
Operating expense
100
100
100
100
Taxable income
?
?
?
?
Income tax
?
?
?
?
Net Income
?
?
?
?
The following table shows selected amounts from the separate financial statements of a parent company (unconsolidated) and one of its subsidiaries. Note that 1) the parent company owns 100% of the subsidiary; 2) During the year the parent company sold some inventory to the subsidiary for $1,000 in scenario I and for $1,700 in scenario II. It had cost the parent company $1,000. The subsidiary further sold the inventory to an unrelated party for $2,000. 3) Located in two different countries, the parent company and the subsidiary have different income tax rates. Specifically, the rate for the parent company is 25% and the rate for the subsidiary is 50%. 4) Companies do not pay tax if their income is equal to or less than zero.
Please calculate and fill the cells with question marks.
| Scenario I | Scenario II | |||
| Parent Company ($) | Subsidiary ($) | Parent Company ($) | Subsidiary ($) | |
| Sales | 1,000 | 2,000 | 1,700 | 2,000 |
| Cost of goods sold | 1,000 | 1,000 | 1,000 | 1,700 |
| Gross profit | ? | ? | ? | ? |
| Operating expense | 100 | 100 | 100 | 100 |
| Taxable income | ? | ? | ? | ? |
| Income tax | ? | ? | ? | ? |
| Net Income | ? | ? | ? | ? |
Related questions
Topics 1 to 3 - Consolidation: Principles, accounting requirements, intra-group transactions and non-controlling interests
Parent Ltd acquired 80% of the issued shares of Subsidiary Ltd on 1 July 2014. At the acquisition date, the equity of Subsidiary Ltd consisted of Share Capital of $200,000; Retained Earnings of $ 74,000 and General Reserve of $6,000.
Parent Ltd uses the full goodwill method. The fair value of non-controlling interest at 1 July 2014 was $63,000.
All the identifiable net assets of Subsidiary Ltd were recorded at fair value at the date of acquisition, except for the following assets:4
| Carrying amount | Fair value | |
| $ | $ | |
| Plant (cost $150,000) | 100,000 | 110,000 |
| Land | 60,000 | 76,000 |
The plant has a further 10-year life, with benefits expected to be received evenly over that period. The land was sold on 1 February 2015 for $80,000. Any valuation reserve in relation to the land is transferred to retained earnings on consolidation.
Three years after acquisition, the financial information at 30 June 2017 of the two companies appears as follows:
|
| Parent Ltd | Subsidiary Ltd |
| $ | $ | |
| Sales | 632,000 | 440,000 |
| Other revenue: | ||
| Debenture interest | 10,000 | - |
| Management and consulting fees | 10,000 | - |
| Dividends from Subsidiary Ltd | 24,000 | - |
| Total revenue | 676,000 | 440,000 |
| Cost of sales | 260,000 | 170,000 |
| Manufacturing expenses | 180,000 | 120,000 |
| Depreciation on plant | 30,000 | 30,000 |
| Administrative expenses | 30,000 | 16,000 |
| Financial expenses | 22,000 | 10,000 |
| Other expenses | 28,000 | 24,000 |
| Total expenses | 550,000 | 370,000 |
| Profit before tax | 126,000 | 70,000 |
| Income tax expense | (50,000) | (34,000) |
| Operating profit after tax | 76,000 | 36,000 |
| Retained earnings 1 July 2016 | 100,000 | 90,000 |
| 176,000 | 126,000 | |
| Transfer to general reserve | 6,000 | - |
| Interim dividend paid | 20,000 | 20,000 |
| Final dividends declared | 20,000 | 10,000 |
| 46,000 | 30,000 | |
| Retained earnings 30 June 2017 | 130,000 | 96,000 |
| General reserve | 100,000 | 20,000 |
| Other components of equity | 26,000 | 20,000 |
| Share capital | 600,000 | 200,000 |
| Debentures | 400,000 | 200,000 |
| Current tax liability | 50,000 | 34,000 |
| Dividend payable | 20,000 | 10,000 |
| Deferred tax liability | - | 14,000 |
| Other liabilities | 180,000 | 24,000 |
| 1,506,000 | 618,000 | |
| Assets | ||
| Financial assets | 100,000 | 120,000 |
| Debentures in Subsidiary Ltd | 200,000 | - |
| Shares in Subsidiary Ltd | 263,200 | - |
| Plant (cost) | 240,000 | 204,000 |
| Accumulated depreciation â plant | (130,000) | (110,000) |
| Other depreciable assets | 152,000 | 110,000 |
| Accumulated depreciation | (80,000) | (50,000) |
| Inventory | 180,000 | 170,000 |
| Deferred tax asset | 170,800 | 60,000 |
| Land | 402,000 | 114,000 |
| Dividend receivable | 8,000 | - |
| 1,506,000 | 618,000 |
Additional information:
(a) The inventory on hand of Subsidiary Ltd on 1 July 2016 included a quantity priced at $20,000 that was transferred from Parent Ltd during the prior financial year. This inventory had cost Parent Ltd $15,000. This entire inventory was sold by Subsidiary Ltd to parties external to the group during the current financial year.
(b) Subsidiary Ltd sold inventory to Parent Ltd for $120,000 during the year. This inventory had an original cost to Subsidiary Ltd of $110,000. This entire inventory was held by Parent Ltd during the year.
(c) On 1 January 2016, Subsidiary Ltd sold an item from its inventory to Parent Ltd for $40,000. Parent Ltd had treated this item as an addition to its plant. The item was put into service as soon as received by Parent Ltd and depreciation charged at 20% p.a. The cost of that item to Subsidiary Ltd was $30,000.
(d) The management and consulting fees of Parent Ltd were all paid by Subsidiary Ltd and represented charges made for administration $4,400 and technical services $5,600. The latter were recognised as manufacturing expenses by Subsidiary Ltd.
(e) All debentures issued by Subsidiary Ltd are held by Parent Ltd. The related interest has been recorded by Parent Ltd accordingly and Subsidiary Ltd recorded the interest paid in financial expenses.
(f) Other components of equity relate to movements in the fair values of the financial assets. The balance of these accounts on 1 July 2016 was $20,000 for Parent Ltd and $16,000 for Subsidiary Ltd.
(g) The tax rate is 30%.
Required:
Prepare an acquisition analysis and the consolidation journal entries necessary for preparation of the consolidated financial statements for the year ending 30 June 2017 for the group comprising Parent Ltd and Subsidiary Ltd.
Note: show all necessary workings and narrations.
| Question 1 | Max. marks allocated |
| Acquisition analysis | 5 |
| Consolidation entries - accuracy | 35 |
| Total | 40 |
| Sendelbach Corporation is a U.S.âbased organization with operations throughout the world. One of its subsidiaries is headquartered in Toronto. Although this wholly owned company operates primarily in Canada, it engages in some transactions through a branch in Mexico. Therefore, the subsidiary maintains a ledger denominated in Mexican pesos (Ps) and a general ledger in Canadian dollars (C$). As of December 31, 2015, the subsidiary is preparing financial statements in anticipation of consolidation with the U.S. parent corporation. Both ledgers for the subsidiary are as follows: |
| Main OperationâCanada | ||
| Debit | Credit | |
| Accounts payable | C$ 39,605 | |
| Accumulated depreciation | 41,000 | |
| Buildings and equipment | C$ 181,000 | |
| Cash | 40,000 | |
| Common stock | 64,000 | |
| Cost of goods sold | 217,000 | |
| Depreciation expense | 8,300 | |
| Dividends, 4/1/15 | 33,000 | |
| Gain on sale of equipment, 6/1/15 | 6,400 | |
| Inventory | 93,000 | |
| Notes payableâdue in 2018 | 83,000 | |
| Receivables | 82,000 | |
| Retained earnings, 1/1/15 | 149,590 | |
| Salary expense | 37,000 | |
| Sales | 326,000 | |
| Utility expense | 10,400 | |
| Branch operation | 7,895 | |
| Totals | C$ 709,595 | C$ 709,595 |
| Branch OperationâMexico | ||
| Debit | Credit | |
| Accounts payable | Ps 64,900 | |
| Accumulated depreciation | 39,900 | |
| Building and equipment | Ps 54,000 | |
| Cash | 66,000 | |
| Depreciation expense | 3,400 | |
| Inventory (beginningâincome statement) | 37,000 | |
| Inventory (endingâincome statement) | 35,000 | |
| Inventory (endingâbalance sheet) | 35,000 | |
| Purchases | 71,000 | |
| Receivables | 35,000 | |
| Salary expense | 10,400 | |
| Sales | 138,000 | |
| Main office | 34,000 | |
| Totals | Ps 311,800 | Ps 311,800 |
| Additional Information |
| ⢠| The Canadian subsidiaryâs functional currency is the Canadian dollar, and Sendelbachâs reporting currency is the U.S. dollar. The Canadian and Mexican operations are not viewed as separate accounting entities. |
| ⢠| The building and equipment used in the Mexican operation were acquired in 2005 when the currency exchange rate was C$0.22 = Ps 1. |
| ⢠| Purchases should be assumed as having been made evenly throughout the fiscal year. |
| ⢠| Beginning inventory was acquired evenly throughout 2014; ending inventory was acquired evenly throughout 2015. |
| ⢠| The Main Office account on the Mexican records should be considered an equity account. This balance was remeasured into C$7,895 on December 31, 2015. |
| ⢠| Currency exchange rates for 1 Ps applicable to the Mexican operation follow: |
| Weighted average, 2014 | C$ | 0.27 |
| January 1, 2015 | 0.29 | |
| Weighted average rate for 2015 | 0.31 | |
| December 31, 2015 | 0.32 | |
| ⢠| The December 31, 2014, consolidated balance sheet reported a cumulative translation adjustment with a $50,950 credit (positive) balance. |
| ⢠| The subsidiaryâs common stock was issued in 2004 when the exchange rate was $0.43 = C$1. |
| ⢠| The subsidiaryâs December 31, 2014, Retained Earnings balance was C$149,590.00, a figure that has been translated into US$71,043. |
| ⢠| The applicable currency exchange rates for 1 C$ for translation purposes are as follows: |
| January 1, 2015 | US$ | 0.70 |
| April 1, 2015 | 0.69 | |
| June 1, 2015 | 0.68 | |
| Weighted average rate for 2015 | 0.67 | |
| December 31, 2015 | 0.65 | |
| a. | Remeasure the Mexican operationâs figures into Canadian dollars. (Hint: Back into the beginning net monetary asset or liability position.) (Input all amounts as positive values.)
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