Paulee Corporation paid $24,800 for an 80% interest in SergioCorporation on January 1, 2015, at which time Sergio'sstockholders' equity consisted of $15,000 of Common Stock and$6,000 of Retained Earnings. The fair values of SergioCorporation's assets and liabilities were identical to reorded bookvalues when Paulee acquired its 80% interest.
Sergio Corporation reported net income of $4,000 and paiddividends of $2,000 during 2015. Paulee Corporation sold inventoryitems to Sergio during 2015 and 2016 as follows:
2015 2016 Paulee's sales to Sergio $5,000 $6,000 Paulee's cost of sales toSerigo 3,000 3,500 Unrealized profit atyear-end 1,000 1,500
At December 31, 2016, the accounts payable of Sergio include$1,500 owed to Paulee for inventory purchases.
Financial statements of Paulee and Sergio appear in the firsttwo columns of the partially completed working papers.
REQUIRED:
1. Show all preliminary computations (5 pts)
2. Complete the consolidation working papers for PauleeCorporation and Subsidiary for the year ended December 31, 2016 (13pts)
3. Give all eliminating journal entires (6 pts)
Paulee Sergio Eliminations- Debit Eliminations- Credit Non-Cont. Interest Consolidated INCOME STATEMENT
Sales
$43,000 $20,000 Income from Sergio 6,700 Cost of Sales (22,000) (8,000) Other expenses
Non-controlling interest Expense
(12,200) (3,000) Net Income 15,500 9,000 RETAINED EARNINGS
Retained Earnings 1/1
9,000 8,000 Add: Net Income 15,500 9,000 Less: Dividends (10,000) (5,000) Retained Earnings 12/31 $14,500 $12,000 BALANCE SHEET
Cash
5,400 3,000 Accounts Receivable- Net 14,000 10,000 Dividend Receivable 2,000 Inventories 18,000 8,000 Goodwill Equipment and Buildings-Net 24,000 31,000 Investment in Sergio 28,100 TOTALASSETS $91,500 $52,000 LIAB. & EQUITY
Accounts payable
17,500 12,500 Dividend payable 7,000 2,500 Other Debt 12,500 10,000 Capital Stock 40,000 15,000 Retained Earnings 14,500 12,000 1/1 Noncontrl Interest 12/31 Noncontrl Interest LIAB. &EQUITY $91,500 $52,000
Paulee Corporation paid $24,800 for an 80% interest in SergioCorporation on January 1, 2015, at which time Sergio'sstockholders' equity consisted of $15,000 of Common Stock and$6,000 of Retained Earnings. The fair values of SergioCorporation's assets and liabilities were identical to reorded bookvalues when Paulee acquired its 80% interest.
Sergio Corporation reported net income of $4,000 and paiddividends of $2,000 during 2015. Paulee Corporation sold inventoryitems to Sergio during 2015 and 2016 as follows:
| 2015 | 2016 | |
| Paulee's sales to Sergio | $5,000 | $6,000 |
| Paulee's cost of sales toSerigo | 3,000 | 3,500 |
| Unrealized profit atyear-end | 1,000 | 1,500 |
At December 31, 2016, the accounts payable of Sergio include$1,500 owed to Paulee for inventory purchases.
Financial statements of Paulee and Sergio appear in the firsttwo columns of the partially completed working papers.
REQUIRED:
1. Show all preliminary computations (5 pts)
2. Complete the consolidation working papers for PauleeCorporation and Subsidiary for the year ended December 31, 2016 (13pts)
3. Give all eliminating journal entires (6 pts)
| Paulee | Sergio | Eliminations- Debit | Eliminations- Credit | Non-Cont. Interest | Consolidated | |
| INCOME STATEMENT Sales | $43,000 | $20,000 | ||||
| Income from Sergio | 6,700 | |||||
| Cost of Sales | (22,000) | (8,000) | ||||
| Other expenses Non-controlling interest Expense | (12,200) | (3,000) | ||||
| Net Income | 15,500 | 9,000 | ||||
| RETAINED EARNINGS Retained Earnings 1/1 | 9,000 | 8,000 | ||||
| Add: Net Income | 15,500 | 9,000 | ||||
| Less: Dividends | (10,000) | (5,000) | ||||
| Retained Earnings 12/31 | $14,500 | $12,000 | ||||
| BALANCE SHEET Cash | 5,400 | 3,000 | ||||
| Accounts Receivable- Net | 14,000 | 10,000 | ||||
| Dividend Receivable | 2,000 | |||||
| Inventories | 18,000 | 8,000 | ||||
| Goodwill | ||||||
| Equipment and Buildings-Net | 24,000 | 31,000 | ||||
| Investment in Sergio | 28,100 | |||||
| TOTALASSETS | $91,500 | $52,000 | ||||
| LIAB. & EQUITY Accounts payable | 17,500 | 12,500 | ||||
| Dividend payable | 7,000 | 2,500 | ||||
| Other Debt | 12,500 | 10,000 | ||||
| Capital Stock | 40,000 | 15,000 | ||||
| Retained Earnings | 14,500 | 12,000 | ||||
| 1/1 Noncontrl Interest | ||||||
| 12/31 Noncontrl Interest | ||||||
| LIAB. &EQUITY | $91,500 | $52,000 |
Related questions
Paulee Corporation paid $24,800 for an 80% interest in SergioCorporation on January 1, 2015, at which time Sergio'sstockholders' equity consisted of $15,000 of Common Stock and$6,000 of Retained Earnings. The fair values of SergioCorporation's assets and liabilities were identical to reorded bookvalues when Paulee acquired its 80% interest.
Sergio Corporation reported net income of $4,000 and paiddividends of $2,000 during 2015. Paulee Corporation sold inventoryitems to Sergio during 2015 and 2016 as follows:
| 2015 | 2016 | |
| Paulee's sales to Sergio | $5,000 | $6,000 |
| Paulee's cost of sales to Serigo | 3,000 | 3,500 |
| Unrealized profit at year-end | 1,000 | 1,500 |
At December 31, 2016, the accounts payable of Sergio include$1,500 owed to Paulee for inventory purchases.
Financial statements of Paulee and Sergio appear in the firsttwo columns of the partially completed working papers.
REQUIRED:
1. Show all preliminary computations (5 pts)
2. Complete the consolidation working papers for PauleeCorporation and Subsidiary for the year ended December 31, 2016 (13pts)
3. Give all eliminating journal entires (6 pts)
| Paulee | Sergio | Eliminations- Debit | Eliminations- Credit | Non-Cont. Interest | Consolidated | |
| INCOME STATEMENT Sales | $43,000 | $20,000 | ||||
| Income from Sergio | 6,700 | |||||
| Cost of Sales | (22,000) | (8,000) | ||||
| Other expenses Non-controlling interest Expense | (12,200) | (3,000) | ||||
| Net Income | 15,500 | 9,000 | ||||
| RETAINED EARNINGS Retained Earnings 1/1 | 9,000 | 8,000 | ||||
| Add: Net Income | 15,500 | 9,000 | ||||
| Less: Dividends | (10,000) | (5,000) | ||||
| Retained Earnings 12/31 | $14,500 | $12,000 | ||||
| BALANCE SHEET Cash | 5,400 | 3,000 | ||||
| Accounts Receivable- Net | 14,000 | 10,000 | ||||
| Dividend Receivable | 2,000 | |||||
| Inventories | 18,000 | 8,000 | ||||
| Goodwill | ||||||
| Equipment and Buildings- Net | 24,000 | 31,000 | ||||
| Investment in Sergio | 28,100 | |||||
| TOTAL ASSETS | $91,500 | $52,000 | ||||
| LIAB. & EQUITY Accounts payable | 17,500 | 12,500 | ||||
| Dividend payable | 7,000 | 2,500 | ||||
| Other Debt | 12,500 | 10,000 | ||||
| Capital Stock | 40,000 | 15,000 | ||||
| Retained Earnings | 14,500 | 12,000 | ||||
| 1/1 Noncontrl Interest | ||||||
| 12/31 Noncontrl Interest | ||||||
| LIAB. & EQUITY | $91,500 | $52,000 |
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 |
