ADM 4215

Fall 2010

Mid-Term #2 – Suggested Solution

Carrying Value Of Sty’s Identifiable Net Assets

(4,000,000 + 2,000,000) $6,000,000

Fair Value Changes:

Fair Value Increase On Inventories 800,000

Fair Value Decrease On Land (1,600,000)

Fair value Increase on P&E 400,000

Fair Value Of Sty’s Identifiable Net Assets $5,600,000

NCI = 20% of $5,600,000 = $1,120,000

NCI Based On

Fair Value of Identifiable Net Assets

Investment Cost (Consideration Transferred) (80%) $6,000,000

Non-Controlling Interest (20%) 1,120,000

Subtotal $7,120,000

Fair Value Of Sty’s Identifiable Net Assets (5,600,000)

Goodwill $ 1,520,000

Step A Investment Elimination Entry:

RE (Sty) / 2,000,000
C/Stock (Sty) / 4,000,000
Inventory / 800,000
P&E / 400,000
Goodwill / 1,520,000
Investment in Sty / 6,000,000
Land / 1,600,000
NCI (calculated) / 1,120,000

Amortization of Fair Value changes:

P&E: Three years (2008, 2009, 2010) have passed since acquisition (December 31, 2007). The P&E fair value increase will be amortized at $40,000 per year ($400,000/10 years). This will be a $40,000 increase in amortization expense per year to write off the P&E fair value increase.

Amortization expense / 40,000
RE / 80,000
P&E / 120,000

Inventory: The $800,000 fair value increase of inventory was realized in 2008 when inventory sold. Sty RE always too high compared to consolidation, therefore entry to write off the fair value increase is:

RE / 800,000
Inventory / 800,000

Goodwill: Impairment of $1,000,000 recognized in income in 2010.

Goodwill impairment loss / 1,000,000
Goodwill / 1,000,000

Inter-company Dividends: $800,000 declared by Sty Ltd

Dividend income (other revenue) (.8 x 800K) / 640,000
NCI (B/S) / 160,000
Dividends declared / 800,000

Intercompany sales:

Sales (3,000 + 1,000) / 4,000,000
COGS / 4,000,000

To eliminate up and downstream Intercompany sales of $3,000,000 and $1,000,000. All of these intercompany sales had been resold by December 31, 2010 so there are no unrealized intercompany profits.

Intercompany Payable and Receivable:

LTL / 2,000,000
Note Receivable / 2,000,000

To eliminate $2,000,000 Sty Note Payable to Pig.

Other revenue / 200,000
Other expense / 200,000

To eliminate Sty Company interest expense on Note Payable to Pig

Current liabilities / 100,000
Current receivable / 100,000

To eliminate Sty unpaid interest on Note Payable to Pig

A.
Pig Company and Subsidiary
Consolidated Income Statement
For the year ending December 31, 2010
Sales (10,000 + 4,000 – 4,000) / $10,000,000
Other revenue (2,000 + 1,000 - 640 - 200) / 2,160,000
$12,160,000
Cost of goods sold (4,000 + 2,000 – 4,000) / $2,000,000
Amortization expense( 800 + 600 + 40) / 1,440,000
Other expense (1,200 + 800 -200) / 1,800,000
Goodwill impairment loss / 1,000,000
Total expenses / 6,240,000
Consolidated Net income of the Enterprise / 5,920,000
NCI (.2 (1,600 - 40) / 312,000
Controlling Interest in Consolidated Net Income / $5,608,000

Distribution of Subsidiary Opening Retained Earnings:

Opening Retained Earnings, Jan 1, 2010 / $3,200,000
Retained earnings at Acquisition / 2,000,000
Retained earnings since Acquisition / 1,200,000
Adjustments for Fair Value Realizations
Inventories / (800,000)
P&E (2 x 40) / (80,000)
Adjusted balance since Acquisition / 320,000
Non-Controlling Interest (20% of 320,000) / (64,000)
To Consolidated Retained earnings / $256,000
Pig Company and Subsidiary
Consolidated Statement of Retained Earnings
For the year ending December 31, 2010
RE, Jan 1/10 ( 20,000 + 256 (from Sty) / $20,256,000
Consolidated Net Income / 5,608,000
25,864,000
Less Dividends (Pig only) / (2,000,000)
RE, Dec 31/10 / $23,864,000
Pig Company and Subsidiary
Consolidated Balance Sheet
December 31, 2010
Cash & AR (3,000 + 2,400 -100) / $5,300,000
Note Receivable (2,000 + 0 -2,000) / 0
Inventory (9,000 + 2,000 + 800 - 800) / 11,000,000
Investment in Sty ( 6,000 + 6,000 – 6,000) / 0
Plant & Equipment (18,000 + 5,000 + 400 - 120) / 23,280,000
Land (4,000 + 2,600 - 1,600)) / 5,000,000
Goodwill (0 + 0 + 1,520 – 1,000) / 520,000
$45,100,000
Current Liabilities (1,000 + 400 -100) / $1,300,000
LTL (7,000 + 3,600 – 2,000) / 8,600,000
NCI ( .2 ( 8,000 - 1,600 (Land) + 280 (P&E)) (1) / 1,336,000
Common Stock (10,000 + 4,000 – 4,000) / 10,000,000
Retained earnings (from Statement) / 23,864,000
$45,100,000

(1) or

Step A / $1,120,000
Step B Dividends / (160,000)
Step C (NCI share since acquisition) / 64,000
NCI share of 2010 Cons NI of Enterprise / 312,000
NCI (BS) at December 31, 2010 / $1,336,000