UNIVERSITY OF NEW BRUNSWICK

Faculty of Business Administration

ADM 4215 (1A) / Midterm # 2 / R. Maher
Advanced Financial Accounting I / November 18, 2010
Time: 80 Minutes / 20 Marks

QUESTION ONE ( 20 Marks)

On December 31, 2007, the Pig Company purchased 80% of the outstanding voting shares of the Sty Company for $6,000,000 cash. On that date, the Sty Company had Common stock of $4,000,000 and Retained earnings of $2,000,000. At the acquisition date, management of Pig Company measured the non-controlling interest in Sty based on the fair value of the net identifiable assets of Sty.

On December 31, 2007 all of the identifiable assets and liabilities of Sty Company had fair values that were equal to their carrying values with the following exceptions:

1.  Inventories with fair values that were $800,000 more than their carrying values.

2.  Land with a fair value that was $1,600,000 less than its carrying value.

3.  Plant and Equipment, with fair values that were $400,000 more than their carrying values. At December 31, 2007, Sty’s Plant and Equipment had a remaining useful life of 10 years.

Both companies use the straight line method to calculate amortization. In its single entity records, Pig Company carries its investment in Sty at cost.

The Land which was on the books of the Sty Company on December 31, 2007 has not been sold as at December 31, 2010.

Financial statements for Pig and Sty for the year ended December 31, 2010 are as follows:

Income Statements
For the Year Ending December 31, 2010
Pig Company / Sty Company
Sales / $10,000,000 / $4,000,000
Other revenues / 2,000,000 / 1,000,000
Total Revenues / 12,000,000 / 5,000,000
Cost of goods sold / 4,000,000 / 2,000,000
Amortization expense / 800,000 / 600,000
Other expenses / 1,200,000 / 800,000
Total Expenses / 6,000,000 / 3,400,000
Net Income / $6,000,000 / $1,600,000
Statements of Retained Earnings
For the Year Ending December 31, 2010
Pig / Sty
Retained earnings, beginning of year / 20,000,000 / 3,200,000
Net Income / 6,000,000 / 1,600,000
Balance Available / 26,000,000 / 4,800,000
Dividends declared / (2,000,000) / (800,000)
Retained earnings, end of year / $24,000,000 / $4,000,000
BALANCE SHEETS
As at December 31, 2010
Pig / Sty
Cash and current receivables / $ 3,000,000 / $ 2,400,000
Note Receivable / 2,000,000 / -
Inventories / 9,000,000 / 2,000,000
Investment in Sty Company (at cost) / 6,000,000 / -
Plant and Equipment (Net) / 18,000,000 / 5,000,000
Land / 4,000,000 / 2,600,000
$42,000,000 / $12,000,000
Current Liabilities / $1,000,000 / $ 400,000
Long-Term Liabilities / 7,000,000 / 3,600,000
Common stock / 10,000,000 / 4,000,000
Retained Earnings / 24,000,000 / 4,000,000
$42,000,000 / $12,000,00

Other Information:

  1. The Long-Term Liabilities of the Sty Company include a $2,000,000 note that is payable to the Pig Company. During 2010, interest expense on this note was $200,000 and on December 31, 2010, $100,000 of this interest had not been paid by Sty.
  1. In each of the years since Pig acquired control over Sty, the Goodwill arising on this business combination has been tested for impairment. In 2010, a Goodwill Impairment Loss of $1,000,000 was recognized. No impairment was found in any of the other years since acquisition.
  1. During 2010, Sty had sales of $3,000,000 to Pig, while Pig had sales of $1,000,000 to Sty. All of the merchandise which was transferred in these intercompany sales has been resold during 2010 to companies outside the consolidated entities.
  1. Pig Company records dividends received from Sly Company in “Other revenue” on its Income Statement.

REQUIRED:

  1. Prepare a Consolidated Income Statement for Pig Company and its subsidiary for the year ended December 31, 2010. (6 Marks)
  1. Prepare a Consolidated Statement of Retained Earnings for Pig Company and its subsidiary for the year ended December 31, 2010. A distribution of Sly’s opening Retained Earnings at January 1, 2010 is required. (6 Marks)
  1. Prepare a Consolidated Balance Sheet for Pig Company and its subsidiary at December 31, 2010. (8 Marks)