On December 31, Year 2, Palm Inc. purchased 80% of the outstanding ordinary shares of Storm Company for $410,000.

On December 31, Year 2, Palm Inc. purchased 80% of the outstanding ordinary shares of Storm Company for $410,000.

On December 31, Year 2, Palm Inc. purchased 80% of the outstanding ordinary shares of Storm Company for $410,000. At that date, Storm had ordinary shares of $300,000 and retained earnings of $70,000. In negotiating the purchase price, it was agreed that the assets on Storm’s statement of financial position were fairly valued except for plant assets, which had a $41,000 excess of fair value over carrying amount. It was also agreed that Storm had unrecognized intangible assets consisting of trademarks that had an estimated value of $30,000. The plant assets had a remaining useful life of 8 years at the acquisition date and the trademarks would be amortized over a 12-year period. Any goodwill arising from this business combination would be tested periodically for impairment. Palm accounts for its investment using the cost method.

Additional Information
At December 31, Year 5, an impairment test of Storm’s goodwill revealed the following:

 

Fair value less disposal costs based on recent offer from prospective purchaser $ 56,000
Value in use based on undiscounted future net cash flows 75,000
Value in use based on discounted future net cash flows using a discount rate of
6%, which is Storm’s incremental borrowing rate 50,000
2%, which is the risk-free rate on government bonds 55,000

An impairment test indicated that the trademarks had a recoverable amount of $15,250. The impairment loss on these assets occurred entirely in Year 6.
On December 26, Year 6, Palm declared dividends of $46,000, while Storm declared dividends of $30,000.
Amortization expense is reported in selling expenses, while impairment losses are reported in other expenses.
Financial statements for Palm and Storm for the year ended December 31, Year 6, were as follows:

 

STATEMENTS OF FINANCIAL POSITION
December 31, Year 6
Palm Storm
Assets
Plant assets — net $ 330,000 $ 260,000
Investment in Storm 410,000
Other investments 92,000 32,000
Notes receivable 20,000
Inventory 200,000 280,000
Accounts receivable 98,000 210,000
Cash 30,000 40,000




$ 1,160,000 $ 842,000








Shareholders’ Equity and Liabilities
Ordinary shares $ 600,000 $ 300,000
Retained earnings 210,000 250,000
Notes payable 180,000 150,000
Other current liabilities 20,000 60,000
Accounts payable 150,000 82,000




$ 1,160,000 $ 842,000









 

INCOME STATEMENTS
Year ended December 31, Year 6
Palm Storm
Sales $ 970,000 $ 615,000
Cost of goods sold (688,000) (410,000)




Gross profit $ 282,000 $ 205,000
Selling expenses (32,000) (45,000)
Other expenses (168,000) (92,000)
Interest and dividend income 44,000 12,000




Profit $ 126,000 $ 80,000









 

Required:
(a) Prepare consolidated financial statements. (Input all values as positive numbers.)
Palm Inc.
Consolidated Income Statement
Year ended December 31, Year 6
(Click to select)Accounts payableAssetsSalesInvestmentInventoryIncome taxesCash $
(Click to select)Common sharesAccounts receivableNon-controlling interestInvestmentRetained earningsInterest income




(Click to select)Interest expenseSelling expensesIncome tax expenseOther expensesSalariesCost of salesRent expenseAdministration expense
(Click to select)Income tax expenseCost of salesAdministration expenseOther expensesRent expenseSelling expensesSalariesInterest expense
(Click to select)Other expensesCost of salesInterest expenseAdministration expenseIncome tax expenseSalariesRent expenseSelling expenses




(Click to select)ProfitLoss $




Attributable to:
Palm’s shareholders $
Non-controlling interest


$





 

Palm Inc.
Consolidated Statement of Financial Position
Year ended December 31, Year 6
(Click to select)InvestmentsTrademarksGoodwillPlant assetsAccounts receivableCashInventoryNotes receivableCurrent assets $
(Click to select)InvestmentsPlant assetsAccounts receivableNotes receivableGoodwillCashCurrent assetsInventoryTrademarks
(Click to select)GoodwillInvestmentsNotes receivableCashTrademarksPlant assetsCurrent assetsInventoryAccounts receivable
(Click to select)InventoryNotes receivableGoodwillCashInvestmentsAccounts receivablePlant assetsCurrent assetsTrademarks
(Click to select)GoodwillCurrent assetsInventoryInvestmentsCashAccounts receivableTrademarksNotes receivablePlant assets
(Click to select)Current assetsInventoryTrademarksAccounts receivableInvestmentsPlant assetsCashNotes receivableGoodwill
(Click to select)Current assetsTrademarksInventoryAccounts receivableNotes receivableGoodwillPlant assetsCashInvestments
(Click to select)Accounts receivablePlant assetsNotes receivableInvestmentsInventoryCurrent assetsTrademarksGoodwillCash


$




(Click to select)Accounts payableNotes receivableOrdinary sharesRetained earningsSalary payableNon-controlling interestOther current liabilitiesNotes payable $
(Click to select)Non-controlling interestSalary payableNotes receivableOther current liabilitiesAccounts payableNotes payableOrdinary sharesRetained earnings
(Click to select)Accounts payableNotes payableOrdinary sharesSalary payableNon-controlling interestOther current liabilitiesRetained earningsNotes receivable
(Click to select)Accounts payableOrdinary sharesRetained earningsNotes receivableSalary payableNotes payableOther current liabilitiesNon-controlling interest
(Click to select)Notes payableOrdinary sharesRetained earningsNon-controlling interestOther current liabilitiesNotes receivableAccounts payableSalary payable
(Click to select)Salary payableRetained earningsOther current liabilitiesOrdinary sharesNotes receivableNotes payableNon-controlling interestAccounts payable


$





 

(b) Assuming that none of the acquisition differential had been allocated to trademarks at the date of acquisition complete the table given below. (Leave no cells blank – be certain to enter “0” wherever required.)
Bal Amortization Loss Bal
Dec. 31/Yr2 to Dec.31/Yr5 Yr6 Yr6 Dec. 31/Yr6
Plant assets $ $ $ $ $
Goodwill










$ $ $ $ $





















 

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