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.
| • |
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 |
|
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|
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| 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 |
|
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|
| 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 |
|
|
|
|
|
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| Profit |
$ |
126,000 |
|
$ |
80,000 |
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| (a) |
Prepare consolidated financial statements. (Input all values as positive numbers.) |
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| Palm Inc. |
| Consolidated Income Statement |
| Year ended December 31, Year 6 |
| (Click to select)Accounts payableAssetsSalesInvestmentInventoryIncome taxesCash |
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$ |
| (Click to select)Common sharesAccounts receivableNon-controlling interestInvestmentRetained earningsInterest income |
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| (Click to select)Interest expenseSelling expensesIncome tax expenseOther expensesSalariesCost of salesRent expenseAdministration expense |
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| (Click to select)Income tax expenseCost of salesAdministration expenseOther expensesRent expenseSelling expensesSalariesInterest expense |
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| (Click to select)Other expensesCost of salesInterest expenseAdministration expenseIncome tax expenseSalariesRent expenseSelling expenses |
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| (Click to select)ProfitLoss |
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$ |
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| Attributable to: |
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| Palm’s shareholders |
|
$ |
| Non-controlling interest |
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$ |
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| 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 |
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| (Click to select)GoodwillInvestmentsNotes receivableCashTrademarksPlant assetsCurrent assetsInventoryAccounts receivable |
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| (Click to select)InventoryNotes receivableGoodwillCashInvestmentsAccounts receivablePlant assetsCurrent assetsTrademarks |
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| (Click to select)GoodwillCurrent assetsInventoryInvestmentsCashAccounts receivableTrademarksNotes receivablePlant assets |
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| (Click to select)Current assetsInventoryTrademarksAccounts receivableInvestmentsPlant assetsCashNotes receivableGoodwill |
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| (Click to select)Current assetsTrademarksInventoryAccounts receivableNotes receivableGoodwillPlant assetsCashInvestments |
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| (Click to select)Accounts receivablePlant assetsNotes receivableInvestmentsInventoryCurrent assetsTrademarksGoodwillCash |
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$ |
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| (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 |
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| (Click to select)Accounts payableNotes payableOrdinary sharesSalary payableNon-controlling interestOther current liabilitiesRetained earningsNotes receivable |
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| (Click to select)Accounts payableOrdinary sharesRetained earningsNotes receivableSalary payableNotes payableOther current liabilitiesNon-controlling interest |
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| (Click to select)Notes payableOrdinary sharesRetained earningsNon-controlling interestOther current liabilitiesNotes receivableAccounts payableSalary payable |
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| (Click to select)Salary payableRetained earningsOther current liabilitiesOrdinary sharesNotes receivableNotes payableNon-controlling interestAccounts payable |
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$ |
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| (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.) |
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Bal |
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Amortization |
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Loss |
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Bal |
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Dec. 31/Yr2 |
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to Dec.31/Yr5 |
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Yr6 |
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Yr6 |
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Dec. 31/Yr6 |
| Plant assets |
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$ |
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$ |
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$ |
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$ |
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$ |
| Goodwill |
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$ |
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$ |
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$ |
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$ |
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$ |
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