Question 1

On September 1,20X5,CanAir Limited decided to buy 100% of the shares outstanding of SkyAir Inc.for $900,000.Can Air will pay for this acquisition by using cash of $500,000 and issuing share capital for the remaining amount.The balances showing on the statement of financial position for the two companies at August 31,20X5 are as follows:
  
After a review of the financial assets and liabilities,CanAir determines that some of the assets of SkyAir have fair values different from their carrying values.These items are listed below:
• Land has a fair value of 225,000
• The building has a fair value of 1,090,000.The remaining useful life of the building is 20 years.
• Internet domain name has a fair value is $55,000.The domain name is estimated to have a useful life of 5 years.
• Customer lists has a fair value is $35,000.It is estimated that the customer lists will have a useful life of 7 years.
During the 20X9 fiscal year,the following events occurred:
1.On March 1,20X9,SkyAir sold land to CanAir for $390,000,which had a carrying value of $275,000.Can Air paid for this with $90,000 cash and a note payable for the difference.This note pays interest at 10% which is paid monthly.
2.CanAir provided management expertise to SkyAir and charged management fees of $890,000.
3.CanAir sold supplies (included in CanAir sales)to SkyAir for $200,000.CanAir charged SkyAir an amount that was 25% above costs.SkyAir still has supplies on hand of $70,000.
4.In 20X8,SkyAir had provided seat space on flights to Can Air for a value of $500,000.This amount was included in sales for SkyAir.Profit margin on these sales is 40%.At the end of August,20X8,CanAir still had an amount of $200,000 in these prepaid seats that had not yet been used.(CanAir includes this in inventory. )
Statements of Financial Position
As at August 31,20X9
  
Statements of Comprehensive Income
For the year ended August 31,20X9
  
Required:
Prepare the consolidated Statement of Comprehensive Income for the year ended August 31,20X9.

Accepted Answer

The answer of On September 1,20X5,CanAir Limited decided to buy...

Question 2

On September 1,20X5,CanAir Limited decided to buy 100% of the shares outstanding of SkyAir Inc.for $900,000.Can Air will pay for this acquisition by using cash of $500,000 and issuing share capital for the remaining amount.The balances showing on the statement of financial position for the two companies at August 31,20X5 are as follows:
  
After a review of the financial assets and liabilities,CanAir determines that some of the assets of SkyAir have fair values different from their carrying values.These items are listed below:
• Land has a fair value of 225,000
• The building has a fair value of 1,090,000.The remaining useful life of the building is 20 years.
• Internet domain name has a fair value is $55,000.The domain name is estimated to have a useful life of 5 years.
• Customer lists has a fair value is $35,000.It is estimated that the customer lists will have a useful life of 7 years.
During the 20X9 fiscal year,the following events occurred:
1.On March 1,20X9,SkyAir sold land to CanAir for $390,000,which had a carrying value of $275,000.Can Air paid for this with $90,000 cash and a note payable for the difference.This note pays interest at 10% which is paid monthly.
2.CanAir provided management expertise to SkyAir and charged management fees of $890,000.
3.CanAir sold supplies (included in CanAir sales)to SkyAir for $200,000.CanAir charged SkyAir an amount that was 25% above costs.SkyAir still has supplies on hand of $70,000.
4.In 20X8,SkyAir had provided seat space on flights to Can Air for a value of $500,000.This amount was included in sales for SkyAir.Profit margin on these sales is 40%.At the end of August,20X8,CanAir still had an amount of $200,000 in these prepaid seats that had not yet been used.(CanAir includes this in inventory. )
Statements of Financial Position
As at August 31,20X9
  
Statements of Comprehensive Income
For the year ended August 31,20X9
  
Required:
Calculate the consolidated retained earnings as at August 31,20X9.
Prepare the consolidated Statement of Financial Position for the year ended August 31,20X9.

Accepted Answer

The answer of On September 1,20X5,CanAir Limited decided to buy...

Question 3

On December 31,20X1,Dad Ltd.purchased 100% of the outstanding common shares of the Sad Ltd.for $9.5 million in cash.On that date,the shareholders' equity of Sad totaled $8 million and consisted of $1 million in no par common shares and $7 million in retained earnings.Both companies use the straight-line method to calculate depreciation.Goodwill,if any arises as a result of this business combination,is written down when there is impairment.Both Dad and Sad report under accounting standards for private enterprises.
For the year ending December 31,20X6,the statements of earnings for Dad and Sad were as follows:  
As at December 31,20X6,the condensed statements of financial position for the two companies were as follows:  
OTHER INFORMATION:
1.On December 31,20X1,Sad had a building with a fair value that was $300,000 greater than its carrying value.The building had an estimated remaining useful life of 20 years.
2.On December 31,20X1,Sad had inventory with a fair value that was $200,000 less than its carrying value.This inventory was sold in 20X3.
3.During 20X6,Dad sold merchandise to Sad for $100,000,a price that includes a gross profit of $40,000.During 20X6,40% of this merchandise was resold by Sad to third parties and the other 60% remains in its December 31,20X6 inventories.On December 31,20X5,the inventories of Sad contained merchandise purchased from Dad on which Dad had recognized a gross profit in the amount of $20,000.
4.During 20X6,Dad declared and paid dividends of $300,000 while Sad declared and paid dividends of $100,000.
5.Dad accounts for its investment in Sad using the cost method.
6.The retained earnings of Dad as at December 31,20x5 was $12,000,000.On that date,Sad had retained earnings of $9,800,000.Sad has not issued any common shares since its acquisition by Dad.
7.There were no specific events or circumstances between 20X2 and 20X6 to indicate any impairment of goodwill.
Required:
Calculate consolidated net income for the year ending December 31,20X6.

Accepted Answer

The answer of On December 31,20X1,Dad Ltd.purchased 100% of the...

Question 4

Which of the following consolidation adjustments will be required for a subsidiary that was acquired as a going concern,but will not be applicable for a parent-founded subsidiary?
A)Amortization of fair value increments on plant and equipment
B)Unrealized profits in ending inventory
C)Unrealized profits in beginning inventory
D)Future income tax on unrealized profits

Accepted Answer

When a subsidiary is acquired as a going concern, the assets and liabilities are often revalued to their fair values at the acquisition date. This can lead to increments in the values of assets such as plant and equipment. These increments are then amortized over the useful life of the assets. This adjustment would not be applicable for a parent-founded subsidiary, as there would be no acquisition-date fair value adjustments to amortize.

Question 5

In 20X1,a parent company sold a tract of land to its subsidiary for $100,000,resulting in a $30,000 loss.The subsidiary's plans for the land did not materialize and it still owned the land at the end of 20X4.At the end of 20X4,what consolidating journal entry should be made with respect to the loss associated with the sale of land?
A) 
B) 
C) 
D)

Accepted Answer

The answer of In 20X1,a parent company sold a tract...

Question 6

On December 31,20X2,the Pipe Ltd.purchased 100% of the outstanding common shares of the Fitter Ltd.for $10.5 million in cash.On that date,the shareholders' equity of Fitter totaled $8 million and consisted of $1 million in no par common shares and $7 million in retained earnings.Both companies use the straight-line method to calculate depreciation and amortization.Goodwill,if any arises as a result of this business combination,is written down if there is a permanent impairment in its value.
For the year ending December 31,20X6,the income statements for Pipe and Fitter were as follows:  
As at December 31,20X6,the condensed balance sheets for the two companies were as follows:  
OTHER INFORMATION:
1.On December 31,20X2,Fitter had a building with a fair value that was $500,000 greater than its carrying value.The building had an estimated remaining useful life of 20 years.
2.On December 31,20X2,Fitter had trademark that was not reported on its balance sheet,but had a fair value that was $200,000.The trademark is amortized over 10 years.
3.During 20X6,Fitter sold merchandise to Pipe for $100,000,a price that includes a gross profit of $40,000.During 20X6,20% of this merchandise was resold by Pipe and the other 80% remains in its December 31,20X6 inventories.On December 31,20X5,the inventories of Pipe contained merchandise purchased from Fitter on which Fitter had recognized a gross profit in the amount of $50,000.
4.During 20X6,it was determined that the goodwill arising at the date of acquisition was impaired and that an impairment loss of $70,000 should be recorded.No impairment had been charged in earlier years.
5.During 20X6,Pipe declared and paid dividends of $300,000 while Fitter declared and paid dividends of $100,000.
6.Pipe accounts for its investment in Fitter using the cost method.
The retained earnings of Pipe as at December 31,20X5 equalled $12,000,000.On that date,Fitter had retained earnings of $9,800,000.Fitter has not issued any common stock since its acquisition by Pipe.
Required:
Prepare,in good form,a consolidated statement of comprehensive income for the year ended December 31,20X6.

Accepted Answer

The answer of On December 31,20X2,the Pipe Ltd.purchased 100% of...

Question 7

On December 31,20X5,Space Co.purchased 100% of the outstanding common shares of Shuttle Ltd.for $1,200,000 in shares and $200,000 in cash.The statements of financial position of Space and Shuttle immediately before the acquisition and issuance of the notes payable were as follows (in 000s):  
The difference in the carrying value and the fair value of the capital assets for Shuttle relates to its office building.This building was originally purchased by Shuttle in January,20X1 and is being depreciated over 30 years.
During 20X6,the year following the acquisition,the following occurred:
1.Shuttle borrowed $350,000 from Space on June 1,20X6,and was charged interest at 10% per annum,which it paid on a monthly basis.There were no repayments of principal made during the remaining of the year.
2.Throughout the year,Shuttle purchased merchandise of $800,000 from Space.Space's gross margin is 30% of selling price.At December 31,20X6,Shuttle still owed Space $250,000 on this merchandise.75% of this merchandise was resold by Shuttle prior to December 31,20X6.
3.Shuttle paid dividends of $250,000 at the end of 20X6 and Space paid dividends of $500,000.
During 20X7,the following occurred:
1.Shuttle paid $150,000 on the loan payable to Space on May 30,20X7.
2.Throughout the year,Shuttle purchased merchandise of $1,000,000 from Space.Space's gross margin is 30% of selling price.At December 31,20X6,Shuttle still owed Space $150,000 on this merchandise.85% of this merchandise was resold by Shuttle prior to December 31,20X7.
3.Shuttle paid dividends of $250,000 at the end of 20X7 and Space paid dividends of $500,000.

Required:
Space has decided to record its investment in Shuttle using the equity method.Determine the balance in the investment in Shuttle account at December 31,20X7 using the equity method.
Prepare the statement of financial position and the statement of comprehensive income for the year ended December 31,20X7 for Space assuming it accounts for its investment in Shuttle using the equity method.

Accepted Answer

The answer of On December 31,20X5,Space Co.purchased 100% of the...

Question 8

On the date that a company acquires a subsidiary,which consolidated financial statement(s)must be prepared?
A)Consolidated statement of financial position
B)Consolidated statement of financial position and consolidated statement of comprehensive income
C)Complete set of consolidated financial statements
D)No consolidated financial statements are required at the acquisition date

Accepted Answer

On the acquisition date, a consolidated statement of financial position is required to reflect the financial position of the combined entity. Other statements are prepared at the end of the reporting period.

Question 9

In consolidating parent-founded subsidiaries,what account is used to offset the parent company's "Investment in Subsidiary" account?
A)Retained earnings
B)Goodwill
C)Paid-in-capital accounts
D)No off-set is necessary

Accepted Answer

When parent-founded subsidiaries are consolidated, any excess of the purchase price over the subsidiary's net assets (i.e. goodwill) is recorded in the parent company's "Investment in Subsidiary" account. To offset this account, the paid-in-capital accounts are used, which represents the capital the subsidiary received from its own stockholders. This is done in order to maintain the separation of the parent and subsidiary's equity accounts. Retained earnings are not used as an offset as they represent earnings retained by the subsidiary and do not directly relate to the parent's investment. No offset is not a viable option as there needs to be a corresponding entry to maintain the accounting equation.

Question 10

In consolidating a wholly-owned parent-founded subsidiary,which of the following adjustments or eliminations is not required?
A)Eliminating any unrealized profits or losses
B)Eliminating intercompany payables and receivables
C)Adjusting for intercompany transactions
D)Adjusting for goodwill impairment

Accepted Answer

Adjusting for goodwill impairment is not required in the consolidation of a wholly-owned parent-founded subsidiary, as there would be no goodwill recorded on the subsidiary's books. Goodwill only arises when a company acquires another company, and the purchase price exceeds the fair value of the net assets acquired. As the subsidiary is wholly-owned by the parent, there is no purchase price involved, and therefore no goodwill to be adjusted or eliminated.

Question 11

On December 31,20X2,the Pipe Ltd.purchased 100% of the outstanding common shares of the Fitter Ltd.for $10.5 million in cash.On that date,the shareholders' equity of Fitter totaled $8 million and consisted of $1 million in no par common shares and $7 million in retained earnings.Both companies use the straight-line method to calculate depreciation and amortization.Goodwill,if any arises as a result of this business combination,is written down if there is a permanent impairment in its value.
For the year ending December 31,20X6,the income statements for Pipe and Fitter were as follows:  
OTHER INFORMATION:
1.On December 31,20X2,Fitter had a building with a fair value that was $500,000 greater than its carrying value.The building had an estimated remaining useful life of 20 years.
2.On December 31,20X2,Fitter had trademark that was not reported on its balance sheet,but had a fair value that was $200,000.The trademark is amortized over 10 years.
3.During 20X6,Fitter sold merchandise to Pipe for $100,000,a price that includes a gross profit of $40,000.During 20X6,20% of this merchandise was resold by Pipe and the other 80% remains in its December 31,20X6 inventories.On December 31,20X5,the inventories of Pipe contained merchandise purchased from Fitter on which Fitter had recognized a gross profit in the amount of $50,000.
4.During 20X6,it was determined that the goodwill arising at the date of acquisition was impaired and that an impairment loss of $70,000 should be recorded.No impairment had been charged in earlier years.
5.During 20X6,Pipe declared and paid dividends of $300,000 while Fitter declared and paid dividends of $100,000.
6.Pipe accounts for its investment in Fitter using the cost method.
The retained earnings of Pipe as at December 31,20X5 equalled $12,000,000.On that date,Fitter had retained earnings of $9,800,000.Fitter has not issued any common stock since its acquisition by Pipe.
Required:
Calculate the consolidated retained earnings at December 31,20X5 and December 31,20X6.Prepare the consolidated statement of changes equity-partial statement showing the change in retained earnings for December 31,20X6 for Pipe.

Accepted Answer

The answer of On December 31,20X2,the Pipe Ltd.purchased 100% of...

Question 12

On September 1,20X5,CanAir Limited decided to buy 100% of the shares outstanding of SkyAir Inc.for $500,000.Can Air will pay for this acquisition by using cash of $500,000.The balances showing on the statement of financial position for the two companies at August 31,20X5 are as follows:
  
After a review of the financial assets and liabilities,CanAir determines that some of the assets of SkyAir have fair values different from their carrying values.These items are listed below:
• The building has a fair value of 1,090,000.The remaining useful life of the building is 20 years.
• Internet domain name has a fair value is $55,000.The domain name is estimated to have a useful life of 5 years.
• Customer lists has a fair value is $35,000.It is estimated that the customer lists will have a useful life of 7 years.
During the 20X9 fiscal year,the following events occurred:
1.On March 1,20X9,SkyAir sold land to CanAir for $390,000,which had a carrying value of $275,000.Can Air paid for this with $90,000 cash and a note payable for the difference.This note pays interest at 10% which is paid monthly.
2.CanAir provided management expertise to SkyAir and charged management fees of $890,000.
3.CanAir sold supplies (included in CanAir sales)to SkyAir for $200,000.CanAir charged SkyAir an amount that was 25% above costs.SkyAir still has supplies on hand of $70,000.
4.In 20X8,SkyAir had provided seat space on flights to Can Air for a value of $500,000.This amount was included in sales for SkyAir.Profit margin on these sales is 40%.At the end of August,20X8,CanAir still had an amount of $200,000 in these prepaid seats that had not yet been used.(CanAir includes this in inventory. )
Statements of Financial Position
As at August 31,20X9
  
Statements of Comprehensive Income
For the year ended August 31,20X9
  
Required:
CanAir would like to report this investment in SkyAir using the equity method.Determine the income from this equity investment for the year.
Determine the balance in the Investment in SkyAir account if the company used the equity method.

Accepted Answer

The answer of On September 1,20X5,CanAir Limited decided to buy...

Question 13

On December 31,20X5,Space Co.purchased 100% of the outstanding common shares of Shuttle Ltd.for $1,200,000 in shares and $200,000 in cash.The statements of financial position of Space and Shuttle immediately before the acquisition and issuance of the notes payable were as follows (in 000s):  
The difference in the carrying value and the fair value of the capital assets for Shuttle relates to its office building.This building was originally purchased by Shuttle in January,20X1 and is being depreciated over 30 years.
During 20X6,the year following the acquisition,the following occurred:
1.Shuttle borrowed $350,000 from Space on June 1,20X6,and was charged interest at 10% per annum,which it paid on a monthly basis.There were no repayments of principal made during the remaining of the year.
2.Throughout the year,Shuttle purchased merchandise of $800,000 from Space.Space's gross margin is 30% of selling price.At December 31,20X6,Shuttle still owed Space $250,000 on this merchandise.75% of this merchandise was resold by Shuttle prior to December 31,20X6.
3.Shuttle paid dividends of $250,000 at the end of 20X6 and Space paid dividends of $500,000.
During 20X7,the following occurred:
1.Shuttle paid $150,000 on the loan payable to Space on May 30,20X7.
2.Throughout the year,Shuttle purchased merchandise of $1,000,000 from Space.Space's gross margin is 30% of selling price.At December 31,20X6,Shuttle still owed Space $150,000 on this merchandise.85% of this merchandise was resold by Shuttle prior to December 31,20X7.
3.Shuttle paid dividends of $250,000 at the end of 20X7 and Space paid dividends of $500,000.

Required:
Calculate the consolidated retained earnings for Space as at December 31,20X7.
Prepare the consolidated statement of financial position for the year ended December 31,20X7 for Space.

Accepted Answer

The answer of On December 31,20X5,Space Co.purchased 100% of the...

Question 14

On January 1,20X3,Dwayne Ltd.formed Carlos Co. ,a 100% owned subsidiary.During 20X6,Dwayne sold Carlos $100,000 in goods.The unrealized profit in Carlos' inventories was $20,000 at December 31,20X5 and $25,000 at December 31,20X6.Ignoring income taxes,what adjustment should be made to the consolidated financial statements for the year ended December 31,20X6 to reflect the unrealized profit in Carlos' ending inventory?
A)Inventory at December 31,20X6 will be increased by $25,000.
B)Cost of goods sold for 20X6 will be decreased by $25,000.
C)Retained earnings at the end of 20X6 will be decreased by $25,000.
D)Retained earnings at the end of 20X6 will be decreased by $5,000.

Accepted Answer

The answer of On January 1,20X3,Dwayne Ltd.formed Carlos Co. ,a...

Question 15

On December 31,20X5,Space Co.purchased 100% of the outstanding common shares of Shuttle Ltd.for $1,200,000 in shares and $200,000 in cash.The statements of financial position of Space and Shuttle immediately before the acquisition and issuance of the notes payable were as follows (in 000s):  
The difference in the carrying value and the fair value of the capital assets for Shuttle relates to its office building.This building was originally purchased by Shuttle in January,20X1 and is being depreciated over 30 years.
During 20X6,the year following the acquisition,the following occurred:
1.Shuttle borrowed $350,000 from Space on June 1,20X6,and was charged interest at 10% per annum,which it paid on a monthly basis.There were no repayments of principal made during the remaining of the year.
2.Throughout the year,Shuttle purchased merchandise of $800,000 from Space.Space's gross margin is 30% of selling price.At December 31,20X6,Shuttle still owed Space $250,000 on this merchandise.75% of this merchandise was resold by Shuttle prior to December 31,20X6.
3.Shuttle paid dividends of $250,000 at the end of 20X6 and Space paid dividends of $500,000.
During 20X7,the following occurred:
1.Shuttle paid $150,000 on the loan payable to Space on May 30,20X7.
2.Throughout the year,Shuttle purchased merchandise of $1,000,000 from Space.Space's gross margin is 30% of selling price.At December 31,20X6,Shuttle still owed Space $150,000 on this merchandise.85% of this merchandise was resold by Shuttle prior to December 31,20X7.
3.Shuttle paid dividends of $250,000 at the end of 20X7 and Space paid dividends of $500,000.

Required:
Prepare the consolidated statement of comprehensive income for the year ended December 31,20X7 for Space.

Accepted Answer

The answer of On December 31,20X5,Space Co.purchased 100% of the...

Question 16

On December 31,20X1,the Dad Ltd.purchased 100% of the outstanding common shares of the Sad Ltd.for $9.5 million in cash.On that date,the shareholders' equity of Sad totaled $8 million and consisted of $1 million in no par common shares and $7 million in retained earnings.Both companies use the straight-line method to calculate depreciation.Goodwill,if any arises as a result of this business combination,is written down if there is a permanent impairment in its value.
For the year ending December 31,20X6,the statements of comprehensive income for Dad and Sad were as follows:  
As at December 31,20X6,the condensed statements of financial position for the two companies were as follows:  
OTHER INFORMATION:
1.On December 31,20X1,Sad had a building with a fair value that was $300,000 greater than its carrying value.The building had an estimated remaining useful life of 20 years.
2.On December 31,20X1,Sad had inventory with a fair value that was $200,000 less than its carrying value.This inventory was sold in 20X3.
3.During 20X6,Dad sold merchandise to Sad for $100,000,a price that includes a gross profit of $40,000.During 20X6,40% of this merchandise was resold by Sad to third parties and the other 60% remains in its December 31,20X6 inventories.On December 31,20X5,the inventories of Sad contained merchandise purchased from Dad on which Dad had recognized a gross profit in the amount of $20,000.
4.During 20X6,Dad declared and paid dividends of $300,000 while Sad declared and paid dividends of $100,000.
5.Dad accounts for its investment in Sad using the cost method.
6.The retained earnings of Dad as at December 31,20x5 was $12,000,000.On that date,Sad had retained earnings of $9,800,000.Sad has not issued any common shares since its acquisition by Dad.
7.There were no specific events or circumstances between 20X2 and 20X6 to indicate any impairment of goodwill.
The retained earnings of Dad as at December 31,20X5 equalled $12,000,000.On that date,Sad had retained earnings of $9,800,000.Sad has not issued any common shares since its acquisition by Dad.
Required:
Calculate the consolidated retained earnings at December 31,20X6.

Accepted Answer

The answer of On December 31,20X1,the Dad Ltd.purchased 100% of...

Question 17

Franklin Ltd. ,a subsidiary of Frayer Ltd. ,sold $500,000 of goods to its parent company in 20X1.At the end of 20X1,some of the goods were not sold and there was $90,000 of unrealized profit associated with these goods.The goods were sold in 20X2.At the end of 20X2,which of the following consolidating entries should be made with respect to the unrealized profits?
A) 
B) 
C) 
D)

Accepted Answer

The answer of Franklin Ltd. ,a subsidiary of Frayer Ltd....

Quiz 4: Wholly-Owned Subsidiaries: Reporting Subsequent to Acquisition

Which of the following consolidation adjustments will be required for a subsidiary that was acquired as a going concern,but will not be applicable for a parent-founded subsidiary?

On the date that a company acquires a subsidiary,which consolidated financial statement(s) must be prepared?

In consolidating parent-founded subsidiaries,what account is used to offset the parent company's "Investment in Subsidiary" account?

In consolidating a wholly-owned parent-founded subsidiary,which of the following adjustments or eliminations is not required?