04 Jun PREPARE A CONSOLIDATED INCOME STATEMENT FOR CHEE CO. FOR THE YEAR ENDED DECEMBER 31, 20X8. BE SURE TO SHOW YOUR SUPPORTING CALCULATIONS.
expenses 768,000 256,000
Total expenses 1,808,000 656,000
Net income $
592,000 $ 198,400
Additional information:
At the beginning of 20X5, Chee
acquired a piece of equipment from Tyme for $168,000. Tyme had purchased the equipment 5 years
ago for $320,000. When Tyme
purchased the equipment, it had expected that it would have a useful life
of 20 years, with no residual value.
Chee concurred with this estimate (i.e., at the time of purchase,
Chee expected that the equipment would have a remaining useful life of 15
years). Both Tyme and Chee use the
straight-line method of amortization.
Sale of goods from Chee to
Tyme:Gross Unsold Goods in Tyme’s
Year Sales Margin Inventory
at Year-End
20X7 $400,000
30% $80,000
20X8 320,000 30% 72,000
Sale of goods from Tyme to
Chee:Gross Unsold Goods in Chee’s
Year Sales Margin Inventory
at Year-End
20X7 $240,000
40% $56,000
20X8 200,000 40% 48,000
All goods in inventory at
year-end were sold to third parties in the subsequent year.
On August 31, 20X8, Chee
purchased a tract of land from Tyme for $106,400 in cash. Tyme had acquired the land 12 years
previously for $52,000.
During 20X8, Chee declared and
paid dividends of $200,000 and Tyme declared and paid dividends of $32,000.
There was no impairment of
goodwill at the end of 20X8.
Chee accounts for its
investments using the cost method and uses the entity theory method to
report its business combinations.
Required:
a) Prepare a consolidated
income statement for Chee Co. for the year ended December 31, 20X8. Be sure to show your supporting
calculations.
b) Prove that your
calculation of net income attributable to the shareholders of Chee Co. in (a)
is correct by calculating Chee’s net income using the equity method.
Problem 6
At
the beginning of 20X3, Jong Ltd. acquired 80% of the outstanding shares of Nye
Co. for $1,400,000. At the acquisition
date, Nye’s shareholders’ equity consisted of the following:
Common
shares $350,000
Retained
earnings 875,000
At
the time of acquisition, all of Nye’s net identifiable assets had carrying
values that equalled their fair values with the exception of its patents. The fair value of the patents exceeded their
carrying values by $525,000 and had a remaining life of 8 years.
The
trial balances for Jong and Nye for December 31, 20X6 are as follows:
Jong Ltd. Nye Co.
DR CR DR CR
Cash 700,000 350,000
Accounts
receivable 1,400,000 249,200
Inventory 2,100,000 1,575,000
Plant
and equipment 9,800,000 1,750,000
Accumulated
amortization 2,800,000 700,000
Patents 280,000
Investment
in Nye 1,400,000
Investment
in Jong bonds 170,800
Accounts
payable 1,744,400 1,734,950
Bonds
payable 350,000
Premium
on bonds payable 5,600
Common
shares 3,150,000 350,000
Retained
earnings 7,000,000 1,400,000
Dividends 420,000 175,000
Sales 3,430,000 1,400,000
Dividend
revenue 140,000
Interest
revenue 15,050
Cost
of goods sold 1,680,000 595,000
Operating
expenses 673,400 210,000
Interest
expense 26,600
Income
tax expense 420,000 _________ 245,000 ________
18,620,000 18,620,000 5,600,000 5,600,000
Additional
information:
20X6 net
income for Jong is $770,000 and for Nye, $365,050.
At the
beginning of 20X6, Jong purchased a piece of equipment from Nye for
$350,000. At the time of purchase,
the equipment had a net book value of $280,000 to Nye and an estimated
useful life of 5 years.
At the end of
20X5, Jong’s inventory included $350,000 of goods purchased from Nye. Nye’s had recorded a gross profit of
$140,000 on this sale.
During 20X6,
Nye sold goods to Jong for $700,000.
Nye earned a gross profit of $280,000 on this sale.
At the end of
20X6, Jong had sold all the goods in its opening inventory to third
parties but still had $210,000 of the goods purchased from Nye during 20X6
in its ending inventory. All of
those goods will be sold to third parties in 20X7.
Amortization
expense for the plant, equipment, and patent are included in operating
expenses.
At the
beginning of 20X4, Jong issued bonds for $359,800. These bonds have an interest rate of 8%,
mature in 7 years, and have a face value of $350,000. Interest will be paid annually at the
end of the year. Nye purchased half
of these bonds at the beginning of 20X6 for $169,750. Any intercompany gains or losses on
these bonds are to be allocated between the two companies.
Both companies
have an average income tax rate of 40%.
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