Question 2 (CGA exam Sept 2012)
Powell Ltd. has one subsidiary, Sandon Ltd., that it acquired several years ago. Powell uses the
cost method to account for its investment in Sandon. The current year’s information for the
companies is as follows:
Separate entity income statement information for the year ended December 31, 2012:
Powell Ltd.
Sandon Ltd.
Sales revenue
$ 2,504,000
$ 2,430,000
Gain on sale of land
170,000
Investment income
276,000
Total
2,950,000
2,430,000
Cost of goods sold
1,780,000
1,458,000
Depreciation and amort. expense
185,000
114,000
Interest expense
124,000
240,000
Other expenses
495,000
543,000
Income tax expense
146,000
30,000
Total
2,730,000
2,385,000
Net income
$ 220,000
$ 45,000
Separate entity balance sheet information as at December 31, 2012:
Powell Ltd.
Sandon Ltd.
Assets
Cash and receivables
$ 422,000
$ 544,000
Inventory
443,000
243,000
Investment in Sandon
540,000
Loan receivable from Sandon
1,200,000
Property, plant, and equip. (net)
1,840,000
1,675,000
Patents
150,000
_________
$ 4,595,000
$ 2,462,000
Liabilities and shareholders’ equity
Current liabilities
$ 455,000
$ 486,000
Long-term liabilities
2,480,000
1,200,000
Common shares
1,000,000
500,000
Retained earnings
660,000
276,000
$ 4,595,000
$ 2,462,000
Additional information
1. On December 31, 2007, Powell obtained control of Sandon by issuing its own common shares
in exchange for 80% of Sandon’s common shares. On the day of the acquisition, Sandon had
common shares of $500,000 and retained earnings of $50,000. The fair values of Sandon’s
identifiable net assets and their carrying amounts were equal except that: 1) the fair value of
inventory exceeded its carrying amount by $20,000; 2) the fair value of equipment was less than
the carrying amount by $35,000; and 3) Sandon had customer lists valued at $90,000 that were
not recorded in the accounts. On December 31, 2007, the equipment had a remaining useful life
of 7 years and customer lists had a remaining useful life of 5 years. The goodwill became
impaired in 2012, a loss of $14,000.
2. On December 31, 2011, Sandon sold a patent to Powell for $200,000 at a gain of $160,000.
On that day, the estimated remaining useful life of the patent was 4 years.
3. During 2012, Powell sold Sandon some land for $320,000. Powell’s carrying amount for the
land just prior to the sale was $150,000.
4. On January 1, 2012, Powell loaned $1,200,000 to Sandon. The loan is payable in full on
December 31, 2016. Interest of $240,000 has accrued on the loan during 2012 but has not yet
been paid. Powell has reported this amount in investment income and Sandon has reported it as
interest expense.
5. Sandon paid dividends of $45,000. Powell has included its share in investment income.
6. The tax rate is 40%.
Required
Prepare Powell’s consolidated statement of financial position as at December 31, 2012.
Question 2 solution
Schedule 1: Calculation of acquisition differential
Value of Sandon implied by acquisition price (540,000 / 0.80)
Carrying amount of identifiable net assets
Acquisition differential
Inventory
20,000
Equip.
(35,000)
Cust. lists
90,000
Goodwill
$ 675,000
550,000
$ 125,000
75,000
50,000
Schedule 2:Acquisition differential allocation, amortization, and impairment schedule
Balance
Balance
Dec. 31, 2007
2008-2011
2012
Dec 31, 2012
Inventory
20,000
(20,000)
0
Equip. (7 years)
(35,000)
20,000
5,000
(10,000) (a)
Cust. lists (5 years) 90,000
(72,000)
(18,000)
0 (b)
Goodwill
50,000
(14,000)
36,000 (c)
Total
125,000
(72,000)
(27,000)
26,000 (d)
Intercompany balances
Loan receivable/loan payable 1,200,000 (e)
Interest receivable/payable on loan 240,000 (f)
Schedule 3:Unrealized intercompany profit, gains and losses
Before tax
Tax
Net of Tax
Land (2012) (DOWN)
170,000
68,000
102,000 (g)
Patent (UP) gain Dec, 31, 2011
Excessive amortization 2012
December 31, 2012
160,000
40,000
120,000
64,000
16,000
48,000
96,000
24,000
72,000 (h)
Deferred tax asset, end of year [(g) 68,000 + (h) 48,000] =116,000 (i)
Calculation of Consolidated Retained Earnings, December 31, 2012
Powell’s RE at December 31, 2012
Land gain held back at December 31, 2012 (g)
Powell’s adjusted RE
$ 660,000
(102,000)
558,000
Sandon’s post-acquisition unadjusted RE
(276,000 – 50,000)
$ 226,000
Accumulated AD to Dec. 31, 2012 (72,000 + 27,000) (99,000)
Sandon’s patent gain at Dec.31, 2012 (h)
(72,000)
Sandon’s adjusted retained earnings
55,000 x .820 = 44,000
Consolidated retained earnings at December 31, 2012
$ 602,000 (k)
Calculation of NCI for Cons. balance sheet
Sandon’s NBV at Dec.31, 2012 (500,000 + 276,000)
Remaining AD at December 31, 2012 (d)
Sandon’s unrealized patent gain Dec,31, 2012 (h)
Total
NCI ownership percentage
NCI December 31, 2012
$ 776,000
26,000
(72,000)
730,000
0.20
$ 146,000 (l)
POWELL LTD.
Consolidated Balance Sheet
December 31, 2012
Assets
Cash and receivables (422,000 + 544,000 – (f) 240,000)
Inventory (443,000 + 243,000)
Property, plant, and equip (net)
(1,840,000 +1,675,000 – (a) 10,000 – (g) 170,000)
Patent (150,000 – (h) 120,000)
Goodwill (c)
Deferred income tax asset (i)
Total assets
3,335,000
30,000
36,000
116,000
$ 4,929,000
Liabilities and shareholders’ equity
Current liabilities (455,000 + 486,000 – (f) 240,000)
Long-term liabilities (2,480,000 + 1,200,000 – (e) 1,200,000)
Common shares
Retained earnings (k)
Non-controlling interest (l)
Total liabilities and shareholders’ equity
$ 701,000
2,480,000
1,000,000
602,000
146,000
$ 4,929,000
$ 726,000
686,000