Assignment 2 Consolidation Question POP Inc purchased 90 of

Assignment 2: Consolidation Question POP Inc. purchased 90% of the voting shares of SOS for $1,000,000 cash on January 1, 2013; in addition, the purchase agreement also included a contingent consideration payable in cash on January 1, 2019. Assume that since the acquisition date management believes that $170,000 is the contingent consideration likely to become payable on January 1, 2019 (ignore time value of money). POP uses the cost method to account for its investment. On that date, SOS\'s Common Stock and Retained Earnings were valued at $300,000 and $600,000 respectively SOS\'s fair values approximated its carrying values with the following exceptions .The equipment had a fair value which was S 80,000 higher than its carrying value, and was estimated to have a remaining useful life of 8 years from the date of acquisition with no salvage value sold by SOS in 2013 the reputation of the work force should be valued at $200,000 . SOS\'s inventory had a fair value which was S2,000 less than book value. This inventory was . SOS\'s skilled workforce had an exceptional reputation in the industry. Experts believed that Both companies use straight line amortization exclusively for all assets and liabilities. The effective tax rate for both companies is 40%. The Financial Statements of POP & SOS for the Year ended December 31, 2016 are shown below: Income Statements POP Inc SOS Inc S1,300,000 $400,000 $830,000 $200,000 Other Revenues Less: Expenses Cost of Goods Sold Depreciation Expense Other Expenses Income Tax Expense $700,000 $30,000 $120,000 $170,000 $330,000 S20,000 $140,000 $120,000 Net Income S680,000 S420,000 Retained Earnings Statements Balance, Jan 1, 2016 Net Income Less: Dividends S1,000,000 $680,000 (S200,000) $800,000 $420,000 (S140,000) Retained Earnings S1,480,000 S1.080,000

Solution

Part a:

Part a:

Calculation of goodwill and purchase price discrepancy amortization schedule:

Common stock

300000

Retained earnings

600000

Add: Increase in equipment value

80000

Reputation of the workforce

200000

Less: Inventory

2000

Contingent consideration

170000

Net asset

Share of POS

907200

Cost of acquisition

1000000

Goodwill as on the date of acquisition

92800

Purchase price discrepancy amortization schedule

Share of net asset

907200

Purchase price

1000000

Discrepancy in purchase price

-92800

Amortization schedule

Year

Amount ($)

2013

9280

2014

9280

2015

9280

2016

9280

2017

9280

2018

9280

2019

9280

2020

9280

2021

9280

2022

9280

Part (b):

Inter-company realized and unrealized profit

Unrealized profit

Realized profit

Pre-tax

Post tax

Pre-tax

Post tax

Land

80000

48000

Inventory

15000

9000

15000

9000

Inventory

20000

12000

Rental fees

25000

15000

Part (c):

Income statement:

Net income of POP

680000

Add: share of SOS

378000

Share of dividend received from SOS

126000

1184000

Less:

Amortization of goodwill

-9280

Unrealized profit in land

-80000

Inventory

-15000

Unrealized rental fees

-25000

-129280

Net income

1054720

Retained earnings statement:

Balance at Jan 01, 2016

1000000

Add: Net income

1054720

2054720

Less: Dividends

200000

1854720

Balance sheet:

Goodwill

55680

Cash

440000

Accounts receivable

710000

Inventory

780000

Land

180000

Equipment

430000

Total assets

2595680

Current liabilities

295000

Common shares

400000

Retained earnings

1854720

Minority interest

45960

Total liabilities

2595680

Part a:
Calculation of goodwill and purchase price discrepancy amortization schedule:
Common stock	300000
Retained earnings	600000
Add: Increase in equipment value	80000
Reputation of the workforce	200000
Less: Inventory	2000
Contingent consideration	170000
Net asset
Share of POS	907200
Cost of acquisition	1000000
Goodwill as on the date of acquisition	92800
Purchase price discrepancy amortization schedule
Share of net asset	907200
Purchase price	1000000
Discrepancy in purchase price	-92800
Amortization schedule
Year	Amount ($)
2013	9280
2014	9280
2015	9280
2016	9280
2017	9280
2018	9280
2019	9280
2020	9280
2021	9280
2022	9280