On January 1, 20x3, Appliance Outlets had the following balances in its sharehol
ID: 2585534 • Letter: O
Question
On January 1, 20x3, Appliance Outlets had the following balances in its shareholders’ equity accounts: Common Stock, $1,425,000, and Retained Earnings, $450,000. General Appliances acquired 64,000 (80%) shares of Appliance Outlets’ common stock for $1,700,000 on that date. The fair value of the Property, Plant, and Equipment was $50,000 in excess of Appliance Outlets book value. Also, General Appliances identified an unrecorded Patent with a fair value of $70,000. The PP&E had an expected remaining useful life of ten years and the Patent four years.
Appliance Outlets issued $500,000 of 8-year, 11% bonds on December 31,20X2. The bonds sold for $476,000. General Appliances purchased one-half of these bonds in the market on January 1. 20x5, for $256,000. Both companies use the straight-line method of amortization of premiums and discounts.
General Appliances sold $1,000,000 of inventory to Appliance Outlets during 20x6 with a markup of 30%. Appliance Outlets had $500,000 (General Appliances cost) of General Appliances inventory unsold in their beginning inventory and $400,000 (General Appliances cost) unsold in their ending inventory.
On July 1, 20x6, General Appliances sold to Appliance Outlets an old building and land with book values of $100,000, and $67,500 respectively. The building had a remaining life of 10 years and a $30,000 salvage value. The sale was made for $195,000 ($110,000 applied to building and $85,000 to land) The building is being depreciated on a straight-line basis. Appliance Outlets paid $20,000 in cash and signed a mortgage note with its parent for the balance. Interest, at 11% of the unpaid balance, and principal payments are due annually beginning July 1, 20x7.
The trial balances of the two companies at December 31, 20x6, were as follows:
Prepare the consolidated financial statements of General Appliances and its subsidiary for the year ended December 31, 20x6. Include all schedules and reconciliations necessary.
On January 1, 20x3, Appliance Outlets had the following balances in its shareholders’ equity accounts: Common Stock, $1,425,000, and Retained Earnings, $450,000. General Appliances acquired 64,000 (80%) shares of Appliance Outlets’ common stock for $1,700,000 on that date. The fair value of the Property, Plant, and Equipment was $50,000 in excess of Appliance Outlets book value. Also, General Appliances identified an unrecorded Patent with a fair value of $70,000. The PP&E had an expected remaining useful life of ten years and the Patent four years.
Appliance Outlets General Cash Accounts Receivable (net) Interest Receivable Inventory Inveatment in Appliance Outlets Investment in 11% bonds Investment in Mortgage Property, Plant and Equipment Accumulated Depreciation Accounts Payable Interest Payable Bonds Payable (11%) Discount on Bonds Payable Mortgage Payable Common Stock Retained Earnings Sales Gain on Sale of Building Interest Income Dividend Income Cost of Goods Sold Depreciation Expense Interest Expense Other Expenses Dividends Declared Appliances 404,486 752,500 9,625 1,950,000 1,700,000 254,000 175,000 9,000,000 (1,695,000) (670,000) (18,333) (2,000,000) 10,470 72,625 105,000 900,000 2,950,000 (940,000) (80,000) (9,625) (500,000) 12,000 (175,000) (7,750,000) (1,425,000) (770,000) 9,800,000) (3,000,000) (1,011,123) (27,500) (36,125) (48,000) 4,940,000 717,000 223,000 2,600,000 320,000 0 1,700,000 95,950 67,544 936,506 60,000 0Explanation / Answer
General Appliances Consolidated Balance Sheet as at 31 December 20X6 Fiscal Ended 31-12-20X6 ASSETS Current Assets Cash $477,111 Accounts Receivables $857,500 Inventories $2,730,000 Total Current Assets $4,064,611 Property, Plant and Equipment, at Cost $12,018,500 Less: Accumulated depreciation ($2,701,000) Net Property and Equipment $9,317,500 Intangible Assets Goodwill on Consolidation $108,000 Other Assets Discount on Bonds Payable $22,470 Total Other Non-Current Assets $22,470 Total Assets $13,512,581 LIABILITY AND STOCKHOLDERS EQUITY: Current Liabilities Accounts Payable $750,000 Interest Payable $18,333 Total current liabilities $768,333 Non-Current Liabilities Bonds Payable $2,250,000 Total Non-Current Liabilities $2,250,000 Total Liabilities $3,018,333 STOCKHOLDER'S EQUITY Common Stock $7,750,000 Retained Earnings $2,305,248 Minority Interest $439,000 Total Stockholder's Equity $10,494,248 Total Liability and Stockholders Equity $13,512,581 Consolidation Workings: Name of Holding Company - General Appliances Name of Subsidiary Company - Appliance Outlets Percentage of Voting Power - 80% Date of Acquisition - 01 January 20X3 Computation of Goodwill / Capital Reserve on Date of Acquisition Investment made $1,700,000 Equity of Subsidiary MI Share Common Stock $1,425,000 $1,140,000 $285,000 Retained Earnings $450,000 $360,000 $90,000 Open Cumulative Dep Book Value Fair Value Inc of AO PPE $50,000 $40,000 $12,000 $28,000 Unrecorded Patent $70,000 $56,000 $42,000 $14,000 Total Equity $1,995,000 $1,596,000 $54,000 $42,000 Goodwill on Acquisition $104,000 Depreciation PPE Remaining Useful Life - years 10 $4,000 Patent Remaining Useful Life - years 4 $14,000 $18,000 Segregation of Retained Earnings into Pre and Post Acquisition Retained Earnings $770,000 Pre Acquisition $450,000 Post Acquisition $320,000 GA Share (80%) $256,000 MI Share (20%) $64,000 Elimination of Investments: AO 8 Year 11% Bonds Value 01 Jan 20X3 $500,000 Issue Value $476,000 Discount $24,000 Discount per year $3,000 No of years till 20X6 - 4 years $12,000 Closing Balance of Discount $12,000 GA 50% of Bonds Value on 01 Jan 20X5 $250,000 Purchase Cost $256,000 Premium $6,000 Premium per year $1,000 No of years till 20X6 - 2 years $2,000 Closing Value of Bonds $254,000 Goodwill / Capital Reserve $4,000 Interest on Bonds $27,500 Computation of Unrealised Profit on Unsold Inventory: Mark up made by GA 30% Opening Inventory $500,000 Opening Mark-up $150,000 Closing Inventory $400,000 Closing Mark-up $120,000 Differential Mark-up to be reversed in AO $30,000 Computation of Unrealised Profit on Fixed Assets: Building Land Date of Sale by GA - 01 July 20X6 Book Value $100,000 $67,500 $167,500 Sale Price to AO $110,000 $85,000 $195,000 Gain to reverse $10,000 $17,500 $27,500 Balance useful life in years 10 Salvage Value $30,000 Depreciable Value $80,000 Method of Depreciation SLM Depreciation for 20X6 for 9 months to reverse $6,000 Advance paid for purchase $20,000 Mortgage Due for Balance $175,000 Interest payable by AO to GA 11% Interest for 20X6 for 9 months to reverse $14,438 Elimination of Dividends: Dividends Declared by AO $60,000 GA Share (80%) $48,000 Computation of Minority Interest Description Amount Common Stock $285,000 Retained Earnings $154,000 $439,000 Trial Balance GA AO Total AO Adj Other Adj Net Cash $404,486 $72,625 $477,111 $477,111 Accounts receivable (net) $752,500 $105,000 $857,500 $857,500 Interest receivable $9,625 $0 $9,625 ($9,625) $0 Inventory $1,950,000 $900,000 $2,850,000 ($120,000) $2,730,000 Investment in AO $1,700,000 $0 $1,700,000 ($1,700,000) $0 Investment in 11% Bonds $254,000 $0 $254,000 ($254,000) $0 Investment in Mortgage $175,000 $0 $175,000 ($175,000) $0 PPE $9,000,000 $2,950,000 $11,950,000 ($27,500) $96,000 $12,018,500 Accumulated Depreciation ($1,695,000) ($940,000) ($2,635,000) $6,000 ($72,000) ($2,701,000) Goodwill $0 $4,000 $104,000 $108,000 Accounts Payable ($670,000) ($80,000) ($750,000) ($750,000) Interest Payable ($18,333) ($9,625) ($27,958) $9,625 ($18,333) Bonds Payable (11%) ($2,000,000) ($500,000) ($2,500,000) $250,000 ($2,250,000) Discount on Bonds Payable $10,470 $12,000 $22,470 $22,470 Mortgage Payable $0 ($175,000) ($175,000) $175,000 $0 Common Stock ($7,750,000) ($1,425,000) ($9,175,000) $1,425,000 ($7,750,000) Retained Earnings ($1,011,123) ($770,000) ($1,781,123) $688,000 ($1,093,123) MI $0 ($439,000) ($439,000) Sales ($9,800,000) ($3,000,000) ($12,800,000) ($12,800,000) Gain on Sale of Building ($27,500) $0 ($27,500) $27,500 $0 Interest Income ($36,125) $0 ($36,125) $41,938 $5,813 Dividend Income ($48,000) $0 ($48,000) $48,000 $0 COGS $4,940,000 $1,700,000 $6,640,000 $6,640,000 Depreciation Expense $717,000 $95,950 $812,950 ($6,000) $18,000 $824,950 Interest Expense $223,000 $67,544 $290,544 ($41,938) $248,606 Other expenses $2,600,000 $936,506 $3,536,506 $3,536,506 Dividend Declared $320,000 $60,000 $380,000 ($48,000) $332,000 $0 $0 $0 $0 $0 $0