Assignment 2: Consolidation Question POP Inc. purchased 90% of the voting shares
ID: 2610458 • Letter: A
Question
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 $420,000 (S140,000) Retained Earnings S1,480,000 S1.080,000Explanation / Answer
Part a:
Part a:
Calculation of goodwill and purchase price discrepancy amortization schedule:
Common stock
300000
Retained earnings
600000
Add: Increase in equipment value
80000
Reputation of the workforce
200000
Less: Inventory
2000
Contingent consideration
170000
Net asset
Share of POS
907200
Cost of acquisition
1000000
Goodwill as on the date of acquisition
92800
Purchase price discrepancy amortization schedule
Share of net asset
907200
Purchase price
1000000
Discrepancy in purchase price
-92800
Amortization schedule
Year
Amount ($)
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