Question: On December 31, Year 4, RAV Company
On December 31, Year 4, RAV Company purchased 60% of the outstanding common shares of ENS Company for $1,260,000. On that date, ENS had common shares of $500,000 and retained earnings of $130,000. In negotiating the purchase price, it was agreed that recorded assets and liabilities were fairly valued except for equipment, which had a $24,000 excess of carrying amount over fair value, and land, which had a $150,000 excess of fair value over carrying amount. The equipment had a remaining useful life of six years at the acquisition date and no salvage value. ENS did not record the fair value deficiency on the equipment because ENS felt that it would recover the carrying amount of this equipment through future cash flows. In addition, ENS registered and owns a number of Internet domain names, which are estimated to be worth $100,000. The right to the names expires in 12 years but the registration can be renewed for 20 years every 20 years, for a nominal fee.
The adjusted trial balances for RAV and ENS for the year ended December 31, Year 8, were as follows:
Additional Information
• Every year, goodwill is evaluated to determine if there has been a loss. The recoverable amount for ENS's goodwill was valued at $100,000 at the end of Year 7 and $75,000 at the end of Year 8.
• RAY's inventories contained $450,000 of merchandise purchased from ENS at December 31, Year 8, and $350,000 at December 31, Year 7. During Year 8, sales from ENS to RAY were $650,000. Merchandise was priced at the same profit margin as applicable to other customers. RAY owed $182,000 to ENS at December 31, Year 8, and $190,000 at December 31, Year 7.
• On July 1, Year 5, ENS purchased a building from RAY for $782,000. The building had an original cost of $832,000 and a carrying amount of $632,000 on RAY's books on July 1, Year 5. ENS estimated the remaining life of the building was 15 years at the time of the purchase from RAY.
• ENS rented another building from RAY throughout the year for $6,000 per month.
• RAY uses the equity method of accounting for its long-term investments.
• Both companies pay tax at the rate of 40%. Ignore deferred income taxes when allocating and amortizing the acquisition differential.
Required:
(a) Prepare a consolidated income statement for the year ended December 31, Year 8.
(b) Prepare the current assets, property, plant, and equipment, and intangible assets sections of the consolidated balance sheet at December 31, Year 8.
(c) Calculate non-controlling interest on the consolidated balance sheet at December 31, Year 7.
(d) If RAY had used the cost method instead of the equity method of accounting for its investment in ENS, would RAY's net income for Year 8 increase, decrease, or remain the same on
(i) its separate-entity income statement?
(ii) the consolidated income statement?
Briefly explain.
(e) Prepare the consolidated financial statements using the worksheet approach.
Transcribed Image Text:
RAV ENS Cash $ 175,000 91,000 Accounts receivable 261,000 242,000 Inventory 626,000 305,000 Land 700,000 330,000 Building-net 870,000 665,000 Equipment-net 722,000 397,000 Investment in ENS 654,600 Cost of goods purchased 2,388,000 2,377,000 (46,000) Change in inventory Amortization expense Income taxes and other expenses Dividends paid 92,000 208,000 104,000 912,000 448,000 256,000 416,400 $8,025,000 Total debits $5,169,000 Accounts payable $ 481,000 $ 328,000 Long-term debt 349,200 732,000 Common shares 1,200,000 500,000 Retained earnings, beginning 615,000 279,000 Sales 5,020,000 3,330,000 Other revenues 109,000 Equity method income from ENS Total credits 250,800 $8,025,000 $5,169,000
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