Advanced accounting
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Kenyatta University *
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ECV 309
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Accounting
Date
Nov 24, 2024
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docx
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1
1.
Allocate the purchase price and calculate the amount of goodwill or bargain
purchase at the date of acquisition January 2, 2019.
To calculate the amount of goodwill or bargain purchase at the date of acquisition, we first need
to allocate the purchase price. The purchase price of $27.25 per share that Paradise Corporation
paid for 8,000 shares represents the controlling interest, which is valued at the price actually
paid. The remaining 2,000 shares, which represent the non-controlling interest, are valued at the
current stock price of $26 per share. Thus, the total purchase price is 8,000 x $27.25 + 2,000 x
$26 = $226,000 + $52,000 = $278,000.
We can then allocate this purchase price to Sun 'n Shade's assets and liabilities as follows:
Capital stock: $10,000
Retained earnings: $119,300
Accumulated other comprehensive income: $3,700
Property, plant, and equipment: $70,000 (fair market value)
In process R&D: $15,000 (fair market value)
Contracts: $22,000 (fair market value)
Assembled workforce: $75,000 (fair market value)
Goodwill: $278,000 - $10,000 - $119,300 - $3,700 - $70,000 - $15,000 - $22,000 - $75,000 =
$12,000
Since the purchase price is greater than the fair market value of Sun 'n Shade's assets and
liabilities, there is $12,000 in goodwill resulting from the acquisition.
2
2.
Calculate the annual amortization of the revalued assets and liabilities. (All
amortization is straight line)
To calculate the annual amortization of the revalued assets and liabilities, we need to determine
the remaining useful life of each asset or liability and apply the straight-line amortization
method.
Property, plant, and equipment: 15-year remaining life, annual amortization of $70,000 / 15 =
$4,667
In process R&D: 5-year remaining life, annual amortization of $15,000 / 5 = $3,000
Contracts: 4-year remaining life, annual amortization of $22,000 / 4 = $5,500
Assembled workforce: Indeterminate remaining life, no annual amortization
Goodwill: Indeterminate remaining life, no annual amortization
3.
Calculate the balance of the revalued assets and liabilities (“R”) at January 1, 2022.
To calculate the balance of the revalued assets and liabilities at January 1, 2022, we need to
subtract the cumulative amortization from the original value of each asset or liability.
Property, plant, and equipment: Original value of $70,000 - Cumulative amortization of 3 years x
$4,667/year = $70,000 - $14,000 = $56,000
In process R&D: Original value of $15,000 - Cumulative amortization of 2 years x $3,000/year =
$15,000 - $6,000 = $9,000
Contracts: Original value of $22,000 - Cumulative amortization of 1 year x $5,500/year =
$22,000 - $5,500 = $16,500
3
Assembled workforce: Original value of $75,000, no cumulative amortization
Goodwill: Original value of $12,000, no cumulative amortization
Thus, the total balance of the revalued assets and liabilities at January 1, 2022 is $56,000 +
$9,000 + $16,500 + $75,000 + $12,000 = $168,500.
4.
Perform the impairment test of unrecorded definite lived intangible assets
To perform the impairment test of unrecorded definite-lived intangible assets, we need to
compare the fair value of the assets to their carrying value. If the fair value is less than the
carrying value, the assets are impaired and the difference should be recognized as an impairment
loss.
5.
Perform the impairment test of goodwill
To perform the impairment test of goodwill, we need to compare the fair value of the investment
in Sun 'n Shade to the carrying value of the investment, including the goodwill. If the fair value
is less than the carrying value, the goodwill is impaired and the difference should be recognized
as an impairment loss.
6.
Calculate the impact of the intercompany transactions:
To calculate the impact of the intercompany transactions, we need to consider each of the items
listed in the question.
I-1 Intercompany sales and purchases of services:
In 2022, Sun 'n Shade charged Paradise
$10,000 for janitorial services costing $7,500. This means that Paradise will record a debit to its
investment in Sun 'n Shade for $10,000, and Sun 'n Shade will record a credit to its revenue for
$10,000.
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4
I-2 Intercompany sales and purchases of merchandise:
During 2022, Paradise and Sun 'n
Shade made the following transfers of merchandise:
Paradise transferred 18,110 units to Sun 'n Shade at a markup of 25% on cost.
Sun 'n Shade transferred 7,850 units to Paradise at a markup of 20% on sales.
The beginning inventory of Paradise included 960 units purchased from Sun 'n Shade, while the
beginning inventory of Sun 'n Shade included 1,635 units sold to Paradise.
The ending inventory of Paradise included 1,025 units purchased from Sun 'n Shade, while the
ending inventory of Sun 'n Shade included 2,420 units sold to Paradise.
To calculate the impact of these transactions, we need to determine the cost of the merchandise
transferred, as well as the intercompany profit earned on each transfer.
For the transfers from Paradise to Sun 'n Shade, the cost of the merchandise is equal to 18,110
units * $0.75 (the cost of the merchandise to Paradise, determined by subtracting the 25%
markup from the sales price of $1). This means that Paradise will record a debit to its investment
in Sun 'n Shade for $13,582.50, and Sun 'n Shade will record a credit to its revenue for
$13,582.50.
For the transfers from Sun 'n Shade to Paradise, the cost of the merchandise is equal to 7,850
units * $0.80 (the cost of the merchandise to Sun 'n Shade, determined by subtracting the 20%
markup from the sales price of $1). This means that Paradise will record a credit to its revenue
for $6,280, and Sun 'n Shade will record a debit to its investment in Paradise for $6,280.
5
I-3 Intercompany receivables and payables
:
At the end of 2022, Paradise had intercompany
receivables from Sun 'n Shade of $5,400, and Sun 'n Shade had intercompany payables to
Paradise of $2,300. This means that Paradise will record a credit to its investment in Sun 'n
Shade for $2,300, and Sun 'n Shade will record a debit to its payables for $2,300.
I-4 Unconfirmed upstream profit in beginning inventory
:
At the beginning of 2022, Paradise
had 960 units in its inventory that were purchased from Sun 'n Shade. The cost of these units to
Paradise was $0.75 per unit (determined by subtracting the 25% markup from the sales price of
$1), while the cost of the units to Sun 'n Shade was $0.60 per unit (determined by subtracting the
20% markup from the cost of $0.75 to Paradise). This means that Paradise has an unconfirmed
profit of $0.15 per unit in its beginning inventory, for a total of $144.
I-5 Unconfirmed downstream profit in the beginning inventory
:
At the beginning of 2022, Sun
'n Shade had 1,635 units in its inventory that were sold to Paradise. The cost of these units to Sun
'n Shade was $0.60 per unit (determined by subtracting the 20% markup from the cost of $0.75
to Paradise), while the cost to Paradise was $0.75 per unit (determined by subtracting the 25%
markup from the sales price of $1). This means that Sun 'n Shade has an unconfirmed profit of
$0.15 per unit in its beginning inventory, for a total of $245.
I-6 Unconfirmed profits (upstream and downstream) in the ending inventories
:
At the end of
2022, Paradise had 1,025 units in its inventory that were purchased from Sun 'n Shade, and Sun
'n Shade had 2,420 units in its inventory that were sold to Paradise. The cost of these units to Sun
'n Shade was $0.60 per unit (determined by subtracting the 20% markup from the cost of $0.75
to Paradise), while the cost to Paradise was $0.75 per unit (determined by subtracting the 25%
markup from the sales price of $1). This means that Paradise has an unconfirmed profit of $0.15
per unit on the units it purchased from Sun 'n Shade, for a total of $153.75. Similarly, Sun 'n
6
Shade has an unconfirmed profit of $0.15 per unit on the units it sold to Paradise, for a total of
$363.
I-7 Unconfirmed gains/losses on downstream transfers of non-depreciable assets:
In 2020,
Paradise sold land costing $5,000 to Sun 'n Shade for $5,500. In 2022, Sun 'n Shade sold the land
for $6,250. This means that Sun 'n Shade has an unconfirmed gain on the sale of the land of
$750.
I-8 Unconfirmed gains/losses on upstream transfers of non-depreciable assets:
During 2022,
Sun 'n Shade sold land with a book value of $2,750 to Paradise for $3,000. Paradise still holds
the land at the end of the year. This means that Paradise has an unconfirmed gain on the purchase
of the land of $250.
I-9 Unconfirmed gains/losses on transfers of depreciable assets:
In 2019, Sun 'n Shade sold
equipment with a cost of $1,750 and $900 in accumulated depreciation to Paradise for $1,500.
Sun 'n Shade estimates that the equipment has a 10-year remaining life and will depreciate the
equipment straight-line. Paradise still holds the equipment at the end of 2022. This means that
Paradise has an unconfirmed loss on the purchase of the equipment equal to the difference
between the cost of the equipment and its depreciated value, or $1,750 - $900 = $850.
7.
Compute Sun ‘n Shade’s Net Income
To compute Sun 'n Shade's net income for 2022, we need to consider the items listed in the
question.
Sun 'n Shade's net income for the year is calculated as follows:
Net income = Total revenue - Total expenses
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Total revenue: Sun 'n Shade's total revenue for the year is not specified in the question, so we
cannot calculate its net income.
Total expenses: Sun 'n Shade's total expenses for the year include the following items:
Cost of goods sold: Sun 'n Shade sold merchandise to Paradise and vice versa during the year.
The cost of the merchandise sold to Paradise was $0.60 per unit (determined by subtracting the
20% markup from the cost of $0.75 to Paradise), while the cost of the merchandise sold to Sun 'n
Shade was $0.75 per unit (determined by subtracting the 25% markup from the sales price of $1).
This means that Sun 'n Shade's cost of goods sold for the year is $18,110 * $0.60 + $7,850 *
$0.75 = $13,985.
Janitorial services: Sun 'n Shade charged Paradise $10,000 for janitorial services that cost $7,500
to provide. This means that Sun 'n Shade's janitorial services expense for the year is $10,000 -
$7,500 = $2,500.
Dividends: Sun 'n Shade paid $1,500 in dividends during the year.
Impairment of IPRD: Sun 'n Shade's in process research and development was impaired during
the year by $2,500.
Impairment of goodwill: Sun 'n Shade's goodwill was impaired during the year by $3,000.
Sun 'n Shade's total expenses for the year are therefore $13,985 + $2,500 + $1,500 + $2,500 +
$3,000 = $23,485.
8
Sun 'n Shade's net income for the year is therefore $23,485 - $0 = -$23,485.
8.
Calculate the (a) Controlling Interest and (b) Non-controlling Interest in Sun ‘n
Shade
To calculate the controlling interest in Sun 'n Shade, we first need to determine the amount of
Sun 'n Shade's equity that Paradise owns. Since Paradise acquired 80 percent of Sun 'n Shade's
voting stock, we can calculate Paradise's ownership of Sun 'n Shade's equity as follows:
Equity = Capital Stock + Retained Earnings + Accumulated Other Comprehensive Income
= $10,000 + $119,300 + $3,700
= $133,000
Paradise's ownership of Sun 'n Shade's equity = 80% * $133,000 = $106,400
The non-controlling interest in Sun 'n Shade is equal to Sun 'n Shade's equity minus Paradise's
ownership of Sun 'n Shade's equity, which is $133,000 - $106,400 = $26,600.
9.
Calculate the amount of Sun ‘n Shade’s (a) Retained Earnings and (b) Paradise’s
Investment account to be eliminated through entry “E”
To calculate the amount of Sun 'n Shade's retained earnings and Paradise's investment account to
be eliminated through entry "E", we need to determine the amount of Sun 'n Shade's net income
for the year. Since we do not have information about Sun 'n Shade's revenues, expenses, and
other items that would affect its net income, we cannot calculate the exact amount of Sun 'n
Shade's net income. However, we know that Sun 'n Shade paid dividends of $1,500 and incurred
9
impairment losses of $2,500 during 2019-2021, so we can assume that its net income for the
period was at least $1,500 + $2,500 = $4,000.
The amount of Sun 'n Shade's retained earnings to be eliminated is equal to Paradise's ownership
of Sun 'n Shade's equity multiplied by Sun 'n Shade's net income, which is $106,400 * $4,000 =
$425,600.
The amount of Paradise's investment account to be eliminated is equal to the amount of Sun 'n
Shade's retained earnings to be eliminated, which is also $425,600.
Therefore, the amount of Sun 'n Shade's retained earnings and Paradise's investment account to
be eliminated through entry "E" is $425,600.
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