On January 1, Year 4, Grant Corporation bought 8,000 (80%) of the outstanding common shares of Lee Company for $70,000 cash. On that date, Lee had $25,000 of common shares outstanding and $30,000 retained earnings. Also on that date, the carrying amount of each of Lee's identifiable assets and liabilities was equal to its fair value except for the following: The patent had an estimated useful life of 5 years at January 1, Year 4, and the entire inventory was sold during Year 4. Grant uses the cost method to account for its investment. Additional Information The recoverable (unimpaired) amount for goodwill was determined to be $10,000 on December 31, Year 6. The goodwill impairment loss occurred in Year 6. Grant's accounts receivable contains $30,000 owing from Lee. Amortization expense is grouped with distribution expenses and impairment losses are grouped with other expenses. The following are the separate-entity financial statements of Grant and Lee as of December 31, Year 6. Required: Assume Grant prepares consolidated statements under the FVE theory (also known as entity theory). Calculate the acquisition differential, goodwill and NCI at the date the two entities became related. Prepare the acquisition eliminating worksheet entry to facilitate the consolidation process on the consolidation worksheet at acquisition date. Prepare a schedule to show the amortization of acquisition differential and impairment losses since acquisition date to December 31, year 6.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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On January 1, Year 4, Grant Corporation bought 8,000 (80%) of the outstanding common shares of Lee Company for $70,000 cash. On that date, Lee had $25,000 of common shares outstanding and $30,000 retained earnings. Also on that date, the carrying amount of each of Lee's identifiable assets and liabilities was equal to its fair value except for the following:

The patent had an estimated useful life of 5 years at January 1, Year 4, and the entire inventory was sold during Year 4. Grant uses the cost method to account for its investment.

Additional Information

The recoverable (unimpaired) amount for goodwill was determined to be $10,000 on December 31, Year 6. The goodwill impairment loss occurred in Year 6.
Grant's accounts receivable contains $30,000 owing from Lee.
Amortization expense is grouped with distribution expenses and impairment losses are grouped with other expenses.

The following are the separate-entity financial statements of Grant and Lee as of December 31, Year 6.

Required: Assume Grant prepares consolidated statements under the FVE theory (also known as entity theory).

Calculate the acquisition differential, goodwill and NCI at the date the two entities became related.
Prepare the acquisition eliminating worksheet entry to facilitate the consolidation process on the consolidation worksheet at acquisition date.
Prepare a schedule to show the amortization of acquisition differential and impairment losses since acquisition date to December 31, year 6.
Calculate consolidated net income for year 6 and show attribution.
Prepare a consolidated income statement using the direct method for year 6.
Calculate consolidated retained earnings at December 31, year 6.
Calculate NCI on the consolidated balance sheet at December 31, year 6 (use either method).
Prepare the consolidated balance sheet using the direct method at December 31, year 6.
Assume Grant used the equity method to report its investment in Lee. In this case what would be the value of the Investment in Lee account at December 31, year 6 on Grant’s separate entity balance sheet?

Carrying amount
$50,000
Fair value
$55,000
20,000
Inventory
Patent
10,000

BALANCE SHEETS
December 31, Year 6
Grant
Lee
Assets
Cash
$ 5,000
$ 18,000
Accounts receivable
185,000
82,000
Inventory
310,000
100,000
Investment in Lee
70,000
Equipment, net
Patent, net
230,000
205,000
2,000
$407,000
$800,000
Liabilities and Shareholders' Equity
Accounts payable
$190,000
60,000
80,000
$195,000
50,000
72,000
25,000
65,000
Other accrued liabilities
Income taxes payable
Common shares
Retained earnings
170,000
300,000
$800,000
$407,000
INCOME STATEMENT
Year ended December 31, Year 6
Grant
$900,000
(340,000)
560,000
Lee
$360,000
(240,000)
120,000
Sales
Cost of goods sold
Gross margin
Distribution expense
Other expenses
Income tax expense
Net income
(30,000)
(180,000)
(120,000)
$230,000
(25,000)
(56,000)
(16,000)
$ 23,000

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