A-1 On January 1, Year 5, AB Company (AB) purchased 80% of the outstanding common shares of Dandy Limited (Dandy) for $8,000.On that date, Dandy's shareholders' equity consisted of common shares of $1,000 and retained earnings of $6,000.In negotiating the purchase price at the date of acquisition, it was agreed that the fair values of all of Dandy's assets and liabilitieswere equal to their carrying amounts and tax base except for the following:EquipmentFairValue$950Dandy has recorded deferred income taxes on its separate-entity balance sheet on all temporary differences. Dandy had a losscarry-forward of $800 as at December 31, Year 4. This carry-forward can be applied against taxable income in the future. Dandydid not previously recognize the benefit of the carry-forward because it was not sure whether it would earn $800 in taxableincome in the future. Now that AB controls Dandy, AB is sure that Dandy will be able to utilize the loss carry-forwards because ABwill transfer income-earning assets to Dandy if necessary to generate taxable income in Dandy. AB plans to utilize these losscarry-forwards as soon as possible.YearYear 5CarryingValue$700Both companies use the straight-line method for amortizing their property, plant, and equipment and pay taxes at a rate of 40%.Dandy's equipment had a remaining useful life of 10 years at the date of acquisition.Year 6Year 7TaxBase$600Dandy reported income before application of any loss carry-forwards as follows for the first three years after being acquired byAB:Incomebefore Tax$ 0100200 Required:(a) Calculate goodwill at the date of acquisition. Be sure to consider the deferred tax implications on the acquisition differential.(Omit $ sign in your response.)Goodwill$ 6750(b) Calculate non-controlling interest at the date of acquisition. (Omit $ sign in your response.)Non-controlling interest$ 250

Consolidation is an activity in which financial statements of a parent and its subsidiary should be…

On January 1, Year 5, AB Company (AB) purchased 80% of the outstanding common shares of Dandy Limited (Dandy) for $8,000. On that date, Dandy's shareholders' equity consisted of common shares of $1,000 and retained earnings of $6,000. In negotiating the purchase price at the date of acquisition, it was agreed that the fair values of all of Dandy's assets and liabilities were equal to their carrying amounts and tax base except for the following:

On January 1, Year 5, AB Company (AB) purchased 80% of the outstanding common shares of Dandy Limited (Dandy) for $8,000. On that date, Dandy's shareholders' equity consisted of common shares of $1,000 and retained earnings of $6,000. In negotiating the purchase price at the date of acquisition, it was agreed that the fair values of all of Dandy's assets and liabilities were equal to their carrying amounts and tax base except for the following:

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Question

A-1

On January 1, Year 5, AB Company (AB) purchased 80% of the outstanding common shares of Dandy Limited (Dandy) for $8,000.
On that date, Dandy's shareholders' equity consisted of common shares of $1,000 and retained earnings of $6,000.
In negotiating the purchase price at the date of acquisition, it was agreed that the fair values of all of Dandy's assets and liabilities
were equal to their carrying amounts and tax base except for the following:
Equipment
Fair
Value
$950
Dandy has recorded deferred income taxes on its separate-entity balance sheet on all temporary differences. Dandy had a loss
carry-forward of $800 as at December 31, Year 4. This carry-forward can be applied against taxable income in the future. Dandy
did not previously recognize the benefit of the carry-forward because it was not sure whether it would earn $800 in taxable
income in the future. Now that AB controls Dandy, AB is sure that Dandy will be able to utilize the loss carry-forwards because AB
will transfer income-earning assets to Dandy if necessary to generate taxable income in Dandy. AB plans to utilize these loss
carry-forwards as soon as possible.
Year
Year 5
Carrying
Value
$700
Both companies use the straight-line method for amortizing their property, plant, and equipment and pay taxes at a rate of 40%.
Dandy's equipment had a remaining useful life of 10 years at the date of acquisition.
Year 6
Year 7
Tax
Base
$600
Dandy reported income before application of any loss carry-forwards as follows for the first three years after being acquired by
AB:
Income
before Tax
$ 0
100
200

Required:
(a) Calculate goodwill at the date of acquisition. Be sure to consider the deferred tax implications on the acquisition differential.
(Omit $ sign in your response.)
Goodwill
$ 6750
(b) Calculate non-controlling interest at the date of acquisition. (Omit $ sign in your response.)
Non-controlling interest
$ 250

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