Intercompany profits

Before tax 40% tax After tax

Opening inventory – S selling

(7,000 x 0.40) 2,800 1,120 1,680 (c)

– P selling

(3,000 x 0.40) 1,200 480 720 (d)

4,000 1,600 2,400 (e)

Ending inventory – S selling

(20,000 x 0.40) 8,000 3,200 4,800 (f)

– P selling

(5,000 x 0.40) 2,000 800 1,200 (g)

10,000 4,000 6,000 (h)

Sale of land – Year 3 S selling (50,000 – 40,000) 10,000 4,000 6,000 (i)

Calculation of consolidated net income – Year 5

Net income of P Company 60,000

Less: Dividends from S (10,000 x 90%) 9,000

Profit in ending inventory (g) 1,200 10,200

49,800

Add: profit in opening inventory (d) 720

Adjusted net income 50,520

Net income of S Company 48,000

Less: profit in ending inventory (f) 4,800

patent amortization (b) 4,000

39,200

Add: profit in opening inventory (c) 1,680

40,880

Consolidated net income 91,400

Attributable to:

Shareholders of P Co. 87,312

Non-controlling interests (10% x 40,880) 4,088

91,400

Calculation of consolidated retained earnings – Jan. 1, Year 5

Retained earnings of P, Jan. 1, Year 5

(101,000 + 12,000) 113,000

Less: profit in opening inventory (d) 720

Adjusted retained earnings 112,280

Retained earnings of S (34,000 + 10,000) 44,000

Retained earnings of S at acquisition 20,000

Increase since acquisition 24,000

Less: Amortization of patents (a) 16,000

Land gain (i) 6,000

Profit in opening inventory (c) 1,680 23,680

Adjusted increase 320 (j)

P's ownership % 90% 288

Consolidated retained earnings, Jan. 1, Year 5 112,568

Calculation of consolidated non-controlling interests, beginning of Year 5 (Method 1)

Company S shareholders' equity

Common shares 60,000

Retained earnings 44,000

104,000

Less: Land gain (i) 6,000

Profit in beginning inventory (c) 1,680 7,680

Adjusted shareholders' equity 96,320

Unamortized acquisition differential 4,000 100,320

10%

Non-controlling interest, Jan 1, Year 5 10,032

Calculation of consolidated non-controlling interests – Jan. 1 Year 5 (Method 2)

Non-controlling interests at date of acquisition (10% x [90,000 / .9) 10,000

S Co.’s adjusted increase in retained earnings (j) 320

NCI’s share @ 10% 32

Non-controlling interest, Jan 1, Year 5 10,032

P Co.

Consolidated Statement of Changes in Equity

For Year Ended December 31, Year 5

Common Retained

Shares Earnings Total NCI Total

Balance, beginning of year 150,000 112,568 262,568 10,032 272,600

Add: net income 87,312 87,312 4,088 91,400

Less: dividends (12,000) (12,000) (1,000) (13,000)

Retained earnings, Dec. 31 150,000 187,880 387,880 13,120 351,000

Proof:

Retained earnings of P, Dec. 31, Year 5

(101,000 + 60,000) 161,000

Less: Profit in ending inventory (g) 1,200

Adjusted retained earnings 159,800

Retained earnings of S, Dec. 31, Year 5

(34,000 + 48,000) 82,000

Retained earnings of S at acquisition 20,000

Increase since acquisition 62,000

Less: Amortization of the patents

((a)16,000 + (b)4,000) 20,000

Land gain (i) 6,000

Profit in ending inventory (f) 4,800 30,800

Adjusted increase 31,200 (k)

P's ownership % 90% 28,080

Consolidated retained earnings, Dec., 31, Year 5 187,880

Calculation of consolidated non-controlling interests – Dec. 31 Year 5 (Method 1)

Company S shareholders' equity

Common shares 60,000

Retained earnings 82,000

142,000

Less: Land gain (i) 6,000

Profit in ending inventory (f) 4,800 10,800

Adjusted shareholders' equity 131,200

Unamortized acquisition differential 0

131,200

10%

Non-controlling interests, Dec. 31, Year 5 13,120

Calculation of consolidated non-controlling interests – Dec. 31 Year 5 (Method 2)

Non-controlling interests at date of acquisition (10% x [90,000 / .9) 10,000

S Co.’s adjusted increase in retained earnings (k) 31,200

NCI’s share @ 10% 3,120

Non-controlling interest, Jan 1, Year 5 13,120

Problem 6-14

(a) Acquisition cost Allocation Acquisition January 1, Year 1

Cost (60,000 x $80) 4,800,000

Implied value of 100% investment (80,000 shares x $80) 6,400,000

CA: Ordinary Shares 3,500,000

Retained Earnings 2,100,000

5,600,000

Acquisition differential 800,000

Allocation: Life

Inventory 100,000 Cr 1

Land 200,000 Dr

Equipment 200,000 Cr 10

Patents 400,000 Dr 5

L.T. Liability 100,000 Cr 4

Subtotal 200,000 Dr

Balance: Goodwill 600,000 Dr

800,000 Dr

Non-controlling interest (20,000 shares @ $80) 1,600,000

Amortization Table:

Allocation Life Amortization Balance

YR 1 – YR 4 YR 5 Dec. 3, YR 5

Inventory 100,000 Cr 1 100,000Cr 0 0

Land 200,000 Dr 200,000 Dr

Equipment 200,000 Cr 10 80,000Cr 20,000 Cr 100,000 Cr

Patents 400,000 Dr 5 320,000Dr 80,000Dr 0

L.T. Liability 100,000 Cr 4 100,000Cr 0

Goodwill 600,000 Dr 600,000 Dr

800,000 Dr 40,000 Dr 60,000 Dr 700,000 Dr

Devine’s accumulated depreciation at date of acquisition 500,000