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Cash - On 1 January 2018, Parent Ltd acquired all the outstanding shares of Subsidiary Lid whose shareholders are to receive one share in Parent Lod for every four shares held plus $10.250 h payable in two years time. The acquisition was made on an cummulative dividend aus W Subsidiary's dividend payable amounted to $2,000. Parent also paid $50,000 consulting and brokerage fees. Shares of Parent were trading at $40 per share on 1 Jan, but due to doubts as to whether the share price would remain at or above this level, Parent agreed to supply cash to the value of any decrease in the share price below $40. This guarantee was valid until Dec 31, 2018 Parent believed that there wa a 50% chance that the share price would fall to $36. On the acquisition day, all identifiable assets and liabilities of Subsidiary Lid were recorded at fax values except for the following: Inventories Buildings Accumulated depreciation Land Fair value (S) Book value ($) Status 30,000 10,000 Sold 80% during 2018 35.000 48,000 A further S-year life (8,000) 70.000 90.000 Sold at $85.000 during 2018 In addition, on the acquisition date Subsidiary had two unrecorded items a self-generated patent of $15.000 (fair value) with a 5-year life and a contingent liability of $9,000 (fair value) Subsidairy has settled the liability by the year end with a payment of $10,000. (Accounts used by the two firms are: *Provision for litigation liability", "Litigation expense" and "Gain (loss) on litigation") Assumptions: 1) There has been no change in Subsidiary's outstanding capital stock since Parent acquired its interest, 2) The accounting period is from January 1 to December 31 for both companies. 3) The share price of Parent dropped to $35 per share on Dec 31, 2018, 4) The income tax rate is 30% and 5) The incremental borrowing rate for Parent Ltd is 10% Addition information follows 1. Subsidiary sold all of its inventories to Parent during 2018. By the end of the year, Patent has resold 60% of these inventories to customers and still owed Subsidiary $5,000 of the purchases. 2. Subsidiary sold equipment with a net book value of $100,000 to Parent on Dec 31, 2018 for $120,000 ($100,000 already received and $20,000 still outstanding). This equipment had a further 4-year life. 3. Parent sold machinery to Subsidiary at $40,000 below its carrying amount on July 1, 2018 Depreciation rate is 10% per year on the cost (half-year depreciation rule applies). There is no outstanding balances on the sale. 4. Parent sold funiture to Subsidiary at $2,000 above its carrying amount on 31 Dec 2018. Subsidairy used this item as inventory. There is no outstanding balances on the sale. 5. Parent's year-end test of goodwill indicated an impairment loss of $10,000. 6. Subsidiary declared dividend of S1,500 on December 31, 2018 7. Outstanding balances between Parent and Subsidiary are recorded in "Receivable from Parent (Subsidiary)" and "Payable to Parent (Subsidiary)" accounts. 2 Subsidiary Sales... The financial statements for Parent and Subsidiary we summarized as follows. Parcot Income Stament for the Far Ended Dec 31, 2018 $300,000 Dividend revenue 3.800 Gain (Loss) on sale of land Gain (Loss) on sale of PPE. (36,000) Cost of sales. 148.000 Litigation expense Depreciation expense.. 5,000 Selling & administrative expenses. 7,800 Tax expense. 12.000 Net income 95.000 Retained earnings, January 1, 2018.. 80.000 Dividend Retained earnings. December 31, 2018..... $173,000 $80,000 550 (5,000) 20,000 60,000 10,000 2,000 1.550 8.000 14.000 10,000 1,500 $22.500 2.000 Balance Sheet at Dec 31, 2018 Capital stock (S10 per share for both companies).. Retained earnings Total oquity Current liabilities Deferred tax liability Dividend payable. Payable to Subsidiary Total liabilities and equity Parent $2,000,000 173.000 2,173,000 192,000 2,000 2,000 25,000 $2,394,000 Subsidiary $100,000 22.500 122.500 215.000 1,000 1,500 $340,000 Land. Buildings Accumulated depreciation. Equipment.... Accumulated depreciation. Machinery Accumulated depreciation. Furniture.. Accumulated depreciation, Cash... Accounts receivable, net. Dividend receivable. Receivable from Parent. Inventories. Deferred tax asset. Investment in Subsidiary. Total Assets $800,000 1,000,000 (200,000) 250,000 (60,000) 70,000 (8,000) 10,000 (2.000) 166,000 80,000 1,500 S100,000 80,000 (20.000) 45,000 (5,000) 14,000 (3,400) 6,000 (600) 58,000 10,250 300 25,000 30,000 450 150,000 1,000 135,500 S2,394.000 $340,000 3 Required: 1. Determine the cost of acquisition for Parent Ltd at the date of acquisition. (6 marks) 2. Determine the amount of goodwill (if any) involved in business combination. (10 marks) 3. Provide consolidation worksheet entries as at December 31 2018. (32 marks) 4. Prepare consolidated income statement and balance sheet for 2018. (47 marks) 5. Explain why a close member of the family of a person is treated as a related party and give two examples of a close family member. (5 marks) END Cash - On 1 January 2018, Parent Ltd acquired all the outstanding shares of Subsidiary Lid whose shareholders are to receive one share in Parent Lod for every four shares held plus $10.250 h payable in two years time. The acquisition was made on an cummulative dividend aus W Subsidiary's dividend payable amounted to $2,000. Parent also paid $50,000 consulting and brokerage fees. Shares of Parent were trading at $40 per share on 1 Jan, but due to doubts as to whether the share price would remain at or above this level, Parent agreed to supply cash to the value of any decrease in the share price below $40. This guarantee was valid until Dec 31, 2018 Parent believed that there wa a 50% chance that the share price would fall to $36. On the acquisition day, all identifiable assets and liabilities of Subsidiary Lid were recorded at fax values except for the following: Inventories Buildings Accumulated depreciation Land Fair value (S) Book value ($) Status 30,000 10,000 Sold 80% during 2018 35.000 48,000 A further S-year life (8,000) 70.000 90.000 Sold at $85.000 during 2018 In addition, on the acquisition date Subsidiary had two unrecorded items a self-generated patent of $15.000 (fair value) with a 5-year life and a contingent liability of $9,000 (fair value) Subsidairy has settled the liability by the year end with a payment of $10,000. (Accounts used by the two firms are: *Provision for litigation liability", "Litigation expense" and "Gain (loss) on litigation") Assumptions: 1) There has been no change in Subsidiary's outstanding capital stock since Parent acquired its interest, 2) The accounting period is from January 1 to December 31 for both companies. 3) The share price of Parent dropped to $35 per share on Dec 31, 2018, 4) The income tax rate is 30% and 5) The incremental borrowing rate for Parent Ltd is 10% Addition information follows 1. Subsidiary sold all of its inventories to Parent during 2018. By the end of the year, Patent has resold 60% of these inventories to customers and still owed Subsidiary $5,000 of the purchases. 2. Subsidiary sold equipment with a net book value of $100,000 to Parent on Dec 31, 2018 for $120,000 ($100,000 already received and $20,000 still outstanding). This equipment had a further 4-year life. 3. Parent sold machinery to Subsidiary at $40,000 below its carrying amount on July 1, 2018 Depreciation rate is 10% per year on the cost (half-year depreciation rule applies). There is no outstanding balances on the sale. 4. Parent sold funiture to Subsidiary at $2,000 above its carrying amount on 31 Dec 2018. Subsidairy used this item as inventory. There is no outstanding balances on the sale. 5. Parent's year-end test of goodwill indicated an impairment loss of $10,000. 6. Subsidiary declared dividend of S1,500 on December 31, 2018 7. Outstanding balances between Parent and Subsidiary are recorded in "Receivable from Parent (Subsidiary)" and "Payable to Parent (Subsidiary)" accounts. 2 Subsidiary Sales... The financial statements for Parent and Subsidiary we summarized as follows. Parcot Income Stament for the Far Ended Dec 31, 2018 $300,000 Dividend revenue 3.800 Gain (Loss) on sale of land Gain (Loss) on sale of PPE. (36,000) Cost of sales. 148.000 Litigation expense Depreciation expense.. 5,000 Selling & administrative expenses. 7,800 Tax expense. 12.000 Net income 95.000 Retained earnings, January 1, 2018.. 80.000 Dividend Retained earnings. December 31, 2018..... $173,000 $80,000 550 (5,000) 20,000 60,000 10,000 2,000 1.550 8.000 14.000 10,000 1,500 $22.500 2.000 Balance Sheet at Dec 31, 2018 Capital stock (S10 per share for both companies).. Retained earnings Total oquity Current liabilities Deferred tax liability Dividend payable. Payable to Subsidiary Total liabilities and equity Parent $2,000,000 173.000 2,173,000 192,000 2,000 2,000 25,000 $2,394,000 Subsidiary $100,000 22.500 122.500 215.000 1,000 1,500 $340,000 Land. Buildings Accumulated depreciation. Equipment.... Accumulated depreciation. Machinery Accumulated depreciation. Furniture.. Accumulated depreciation, Cash... Accounts receivable, net. Dividend receivable. Receivable from Parent. Inventories. Deferred tax asset. Investment in Subsidiary. Total Assets $800,000 1,000,000 (200,000) 250,000 (60,000) 70,000 (8,000) 10,000 (2.000) 166,000 80,000 1,500 S100,000 80,000 (20.000) 45,000 (5,000) 14,000 (3,400) 6,000 (600) 58,000 10,250 300 25,000 30,000 450 150,000 1,000 135,500 S2,394.000 $340,000 3 Required: 1. Determine the cost of acquisition for Parent Ltd at the date of acquisition. (6 marks) 2. Determine the amount of goodwill (if any) involved in business combination. (10 marks) 3. Provide consolidation worksheet entries as at December 31 2018. (32 marks) 4. Prepare consolidated income statement and balance sheet for 2018. (47 marks) 5. Explain why a close member of the family of a person is treated as a related party and give two examples of a close family member. (5 marks) END

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