On December 31, 2017, Perez Ltd. (Perez), a public company, purchased 70% of the outstanding common shares of Saville Ltd. (Saville) for $8,750,000. On that date, Saville's shareholders' equity consisted of common shares of $6,250,000 and retained earnings of $2,000,000. The financial statements for Perez and Saville for the year ended December 31, 2020, are as follows: Balance sheets As at December 31, 2020 Cash Accounts receivable Inventory Equipment - net Investment in Saville Perez Ltd. Saville Ltd. $ 850,000 $ 175,000 2,000,000 1,125,000 3,500,000 1,450,000 5,850,000 13,500,000 8,750,000 $ 20.950.000 $ 16.250,000 Current liabilities Notes payable Common shares Retained earnings $ 500,000 $ 1,275,000 7,250,000 5,925,000 2,500,000 6,250,000 10,700,000 2,800,000 $ 20.950,000 $ 16.250.000 Statements of comprehensive income Year ended December 31, 2020 Perez Ltd. Saville Ltd. Sales $ 7,875,000 $ 13,550,000 Cost of sales (4,525,000) (8,200,000) Other revenue 625,000 Other expenses (950,000) (3,700,000) Income tax expense (1,200,000) (650,000) Net income and comprehensive income $ 1,825,000 $ 1,000,000 The following is a reconciliation of the retained earnings account for the year ended December 31, 2020: Retained earnings, beginning Net income Dividends declared and paid Retained earnings, end Perez Ltd. Saville Ltd. $ 9,000,000 $2,550,000 1,825,000 1,000,000 (125,000) (750,000) $10.700,000 $2,800,000 Additional information: 1. In negotiating the purchase price, it was agreed that the fair value of all of Saville's assets and liabilities was equal to their carrying values except for the following: Carrying value Fair value Inventory $1,175,000 $1,100,000 Equipment 2,750,000 3,250,000 2. Both companies use the first in, first out method to account for their inventory, and the straight-line method for depreciating their equipment. Saville's equipment at the date of acquisition had a remaining useful life of five years. 3. Each year, goodwill is evaluated to determine whether there has been impairment. Goodwill impairment was $125,000 in 2018, $0 for 2019, and $150,000 in 2020. 4. On January 2, 2018, Perez sold equipment to Saville for $700,000. Perez paid $750,000 for this equipment on January 2, 2016, and had been depreciating the equipment on a straight-line basis over 10 years with NO residual value. There was NO change in the estimated useful life of this equipment at the time of the purchase by Saville. 5. During 2020, Perez purchased inventory from Saville for $750,000. Of this inventory, 60% was resold by Perez and the other 40% remained in its inventory at December 31, 2020. On December 31, 2019, the inventory of Perez contained $500,000 of inventory purchased from Saville. Saville earns a gross margin of 25% on its sales to Perez. 6. Perez uses the identifiable net assets (INA) method to account for the non-controlling interest. 7. Both companies are subject to tax at a rate of 40%. Required: a) Prepare a purchase price allocation on the date of acquisition and a purchase price amortization schedule. (5 marks) b) Prepare supporting schedules for any unrealized/realized intercompany profits. (3 marks) c) Prepare a consolidated statement of comprehensive income for the year ended December 31, 2020. Show the allocation of the consolidated net income between the parent company and the non-controlling interest. (11 marks) d) Calculate the following balances for the consolidated statement of financial position as at December 31, 2020: i. inventory (1 mark) ii. equipment - net (1 mark) iii. deferred income taxes (1 mark) iv. retained earnings (1.5 marks) non-controlling interest (1.5 marks) V. On December 31, 2017, Perez Ltd. (Perez), a public company, purchased 70% of the outstanding common shares of Saville Ltd. (Saville) for $8,750,000. On that date, Saville's shareholders' equity consisted of common shares of $6,250,000 and retained earnings of $2,000,000. The financial statements for Perez and Saville for the year ended December 31, 2020, are as follows: Balance sheets As at December 31, 2020 Cash Accounts receivable Inventory Equipment - net Investment in Saville Perez Ltd. Saville Ltd. $ 850,000 $ 175,000 2,000,000 1,125,000 3,500,000 1,450,000 5,850,000 13,500,000 8,750,000 $ 20.950.000 $ 16.250,000 Current liabilities Notes payable Common shares Retained earnings $ 500,000 $ 1,275,000 7,250,000 5,925,000 2,500,000 6,250,000 10,700,000 2,800,000 $ 20.950,000 $ 16.250.000 Statements of comprehensive income Year ended December 31, 2020 Perez Ltd. Saville Ltd. Sales $ 7,875,000 $ 13,550,000 Cost of sales (4,525,000) (8,200,000) Other revenue 625,000 Other expenses (950,000) (3,700,000) Income tax expense (1,200,000) (650,000) Net income and comprehensive income $ 1,825,000 $ 1,000,000 The following is a reconciliation of the retained earnings account for the year ended December 31, 2020: Retained earnings, beginning Net income Dividends declared and paid Retained earnings, end Perez Ltd. Saville Ltd. $ 9,000,000 $2,550,000 1,825,000 1,000,000 (125,000) (750,000) $10.700,000 $2,800,000 Additional information: 1. In negotiating the purchase price, it was agreed that the fair value of all of Saville's assets and liabilities was equal to their carrying values except for the following: Carrying value Fair value Inventory $1,175,000 $1,100,000 Equipment 2,750,000 3,250,000 2. Both companies use the first in, first out method to account for their inventory, and the straight-line method for depreciating their equipment. Saville's equipment at the date of acquisition had a remaining useful life of five years. 3. Each year, goodwill is evaluated to determine whether there has been impairment. Goodwill impairment was $125,000 in 2018, $0 for 2019, and $150,000 in 2020. 4. On January 2, 2018, Perez sold equipment to Saville for $700,000. Perez paid $750,000 for this equipment on January 2, 2016, and had been depreciating the equipment on a straight-line basis over 10 years with NO residual value. There was NO change in the estimated useful life of this equipment at the time of the purchase by Saville. 5. During 2020, Perez purchased inventory from Saville for $750,000. Of this inventory, 60% was resold by Perez and the other 40% remained in its inventory at December 31, 2020. On December 31, 2019, the inventory of Perez contained $500,000 of inventory purchased from Saville. Saville earns a gross margin of 25% on its sales to Perez. 6. Perez uses the identifiable net assets (INA) method to account for the non-controlling interest. 7. Both companies are subject to tax at a rate of 40%. Required: a) Prepare a purchase price allocation on the date of acquisition and a purchase price amortization schedule. (5 marks) b) Prepare supporting schedules for any unrealized/realized intercompany profits. (3 marks) c) Prepare a consolidated statement of comprehensive income for the year ended December 31, 2020. Show the allocation of the consolidated net income between the parent company and the non-controlling interest. (11 marks) d) Calculate the following balances for the consolidated statement of financial position as at December 31, 2020: i. inventory (1 mark) ii. equipment - net (1 mark) iii. deferred income taxes (1 mark) iv. retained earnings (1.5 marks) non-controlling interest (1.5 marks) V