Consolidation after Acquisition – Steps 5 to 8 (Purcell Inc. example)

On October 1, Year 3, PST Corp. purchased 80% of the outstanding voting shares of SDD Corp. for $800,000 cash. On that date, SDD reported the following:

	Book value	Fair value
Property, plant, and equipment (PPE), net	$560,000	$640,000
Long-term debt (LTD)	350,000	330,000
Common shares	300,000
Retained earnings	250,000

PP&E had a remaining useful life of 10 years. The long-term debt matures in five years.

On January 1, Year 6, PST reported $1,450,000 of retained earnings, and SDD reported $375,000. PST uses the cost method to record its investment in SDD in its legal entity financial statements.

During Year 6, the consolidated net income attributable to PST was $368,000. PST declared dividends of $200,000, of which half remained unpaid at December 31, Year 6. What amount should be reported as consolidated retained earnings at December 31, Year 6?

Increase in SDD's retained earnings since acquisition to Jan. 1, Year 6: $375,000 − $250,000	$125,000
Amortization of fair value differentials to Jan. 1, Year 6:
PPE: [(560,000 – 640,000) / 10] × 2 years and 3 months	(18,000)
LTD: [(– 350,000 – (-330,000) / 5] × 2 years and 3 months	(9,000)
Adjusted increase in SDD's retained earnings since acquisition	98,000
Less: NCI portion (20% × $98,000)	(19,600)
Equity pickup to Jan. 1, Year 6	78,400
PST's retained earnings, Jan. 1, Year 6	1,450,000
Consolidated retained earnings, Jan. 1, Year 6	$1,528,400
Add: Consolidated net income attributable to PST	368,000
Less: Dividends declared by PST	(200,000)
Consolidated retained earnings, Dec. 31, Year 6	1,696,400

PET Co. owns 70% of the common shares of SAL Corp. PET has no other investments. Goodwill associated with the investment is nil, but there is an FV differential of $62,500 (amount on the date of acquisition) relating to SAL's unrecorded patent that is being amortized over 10 years.

PET's and SAL's reported net income for Year 5 is as follows:

	PET Co.	SAL Corp.
Net income	$200,000	$75,000

SAL declared $25,000 in dividends in Year 5. Assuming PET uses the cost method, what amount of consolidated net income attributable to NCI would be reported in Year 5?

Calculated as:

SAL's net income	$75,000
Current-period amortization of FV differentials:
Patent: $62,500 / 10	(6,250)
SAL's adjusted net income	68,750
NCI's portion (30% × $68,750)	$20,625

On October 1, Year 3, PST Corp. purchased 80% of the outstanding voting shares of SDD Corp. for $800,000 cash. On that date, SDD reported the following:

	Book value	Fair value
Property, plant, and equipment (PP&E), net	$560,000	$640,000
Long-term debt (LTD)	350,000	330,000
Common shares	300,000
Retained earnings	250,000

PP&E had a remaining useful life of 10 years. The long-term debt matures in five years.

What will be the effect on consolidated net income of the amortization of FV differentials for the year ended December 31, Year 3?

The amortization must be prorated for three months. {[($560,000 − $640,000)/10] + [($330,000 − $350,000)/5]} × 3/12 = $(3,000)

Which of the following statements best describes the key presentation requirements under IFRS?

A Parent must consolidate all of its subsidiaries

Which of the following is part of the elimination entry needed to adjust the opening SFP accounts when preparing consolidated financial statements after the date of acquisition?

All of the subsidiary's R/E must be eliminated except the equity pickup since acquisition to the beginning of the year

Pop Corp. owns 70% of the common shares of its subsidiary Soda Inc. During the current year, Pop charged Soda $5,000 per month for consulting fees. Soda charged Pop $27,000 for warehouse rent for the year. Pop and Soda reported total revenues of $150,000 and $120,000, respectively, on their stand-alone entity SCIs. Pop and Soda reported net income of $15,000 and $18,000, respectively, on their stand-alone entity SCIs.

What amount would be reported for total expenses on the consolidated SCI?

Consolidated expenses:

• Pop expenses = $150,000 – $15,000 = $135,000

• Soda expenses = $120,000 – $18,000 = $102,000

• Intercompany expenses = ($5,000 × 12) + $27,000 = $87,000

• Consolidated operating expenses = $135,000 + $102,000 – $87,000 = $150,000

Which of the following best describes the steps in directly calculating consolidated retained earnings (R/E)?

Calculate opening consolidated R/E, consolidated net income and then consolidated ending R/E