Question

On January 1, Year 1, Par Ltd. purchased 80% of the outstanding common shares of Son Company for $90,000 in cash. On the date of the purchase, Son had common shares of S38,000 and retained earnings of $26,000 Son has a new patent that is not recorded in its books but has a fair value of $15,000. The patent rights extend for another 3 years. The carrying amounts of Son's assets and liabilities were equal to their fair value except for the following items: Carrying value Inventory Equipment Bond payable 40,000 60,000 30,000 Fair value 35,000 70,000 38,000 The equipment in Son's books has an expected remaining useful life of 10 years and the bond payable matures December 31 Year 4. Due to economic changes the annual goodwill impairment tests resulted in a $1,000 loss in Year 2 and $2,000 loss in Year 3. At December 31, Year 3, son owed Par $20,000 in an interest bearing note at 500 (note was issued in Year 2). During Year 3, Par paid $20,000 in dividends and Son paid S10,000 in dividends The balance sheets and income statements for both companies for the year ended Year 3 are as follows:

Answer 1

consolidated Income Statement
Par Ltd		Amount	fair value adjustments	Elimination	Amount
Sales	$	12,98,000			12,98,000
Other income	$	10,000		-9000	1,000
Cost of goods sold	$	7,70,000			7,70,000
Depreciation / Amortisation expense	$	1,48,000	8000		1,56,000
Administration expense	$	78,000			78,000
Other expense	$	1,50,000		-1000	1,49,000
Income tax expense	$	46,000			46,000
Net Income		1,16,000	-8,000	-8,000	1,00,000
Consolidated retained earnings at January 1, Year 3
		Par	Son	Acquistion Adjustments	Total
Retained Earnings at Dec 31, Year 3	$	2,00,000	65,000		2,65,000
Less Profit for Year 3		-76,000	-40,000		-1,16,000
Add Acquistion adjustments					-
Fair value of patent	$			15,000	15,000
Fair value of Inventory	$			-5,000	-5,000
Fair value of Equipment	$			10,000	10,000
Bond payable	$			-8,000	-8,000
Less Depreciation on equipment fair value	$			-2,000	-2,000
Less Patent amortisation	$			-10,000	-10,000
Less Goodwill Impairment	$			-3,000	-3,000
Retained Earnings at January 1, Year 3					1,46,000

Consolidated financial statements at Dec 31 , Year 3
		Par	Son	Acquistion Ajustments	Elimination	Fair value adjustments & Impairment	Consolidated
Assets
Cash	$	50,000	35,000				85,000
Accounts receivable	$	1,00,000	40,000				1,40,000
Notes receivable	$	80,000			-20,000		60,000
Inventory	$	90,000	80,000	-5,000			1,65,000
Land	$	60,000	50,000				1,10,000
Equipment	$	6,00,000	2,98,000	10,000			9,08,000
Accumulated depreciation	$	1,00,000	50,000			3,000	1,53,000
Patent	$			15,000		-15,000	-
Goodwill	$			29,200		-3,000	26,200
Investment in son	$	90,000		-90,000			-
	$	9,70,000	4,53,000	-40,800	-20,000	-21,000	13,41,200
Liabilities & Shareholders equity
Accounts payable	$	70,000	50,000				1,20,000
Notes payable	$		30,000		-20,000		10,000
Bonds payable	$	2,00,000	2,70,000	8,000			4,78,000
Common shares	$	5,00,000	38,000	-38,000			5,00,000
Retained earnings	$	2,00,000	65,000	-26,000		-21,000	2,18,000
Non controlling Interest	$			15,200			15,200
	$	9,70,000	4,53,000	-40,800	-20,000	-21,000	13,41,200

Calculation and allocation of acquistional differential and AD amortization / impairment
Par Limited
80%	$	90,000
Son Limited
Retained earnings (RE) - Jan 1, Year 1	$	26,000
Add
Fair value of patent	$	15,000
Fair value of Inventory	$	-5,000
Fair value of Equipment	$	10,000
Bond payable	$	-8,000
	$	38,000
Equity	$	38,000
Total Equity / RE	$	76,000
80% of Acquistion	$	60,800
Consideration paid	$	90,000
Goodwill	$	29,200
Less Impairment
Year 1	$	-1,000
Goodwill - year 1		28,200
Year 2	$	-2,000
Goodwill - year 2		26,200
Patent amortisation	$	15,000
3 years useful lifes	$	5,000
Equipment	$	10,000
10 Year useful life	$	1,000