Pearl Company owns 60% of the voting shares of Jasper Inc. which it acquired on the...
Pearl Company owns 60% of the voting shares of Jasper Inc. which it acquired on the latter’s incorporation on January 1, 2012, and accounts for its investment using the cost method. The Income Statements for the two companies for the year ended December 31, 2012, are as follows:
|
Pearl Company |
Jasper Inc. |
|||
|
Sales |
$ 3,200,000 |
$ 1,200,000 |
||
|
Dividend income |
60,000 |
- |
||
|
3,260,000 |
1,200,000 |
|||
|
Cost of sales |
2,400,000 |
900,000 |
||
|
Other expenses |
300,000 |
100,000 |
||
|
2,700,000 |
1,000,000 |
|||
|
Income before tax |
560,000 |
200,000 |
||
|
Income taxes |
200,000 |
80,000 |
||
|
Net income for the year |
$ 360,000 |
$ 120,000 |
The only intercompany transaction during 2012 was a sale of inventory from Pearl Company to Jasper Inc. for $400,000. Half of this was still in Jasper’s inventory at December 31, 2012. Pearl Company earned a gross profit of 25% on the sale. Jasper Inc. paid dividends of $100,000 during 2012. Both companies pay income tax at a rate of 40%.
Required:
Prepare, in good form, an income statement for Pearl Company and its investee Jasper Inc. in accordance with International Financial Reporting Standards
- if Jasper Inc. is reported as a joint venture (using the equity method). (5 marks)
b) if Jasper Inc. is reported as a subsidiary. (5 marks)
Homework Answers
| Given | |||
| Pearl Company owns 60% of voting shares in Jasper Inc on Jan 1,2012 | |||
| So, Pear company (Holding Co) | |||
| Jasper Inc (Subsidary co) | |||
| (a) Ans | |||
| If Jasper is reported as a Joint venture ( using Equity method): | |||
| * Calculation of share of Post Acqusition Profit: | |||
| 1. Post Acquisition profit in Jasper Inc : | 120000 | ||
| (120000*12/12) | |||
| 2.Share of post acquisition of Pearl co | 72000 | ||
| (120000*12/12*60%) | |||
| * Calculation of Un realised profit : | |||
| 1.Pearl company sold inventory to Jasper Inc ( It is a down stream transaction) | |||
| at GP of 25% on sales | |||
| Sale value of goods: $4,00,000 | |||
| Unsold goods 50% = $2,00,000 | |||
| Un realised profit | $ 40,000.00 | ||
| So, in pearl income of $40,000 have to reduce , because it is not realised yet. | |||
| At the time of tax payment made by pearl co - for the unrealised profit they paid tax (40,000*30%) = $12,000 | |||
| So we have to recognise this as Deferred tax Asset in Group point of view | |||
| Income Statement of Pearl and Jasper : | |||
| Particulars | Pearl Co | Jasper Inc | |
| Sales | $ 32,00,000 | $ 12,00,000.00 | |
| Less : Un sold goods by Jasper | $ 2,00,000.00 | ||
| $ 30,00,000 | $ 12,00,000.00 | ||
| Dividend Income | $ 60,000 | $ - | |
| Cost of sales | $ 24,00,000.00 | $ 9,00,000.00 | |
| Less : Un sold goods by Jasper | $ 1,60,000.00 | ||
| $ 22,40,000.00 | $ 9,00,000.00 | ||
| Other Expenses | $ 3,00,000.00 | $ 1,00,000.00 | |
| Income before tax | $ 5,20,000.00 | $ 2,00,000.00 | |
| Income Taxes | $ 1,56,000.00 | $ 60,000.00 | |
| Net income during the year | $ 3,64,000.00 | $ 1,40,000.00 | |
| (b) Answer | |||
| If Jasper is reported as a Subsidary ( using Equity method): | |||
| Income Statement of Pearl and Jasper : | |||
| Particulars | Pearl Co | Jasper Inc | |
| Sales | $ 32,00,000 | $ 12,00,000.00 | |
| Less : Un sold goods by Jasper | $ 2,00,000.00 | ||
| $ 30,00,000 | $ 12,00,000.00 | ||
| Dividend Income | $ 60,000 | $ - | |
| Cost of sales | $ 24,00,000.00 | $ 9,00,000.00 | |
| Less : Un sold goods by Jasper | $ 1,60,000.00 | ||
| $ 22,40,000.00 | $ 9,00,000.00 | ||
| Other Expenses | $ 3,00,000.00 | $ 1,00,000.00 | |
| Income before tax | $ 5,20,000.00 | $ 2,00,000.00 | |
| Income Taxes | $ 1,56,000.00 | $ 60,000.00 | |
| Net income during the year | $ 3,64,000.00 | $ 1,40,000.00 | |
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