Question

On Jan 1, 2016, PORE Inc. purchased 80% of the voting shares of SCORE Inc. for $900,000 cash, plus a commitment to pay an additional $300,000 in three years if sales grow by more than 20% over the next three years. An independent business valuator stated that PORE Inc. could have paid an extra $100,000 at the date of acquisition instead of agreeing to a potential payment of $300,000 in three years.

On the date of acquisition, SCORE’s Common Stock and Retained Earnings were valued at $200,000 and $600,000 respectively. PORE uses the cost method to account for its investment. SCORE’s fair values approximated its carrying values with the following exception.The equipment had a fair value that was $ 100,000 higher than its carrying value, and was estimated to have a remaining useful life of 10 years from the date of acquisition with no salvage value.

SCORE’s inventory had a fair value that was $2,000 more than book value.
SCORE sold this inventory in 2016.SCORE had an internally developed patent that had a fair value of $20,000 and can be used for four years. SCORE did not include the value of the patent on its financial records. Both companies use straight line amortization exclusively for all assets and liabilities if applicable.

The effective tax rate for both companies is 40%.

The Financial Statements of PORE & SCORE for the Year ended December 31, 2019 are shown below:

Income Statements

                                                           PORE Inc.               SCORE Inc.

Sales                                                    $1,110,000                     $530,000

Other Revenues                                     $400,000                     $160,000

Less: Expenses:

Cost of Goods Sold:                              $800,000                     $330,000

Depreciation Expense                              $30,000                       $20,000

Other Expenses                                      $110,000                     $150,000

Income Tax Expense                              $170,000                       $50,000

Net Income                                            $400,000                     $140,000

Retained Earnings Statements

Balance, Jan 1, 2019                           $1,020,000                     $760,000

Net Income                                            $400,000                     $140,000

Less: Dividends                                   ($260,000)                   ($100,000)

Retained Earnings                            $1,160,000                     $800,000

Balance Sheet

                                                           PORE Inc.               SCORE Inc.

Cash                                                       $300,000                     $240,000

Accounts Receivable                               300,000                       395,000

Inventory                                                 250,000                       175,000

Investment in SCORE Inc.                      900,000                                   -

Land                                                           80,000                         70,000

Equipment (net)                                       220,000                       210,000

Total Assets                                        $2,050,000                  $1,090,000

Current Liabilities                                  $270,000                       $90,000

Bonds Payable                                         220,000                                   -

Common Shares                                       400,000                       200,000

Retained Earnings                                 1,160,000                       800,000

Total Liabilities and Equity              $2,050,000                  $1,090,000

Other Information:

1. On Jan 2, 2016, SCORE purchased equipment for $70,000 and estimated its useful life would be 7 years with no salvage value. On Jan 1, 2019, SCORE sold the equipment to PORE for $80,000. Both companies use straight line depreciation.

2. During 2018, PORE sold a parcel of land to SCORE for $95,000. PORE had purchased this land in 2016 for $80,000. Score still has the land and uses as a warehouse space.

3. During 2019, PORE charged SCORE $15,000 of management fees. SCORE paid $10,000 during the year and expects to pay the remaining $5,000 in 2020.

4. During December 2019, PORE sold inventory to SCORE for $80,000, the cost of the inventory to PORE was $60,000. 40% of these goods remained in SCORE’s inventory at the end of 2019.

5. During December 2018, SCORE sold inventory to PORE for $60,000, the cost of the inventory to SCORE was $30,000. 10% of these goods remained in PORE’s inventory at the end of 2018. PORE eventually sold the entire inventory to an outside customer in 2019.

6. A goodwill impairment test conducted during December of 2017 revealed a loss of $50,000 and Dec of 2019 another loss of 35,000.

REQUIRED:

1. 
   

1. Prepare a schedule showing the calculation of goodwill at the date of acquisition of SCORE under the fair value enterprise method, and an acquisition differential amortization schedule.

2. 
   

1. Prepare a schedule showing the inter-company realized and unrealized profits. Your schedule should include both pre-tax and after-tax amounts.

c) Prepare the consolidated financial statements under the fair value enterprise method: Income statement and Retained Earnings for the year ended December 31^st, 2019, and Balance Sheet as at December 31^st, 2019. Show all supporting calculations.

     NOTE: In preparing Consolidated Statement of Retained Earnings you need to calculate the opening retained earnings. Don’t forget to show all your calculations.