Question

QUESTION 2 (6 marks)

The following are the financial statements of Raleigh Corp and Tweedmere Inc. prepared on December 31, 2015:          

2015 INCOME STATEMENTS

                                          Raleigh               Tweedmere

       Misc. revenues                  926,500            270,000

       Interest revenue                                              3,600

       Dividend revenue                        10,500                       _   

                                          $937,000             $273,600

       Misc. expenses                  736,400            229,600

       Interest expense                      3,600                    

       Income tax expense                     80,000               20,000

                                          $820,000             249,600

       Net income                       $117,000             $ 24,000

2015 RETAINED EARNINGS STATEMENTS

       Bal, Jan 1                          $153,000             $ 72,000

       Net income                       117,000                24,000

                                          289,800                96,000

       Dividends                              50,000               15,000

       Bal. Dec 31                       $220,000             $ 81,000

BALANCE SHEETS – December 31, 2015

       Misc. Assets                      $535,125             $211,000

       Note Receivables                                           60,000

       Investment in Tweedmere          56,875                -------

                                          $592,000             $271,000

       Misc. Liabilities                $212,000             $140,000

       Note Payable                                60,000             

       Common Shares               100,000                50,000

       Retained Earnings                    220,000                81,000

                                          $592,000             $271,000

Other information:

1.         Raleigh acquired 70% of Tweedmere on January 1, 2012 at a cost of $56,875. On this date Tweedmere retained earnings amounted to $10,000, and the acquisition differential was entirely allocated to goodwill. Impairment tests conducted yearly since acquisition yielded a loss of $3,000 in 2012 and a further loss of $2,250 in 2015.

       Raleigh uses the cost method to account for the investment.

       Use the entity theory for calculations.

2.         The December 31, 2015 inventory of Raleigh contained purchases made from Tweedmere amounting to $10,000. Tweedmere sells to Raleigh at a 40% gross profit.

3.         On July 1, 2015 Raleigh borrowed $60,000 from Tweedmere and signed a note bearing interest at 12% per year.

4.    Both companies pay income tax at a rate of 40%.

REQUIRED:

Calculate the balance in the “Investment in Tweedmere” account as at December 31, 2015, if Raleigh had used the equity method.

Answer 1

2015 Income Statement
	Tweedmere	Adjustments	Amount
Misc. revenues	$                      270,000		$ 270,000
Interest revenue	$                           3,600	$          (3,600)	$             -
	$                      273,600		$ 270,000
Misc. expenses	$                      229,600	$                (4,000)	$ 225,600
Interest expense	$                                  -		$             -
Income tax expense	$                         20,000		$    20,000
	$                      249,600		$ 245,600
Net income	$                         24,000		$    24,400
INVESTMENT VALUE	$                         56,875
ADD: EARNINGS
RETAINED EARNINGS (72000 -10000)*.7	$                         43,400
PROFIT FOR THE YEAR 16400 * .7	$                         17,080
	$                      117,355
LESS: DIVIDENDS	$                         10,500
15000*0.7
INVESTMENT VALUE	$                      106,855