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, 2015 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 2015 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 STATEMENTS
	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