Reference no: EM133496433

Case: On January 1, Year 3, the Pen Company purchased 80% of the outstanding voting shares of the Silk Company for $1.6 million in cash. On that date, Silk's balance sheet and the fair values of its identifiable assets and liabilities were as follows:

	Carrying Value	Fair Value
Cash	$ 25,000	$ 25,000
Accounts receivable	310,000	290,000
Inventories	650,000	600,000
Plant and equipment (net)	2,015,000	2,050,000
Total assets	$3,000,000
Current liabilities	$300,000	300,000
Long-term liabilities	1,200,000	1,100,000
Common shares	500,000
Retained earnings	1,000,000
Total liabilities and shareholders' equity	$3,000,000

On January 1, Year 3, Silk's plant and equipment had a remaining useful life of 8 years. Its long-term liabilities matured on January 1, Year 7. Goodwill, if any, is to be tested yearly for impairment.

The balance sheets as on December 31, Year 9, for the two companies were as follows:

BALANCE SHEETS
As on December 31, Year 9
	Pen	Silk
Cash	$ 500,000	$ 40,000
Accounts receivable	1,700,000	500,000
Inventories	2,300,000	1,200,000
Plant and equipment, net	8,200,000	4,000,000
Investment in Silk, at cost	1,600,000	-
Land	700,000	260,000
Total assets	$15,000,000	$6,000,000
Current liabilities	$ 600,000	$ 200,000
Long-term liabilities	3,000,000	3,000,000
Common shares	1,000,000	500,000
Retained earnings	10,400,000	2,300,000
Total liabilities and shareholders' equity	$15,000,000	$6,000,000

Additional Information

• The inventories of both companies have a maximum turnover period of one year. Receivables have a maximum turnover period of 62 days.
• On July 1, Year 7, Pen sold a parcel of land to Silk for $100,000. Pen had purchased this land in Year 4 for $150,000. On September 30, Year 9, Silk sold the property to another company for $190,000.
• During Year 9, $2 million of Pen's sales were to Silk. Of these sales, $500,000 remains in the December 31, Year 9, inventories of Silk. The December 31, Year 8, inventories of Silk contained $312,500 of merchandise purchased from Pen. Pen's sales to Silk are priced to provide it with a gross profit of 20%.
• Pen and Silk reported net income of $1,000,000 and $400,000, respectively, for Year 9.
• During Year 9, $1.5 million of Silk's sales were to Pen. Of these sales, $714,280 remains in the December 31, Year 9, inventories of Pen. The December 31, Year 8, inventories of Pen contained $857,140 of merchandise purchased from Silk. Silk's sales to Pen are priced to provide it with a gross profit of 30%.
• Dividends declared on December 31, Year 9, were as follows:

Pen	$350,000
Silk	100,000

• Goodwill impairment tests resulted in losses of $52,200 in Year 4 and $8,700 in Year 9.
• Assume a 40% tax rate for both companies and that dividends have not yet been paid.

Required:

1. Calculate the acquisition differential.
2. Calculate goodwill if any.
3. Calculate acquisition non-controlling interests.
4. Calculate amortization schedule of required assets and liabilities.
5. Calculate intercompany profit/loss after tax.
6. Calculate consolidated retained earnings at January 1, Year 9.
7. Calculate consolidated net income at December 31, Year 9.
8. Calculate consolidated non-controlling interests at December 31, Year 9.
9. Prepare the balance sheet for Year 9.