Reference no: EM13333404

Problem

On January 1, 20X4, Chee Co. purchased 80% of the outstanding shares of Tyme Ltd. for $2,000,000 in cash. On the acquisition date, Tyme's shareholders' equity consisted of the following:

Common shares        $1,600,000
  Retained earnings          800,000

At the time of acquisition, the carrying values of Tyme's identifiable net assets equalled their fair market values with the following exceptions:

• The fair value of a building with an estimated  remaining life of 10 years was $480,000 less than its carrying value.
• A long-term liability that matures in 8 years has  a fair value that is $400,000 less than its carrying value.

The condensed income statements for Chee and Tyme are presented below:

Income Statements

Year ended December 31, 20X8

Additional information:

• At the beginning of 20X5, Chee acquired a piece of  equipment from Tyme for $168,000.  Tyme had purchased the equipment 5 years ago for $320,000. When Tyme purchased the equipment, it  had expected that it would have a useful life of 20 years, with no  residual value. Chee concurred with  this estimate (i.e., at the time of purchase, Chee expected that the  equipment would have a remaining useful life of 15 years). Both Tyme and Chee use the straight-line  method of amortization.
• Sale of goods from Chee to Tyme:
  
  Gross    Unsold Goods in Tyme's
  Year     Sales Margin   Inventory at Year-End
  20X7    $400, 000 30%        $80,000
  20X8    320,000 30%         72,000
• Sale of goods from Tyme to Chee:
  
  Gross    Unsold Goods in Chee's
  Year     Sales Margin   Inventory at Year-End
  20X7    $240, 000 40%        $56,000
  20X8    200,000 40%         48,000
• All goods in inventory at year-end were sold to  third parties in the subsequent year.
• On August 31, 20X8, Chee purchased a tract of land  from Tyme for $106,400 in cash.  Tyme had acquired the land 12 years previously for $52,000.
• During 20X8, Chee declared and paid dividends of  $200,000 and Tyme declared and paid dividends of $32,000.
• There was no impairment of goodwill at the end of  20X8.
• Chee accounts for its investments using the cost  method and uses the entity theory method to report its business  combinations.

Required:

a) Prepare a consolidated income statement for Chee Co. for the year ended December 31, 20X8. Be sure to show your supporting calculations.

b) Prove that your calculation of net income attributable to the shareholders of Chee Co. in (a) is correct by calculating Chee's net income using the equity method.