Asked by Jordan Pollock on Jun 11, 2024
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Brand X Inc. purchased a controlling interest in Brand Y Inc. on January 1, 2020. On that date, Brand Y Inc. had common shares and retained earnings worth $180,000 and $20,000, respectively. Goodwill is tested annually for impairment. At the date of acquisition, Brand Y's assets and liabilities were assessed for fair value as follows:
Inventory $5,000 less than book value Equipment $30,000 less than book value Patent $24,000 greater than book value Bonds Payable $5,000 less than book value \begin{array}{|l|r|}\hline \text { Inventory } & \$ 5,000 \text { less than book value } \\\hline \text { Equipment } & \$ 30,000 \text { less than book value } \\\hline \text { Patent } & \$ 24,000 \text { greater than book value } \\\hline \text { Bonds Payable } & \$ 5,000 \text { less than book value }\\\hline\end{array} Inventory Equipment Patent Bonds Payable $5,000 less than book value $30,000 less than book value $24,000 greater than book value $5,000 less than book value The balance sheets of both companies, as at December 31, 2020 are disclosed below:
Brand X Inc. Brand Y Inc. Cash $200,000$45,000 Accounts Receivable $100,000$40,000 Inventory $80,000$55,000 Equipment (net) $220,000$100,000 Patent $60,000 Investment in Brand Y $348,000 Total Assets $948,000$300,000 Current Liabilities $480,000$53,000 Bonds Payable $270,000$50,000 Common Shares $100,000$180,000 Retained Earnings $98,000$19,000 Total Liabilities and Equity $948,000$300,000\begin{array}{|l|r|r|}\hline & \text { Brand X Inc. } & \text { Brand Y Inc. } \\\hline \text { Cash } & \$ 200,000 & \$ 45,000 \\\hline \text { Accounts Receivable } & \$ 100,000 & \$ 40,000 \\\hline \text { Inventory } & \$ 80,000 & \$ 55,000 \\\hline \text { Equipment (net) } & \$ 220,000 & \$ 100,000 \\\hline \text { Patent } & & \$ 60,000 \\\hline \text { Investment in Brand Y } & \$ 348,000 \\\hline \text { Total Assets } & \$ 948,000 & \$ 300,000 \\\hline \text { Current Liabilities } & \$ 480,000 & \$ 53,000 \\\hline \text { Bonds Payable } & \$ 270,000 & \$ 50,000 \\\hline \text { Common Shares } & \$ 100,000 & \$ 180,000 \\\hline \text { Retained Earnings } & \$ 98,000 & \$ 19,000 \\\hline \text { Total Liabilities and Equity } & \$ 948,000 & \$ 300,000\\\hline\end{array} Cash Accounts Receivable Inventory Equipment (net) Patent Investment in Brand Y Total Assets Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity Brand X Inc. $200,000$100,000$80,000$220,000$348,000$948,000$480,000$270,000$100,000$98,000$948,000 Brand Y Inc. $45,000$40,000$55,000$100,000$60,000$300,000$53,000$50,000$180,000$19,000$300,000 The net incomes for Brand X and Brand Y for the year ended December 31, 2020 were $1,000 and $50,000 respectively. Brand X did not declare any dividends during the year. However, Brand Y paid $51,000 in dividends to make up for several years in which the company had never paid any dividends.
An impairment test conducted on December 31, 2020 revealed that the Goodwill should actually have a value $2,000 lower than the amount calculated on the date of acquisition.
Both companies use a FIFO system, and Brand Y's inventory on the date of acquisition was sold during the year. Brand Y's equipment and patent have useful lives of 10 years and 6 years respectively from the date of acquisition. All bonds payable mature on January 1, 2025.
Prepare Brand X's consolidated balance sheet as at December 31, 2020, assuming that Brand X purchased 100% of Brand Y for $350,000 and accounts for its investment using the equity method.
Goodwill Impairment
The decrease in the value of a company’s goodwill, which occurs when the market value of the entity is less than its recorded value on the balance sheet.
Fair Value Adjustment
An accounting process to adjust the book value of an asset or liability to reflect its current market value.
- Gain insight into the procedural aspects of the Equity Method for investment accounting.
- Understand adjustments necessary for inventory valuation differences at acquisition.
- Assess and account for goodwill and its impairment losses.
Verified Answer
JY
Jazmine YvetteJun 14, 2024
Final Answer :
Brand X Inc.
Consolidated Balance Sheet
As at December 31, 2020
Cash $245,000 Accounts Receivable $140,000 Inventory (80+55−5+5)$135,000 Equipment (net) (220+100−30+3)$293,000 Patent (60+24−4)$80,000 Goodwill ∗ seebelow $154,000 Total Assets $1,047,000 Current Liabilities (270+50−5+1)$533,000 Bonds Payable $316,000 Common Shares $100,000 Retained Earnings $98,000 Total Liabilities and Equity $1,047,000\begin{array}{|l|r|r|}\hline \text { Cash } & & \$ 245,000 \\\hline \text { Accounts Receivable } & \$ 140,000 \\\hline \text { Inventory } & (80+55-5+5) & \$ 135,000 \\\hline \text { Equipment (net) } & (220+100-30+3) & \$ 293,000 \\\hline \text { Patent } & (60+24-4) & \$ 80,000 \\\hline \text { Goodwill } & * \text { seebelow } & \$ 154,000 \\\hline \text { Total Assets } & & \mathbf{\$ 1 , 0 4 7 , 0 0 0} \\\hline \text { Current Liabilities } & (270+50-5+1) & \$ 533,000 \\\hline \text { Bonds Payable } && \$ 316,000 \\\hline \text { Common Shares } && \$ 100,000 \\\hline \text { Retained Earnings } && \$ 98,000 \\\hline \text { Total Liabilities and Equity } & & \mathbf{\$ 1 , 0 4 7 , 0 0 0} \\\hline\end{array} Cash Accounts Receivable Inventory Equipment (net) Patent Goodwill Total Assets Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity $140,000(80+55−5+5)(220+100−30+3)(60+24−4)∗ seebelow (270+50−5+1)$245,000$135,000$293,000$80,000$154,000$1,047,000$533,000$316,000$100,000$98,000$1,047,000 Note: Consolidated Retained Earnings are the same as the parent's retained earnings under the Equity Method.
The following explanation may help students understand how some of these figures were derived:
Goodwill:
Purchase Price $350,000 Less: NBV of net assets 200,000 AD $150,000 Allocated Inventory (5,000) Equipment (30,000) Patent 24,000 Bonds payable 5,000 Goodwill $156,000 Less: Impairment loss ($2,000) Goodwill-Dec. 31/20$154,000\begin{array}{|l|r|}\hline \text { Purchase Price } & \$ 350,000 \\\hline \text { Less: NBV of net assets } & 200,000 \\\hline \text { AD } & \$ 150,000 \\\hline \text { Allocated } & \\\hline \text { Inventory } & (5,000) \\\hline \text { Equipment } &(30,000) \\\hline \text { Patent } & 24,000 \\\hline \text { Bonds payable } & 5,000 \\\hline \text { Goodwill } & \$ 156,000 \\\hline \text { Less: Impairment loss } & (\$ 2,000) \\\hline \text { Goodwill-Dec. } \mathbf{3 1 / 2 0} & \$ 154,000 \\\hline\end{array} Purchase Price Less: NBV of net assets AD Allocated Inventory Equipment Patent Bonds payable Goodwill Less: Impairment loss Goodwill-Dec. 31/20$350,000200,000$150,000(5,000)(30,000)24,0005,000$156,000($2,000)$154,000
Consolidated Balance Sheet
As at December 31, 2020
Cash $245,000 Accounts Receivable $140,000 Inventory (80+55−5+5)$135,000 Equipment (net) (220+100−30+3)$293,000 Patent (60+24−4)$80,000 Goodwill ∗ seebelow $154,000 Total Assets $1,047,000 Current Liabilities (270+50−5+1)$533,000 Bonds Payable $316,000 Common Shares $100,000 Retained Earnings $98,000 Total Liabilities and Equity $1,047,000\begin{array}{|l|r|r|}\hline \text { Cash } & & \$ 245,000 \\\hline \text { Accounts Receivable } & \$ 140,000 \\\hline \text { Inventory } & (80+55-5+5) & \$ 135,000 \\\hline \text { Equipment (net) } & (220+100-30+3) & \$ 293,000 \\\hline \text { Patent } & (60+24-4) & \$ 80,000 \\\hline \text { Goodwill } & * \text { seebelow } & \$ 154,000 \\\hline \text { Total Assets } & & \mathbf{\$ 1 , 0 4 7 , 0 0 0} \\\hline \text { Current Liabilities } & (270+50-5+1) & \$ 533,000 \\\hline \text { Bonds Payable } && \$ 316,000 \\\hline \text { Common Shares } && \$ 100,000 \\\hline \text { Retained Earnings } && \$ 98,000 \\\hline \text { Total Liabilities and Equity } & & \mathbf{\$ 1 , 0 4 7 , 0 0 0} \\\hline\end{array} Cash Accounts Receivable Inventory Equipment (net) Patent Goodwill Total Assets Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity $140,000(80+55−5+5)(220+100−30+3)(60+24−4)∗ seebelow (270+50−5+1)$245,000$135,000$293,000$80,000$154,000$1,047,000$533,000$316,000$100,000$98,000$1,047,000 Note: Consolidated Retained Earnings are the same as the parent's retained earnings under the Equity Method.
The following explanation may help students understand how some of these figures were derived:
Goodwill:
Purchase Price $350,000 Less: NBV of net assets 200,000 AD $150,000 Allocated Inventory (5,000) Equipment (30,000) Patent 24,000 Bonds payable 5,000 Goodwill $156,000 Less: Impairment loss ($2,000) Goodwill-Dec. 31/20$154,000\begin{array}{|l|r|}\hline \text { Purchase Price } & \$ 350,000 \\\hline \text { Less: NBV of net assets } & 200,000 \\\hline \text { AD } & \$ 150,000 \\\hline \text { Allocated } & \\\hline \text { Inventory } & (5,000) \\\hline \text { Equipment } &(30,000) \\\hline \text { Patent } & 24,000 \\\hline \text { Bonds payable } & 5,000 \\\hline \text { Goodwill } & \$ 156,000 \\\hline \text { Less: Impairment loss } & (\$ 2,000) \\\hline \text { Goodwill-Dec. } \mathbf{3 1 / 2 0} & \$ 154,000 \\\hline\end{array} Purchase Price Less: NBV of net assets AD Allocated Inventory Equipment Patent Bonds payable Goodwill Less: Impairment loss Goodwill-Dec. 31/20$350,000200,000$150,000(5,000)(30,000)24,0005,000$156,000($2,000)$154,000
Learning Objectives
- Gain insight into the procedural aspects of the Equity Method for investment accounting.
- Understand adjustments necessary for inventory valuation differences at acquisition.
- Assess and account for goodwill and its impairment losses.