Parrot Company purchased 75% of the outstanding common shares and 50% of the outstanding preference shares of Saltines Inc. on January 1, 2020, on which date the balance sheet and fair values of Saltines' assets and liabilities were as follows:Saltines Inc.Balance Sheetas at December 31, 2019 Book Values Fair Values Cash $ 130 , 000 $ 130 , 000 Accounts receivable 120 , 000 110 , 000 Inventory 320 , 000 290 , 000 Capital assets (net) 720 , 000 800 , 000 $ 1 , 290 , 000 Current liabilities $ 190 , 000 $ 190 , 000 Long-term debt 300 , 000 300 , 000 Common shares 300 , 000 Preferred shares 200 , 000 Contributed surplus 50 , 000 Retained earnings 250 , 000 $ 1 , 290 , 000 \begin{array}{|l|r|r|}\hline & ext { Book Values } & ext { Fair Values } \\hline ext { Cash } & \$ 130,000 & \$ 130,000 \\hline ext { Accounts receivable } & 120,000 & 110,000 \\hline ext { Inventory } & 320,000 & 290,000 \\hline ext { Capital assets (net) } & 720,000 & 800,000 \\hline & \$ 1,290,000 & \\hline ext { Current liabilities } & \$ 190,000 & \$ 190,000 \\hline ext { Long-term debt } & 300,000 & 300,000 \\hline ext { Common shares } & 300,000 \\hline ext { Preferred shares } & 200,000 \\hline ext { Contributed surplus } & 50,000 \\hline ext { Retained earnings } & 250,000 \\hline & \$ 1,290,000 \\hline\end{array} Cash Accounts receivable Inventory Capital assets (net) Current liabilities Long-term debt Common shares Preferred shares Contributed surplus Retained earnings Book Values $130 , 000 120 , 000 320 , 000 720 , 000 $1 , 290 , 000 $190 , 000 300 , 000 300 , 000 200 , 000 50 , 000 250 , 000 $1 , 290 , 000 Fair Values $130 , 000 110 , 000 290 , 000 800 , 000 $190 , 000 300 , 000

Question

Parrot Company purchased 75% of the outstanding common shares and 50% of the outstanding preference shares of Saltines Inc. on January 1, 2020, on which date the balance sheet and fair values of Saltines' assets and liabilities were as follows:Saltines Inc.Balance Sheetas at December 31, 2019  Book Values   Fair Values   Cash  $ 130 , 000 $ 130 , 000  Accounts receivable  120 , 000 110 , 000  Inventory  320 , 000 290 , 000  Capital assets (net)  720 , 000 800 , 000 $ 1 , 290 , 000  Current liabilities  $ 190 , 000 $ 190 , 000  Long-term debt  300 , 000 300 , 000  Common shares  300 , 000  Preferred shares  200 , 000  Contributed surplus  50 , 000  Retained earnings  250 , 000 $ 1 , 290 , 000 \begin{array}{|l|r|r|}\hline  &  	ext { Book Values }  &  	ext { Fair Values } \\hline 	ext { Cash }  &  \$ 130,000  &  \$ 130,000 \\hline 	ext { Accounts receivable }  &  120,000  &  110,000 \\hline 	ext { Inventory }  &  320,000  &  290,000 \\hline 	ext { Capital assets (net) }  &  720,000  &  800,000 \\hline  &  \$ 1,290,000  &  \\hline 	ext { Current liabilities }  &  \$ 190,000  &  \$ 190,000 \\hline 	ext { Long-term debt }  &  300,000  &  300,000 \\hline 	ext { Common shares }  &  300,000 \\hline 	ext { Preferred shares }  &  200,000 \\hline 	ext { Contributed surplus }  &  50,000 \\hline 	ext { Retained earnings }  &  250,000 \\hline  &  \$ 1,290,000 \\hline\end{array}  Cash   Accounts receivable   Inventory   Capital assets (net)   Current liabilities   Long-term debt   Common shares   Preferred shares   Contributed surplus   Retained earnings  ​  Book Values  $130 , 000 120 , 000 320 , 000 720 , 000 $1 , 290 , 000 $190 , 000 300 , 000 300 , 000 200 , 000 50 , 000 250 , 000 $1 , 290 , 000 ​  Fair Values  $130 , 000 110 , 000 290 , 000 800 , 000 $190 , 000 300 , 000 ​ ​

Kerri Deans · Accepted Answer

Final Answer :

Parrot paid $460,000 for the common shares and $105,000 for the preference shares. The contributed surplus arose from the issue of the preferred shares at a price higher than their stated value. The preferred shares paid cumulative dividends of 5% of their stated value but dividends for 2018 and 2019 were unpaid. The shares were redeemable, at the option of the issuer, at a premium of 8%.
The capital assets of Saltines had a remaining useful life of ten years at January 1, 2010. Any unallocated acquisition differential would be treated as goodwill, which is assessed annually for impairment. Parrot accounts for its interest in Saltines using the cost method and accounts for the non-controlling interest in its consolidated financial statements using the fair value enterprise method.
Parrot's net income for 2020 was $300,000 and Parrot paid dividends of $150,000 on December 31, 2020. Saltines' net income for 2020 was $120,000 before a loss from discontinued operations of $60,000 (net of tax). Saltines paid dividends of $75,000 in 2020. (Parrot included all dividends received in its income for 2020.)
Parrot has no contributed surplus on its own balance sheet as at the end of 2020. Calculate the amount of the contributed surplus shown on the consolidated balance sheet of Parrot and its subsidiary as at December 31, 2020.

$3,000\begin{array}{|l|r|}\hline \text { Amount paid for preferred shares } & \$ 105,000 \\\hline \text { Carrying value of } 50 \% \text { of preferred shares at Dec. } 31,2020 & 108,000 \\\$ 200,000+\$ 16,000=\$ 216,000 \times 50 \% & \\\hline \text { Contributed surplus }&\$3,000\\\hline\end{array}

Definitions

Learning Objectives

Learning Objectives

Related questions