ASSIGNMENT 5

Question 1 (25 marks)

On December 31, 2013, Poplar Inc. purchased 80% of the 600,000 outstanding common shares of Spruce Ltd for
$5.4 million in cash. On that date, the shareholders’ equity of Spruce totalled $6 million and consisted of $1 million
in common shares, $1 million in contributed surplus and $4 million in retained earnings. On December 31, 2013,
Spruce had a plot of land with a fair value that was $100,000 greater than its carrying value, equipment (with a
remaining life of 6 years) with a fair value that was $120,000 greater than its carrying value and long-term debt
maturing on December 31, 2021 with a fair value that was $200,000 greater than its book value. Any remaining
purchase discrepancy was allocated to goodwill which was assessed annually for impairment.

For the year ended December 31, 2019, the condensed income statements for the two companies were as follows:

Poplar Inc. Spruce Ltd.

Sales and other revenue $ 12,500,000 $ 5,600,000
Cost of goods sold 8,000,000 4,000,000
Amortization expense 1,500,000 1,000,000
Other expenses 1,100,000 1,400,000
Income tax expense 700,000 (200,000)

Net income (loss) $ 1,200,000 $ (600,000)

At December 31, 2019, the condensed balance sheets of the two companies were as follows:
Poplar Inc. Spruce Ltd.
Total assets $ 29,000,000 $ 11,100,000

Liabilities 5,000,000 1,200,000

Common shares 11,000,000 1,000,000
Contributed surplus 1,100,000 1,000,000
Retained earnings 11,900,000 7,900,000
$ 29,000,000 $ 11,100,000

Other information:
1. Poplar values the noncontrolling interest in its subsidiary based on the market value of the subsidiary’s shares
immediately following the acquisition. When the markets opened on January 2, 2014, shares of Spruce were
trading for $11 per share.
2. Impairment of the controlling interest in the subsidiary’s goodwill was $85,000 in 2015 and $170,000 in 2019.
Impairment of the noncontrolling interest in goodwill was $15,000 in 2015 and $30,000 in 2019. There was no
goodwill impairment recognized in any other year.
3. On July 1, 2018, Spruce sold the land to which the purchase discrepancy related to an unrelated company,
recording a profit of $200,000 before income taxes from the sale.
4. On January 1, 2018, Spruce sold a machine to Poplar for $30,000. When Spruce purchased the machine on
January 1, 2011 for $80,000, it was estimated that its service life would be ten years with no salvage value.
There was no change in the estimated service life or salvage value at the time of the intercompany sale.
5. During 2019, Poplar sold merchandise to Spruce for $100,000, a price that included a gross profit of $40,000.
During 2019, half of this merchandise was resold by Spruce and the other half remained in its December 31,
2019, inventories. On December 31, 2018, the inventories of Spruce contained merchandise purchased from
Poplar on which Poplar had recorded a gross profit of $25,000.
6. On December 31, 2019, Spruce owed Poplar $100,000. (At the end of 2018, Spruce owed Poplar $50,000.)
7. During 2019, Poplar declared and paid dividends of $300,000 and Spruce declared and paid dividends of
$100,000.
8. Poplar accounts for its investment using the cost method.
9. Both companies pay income tax at a marginal rate of 40%. In preparing its consolidated financial statements,
Poplar accounts fully for the future income taxes arising from intercompany transactions but does not account
for income taxes in its allocation of the purchase discrepancy.
Required:
(a) Calculate the consolidated net income of Poplar Inc. and its subsidiary Spruce Ltd. for the year ended
December 31, 2019. (7 marks)
(b) Prepare the condensed consolidated balance sheet of Poplar Inc. and its subsidiary Spruce Ltd. as at
December 31, 2019. Show your calculations of consolidated retained earnings and noncontrolling interest.
(18 marks)
*****
Question 2 (25 marks)
The Statements of Financial Position of Plymouth Incorporated and Studebaker Incorporated at December 31, 2018,
were:
STATEMENTS OF FINANCIAL POSITION
as at December 31, 2018

Plymouth Inc. Studebaker Inc.

Cash $ 26,000 $ 97,600
Receivables 50,000 177,200
Inventories 160,000 124,000
Investment in subsidiary 415,800 -
Property, plant and equipment 1,480,000 980,000
Accumulated amortization (1,251,800) (696,800)
Patents (net of amortization) - 62,000
$ 880,000 $ 744,000
Current liabilities $ 120,000 $ 106,000
Dividends payable 12,000 60,000
Bonds payable 188,000 -
Common shares 400,000 300,000
Retained earnings 160,000 278,000
$ 880,000 $ 744,000
You are provided with information to enable you to prepare consolidated financial statements for the two
companies as at December 31, 2018:

 Plymouth Incorporated acquired 90% of the outstanding 100,000 common shares of Studebaker Incorporated
on July 1, 2011, at a cost of $415,800. Plymouth accounts for its investment in Studebaker using the cost
method and values the noncontrolling interest in its subsidiary based on the value of its shares on the national
stock exchange immediately after the acquisition. When the markets opened on July 2, 2011, shares in
Studebaker were trading for $4.25 per share.
 On the acquisition date, the shareholders’ equity of Studebaker amounted to $350,000 and its accumulated
amortization amounted to $190,000. Inventory on its balance sheet was overvalued by $24,000, buildings with
a remaining life of 10 years were undervalued by $40,000 and the patents (which had a carrying value of
$80,000) had a fair value of $112,000 and a remaining economic life of eight years. There were no changes in
Studebaker’s share capital between the acquisition date and the end of 2018.
 From the acquisition date to December 31, 2017, goodwill impairment totalled $16,000 of which $1,000
pertained to the noncontrolling interest share of the goodwill. Goodwill impairment in 2018 indicated a further
loss of $20,000 of which $800 related to the noncontrolling interest share.
 During 2018, Plymouth reported net income of $82,000 and declared dividends of $50,000 and Studebaker
declared net income of $126,000 and declared dividends of $100,000.
 Plymouth has been selling merchandise to its subsidiary on a regular basis with the goods priced to provide
Plymouth with a gross profit of 30%. Such sales amounted to $100,000 in 2017 and $150,000 in 2018. On
January 1, 2018, the inventory of Studebaker contained goods purchased from Plymouth at a cost of $36,000
and its inventory at December 31, 2018 contained goods purchased from
Plymouth at a cost of $44,000.
 On August 1, 2016, Studebaker sold some land to Plymouth at a profit of $36,000. During 2018, Plymouth sold
one-third of this land to an unrelated party.
 Plymouth also charges royalties to Studebaker. During 2018, these charges totalled $60,000. At December 31,
2018, Studebaker owed Plymouth $10,000 for royalties and an additional $12,000 for inventory purchases.
 Both companies pay income tax at a rate of 40%.

Required:
a) Prepare the consolidated statement of financial position of Plymouth and its subsidiary Studebaker as at
December 31, 2018.
b) Prepare the journal entries that would be made on the books of Plymouth for the year ended December 31,
2018, if Plymouth accounted for its investment in Studebaker using the equity method.

END OF ASSIGNMENT