Question

On January 2, 20X7, Victory Co. acquired 60% of the shares of Sauce Ltd. by issuing...

On January 2, 20X7, Victory Co. acquired 60% of the shares of Sauce Ltd. by issuing shares valued at $1,200,000. On this date, Sauce’s building and machinery had estimated remaining useful lives of 10 years and 5 years respectively. Both Victory and Sauce use straight-line depreciation. The separate-entity statements of financial position for Victory and Sauce just prior to the acquisition are presented below.

Statements of Financial Position
As of January 1, 20X7

Victory Co. Sauce Ltd.

(Carrying Value)

(Carrying Value)

(Fair Value)

Noncurrent assets:

   Land

$ -

$ 360,000

$ 640,000

   Building

2,080,000

1,200,000

1,040,000

   Accumulated depreciation

(320,000)

(400,000)

   Machinery

1,400,000

1,040,000

80,000

   Accumulated depreciation

(560,000)

(640,000)

   Total noncurrent assets

2,600,000

1,560,000

Current assets:

   Inventories

640,000

240,000

240,000

   Accounts receivable

560,000

160,000

160,000

   Cash

400,000

80,000

80,000

   Total current assets

1,600,000

480,000

Total assets

$4,200,000

$2,040,000

Shareholders’ Equity:

   Common shares

$1,760,000

$ 800,000

   Retained earnings

1,800,000

520,000

Total shareholders’ equity

3,560,000

1,320,000

Noncurrent liabilities:

   Long-term bank loan

-

400,000

400,000

Current liabilities:

   A/P and accrued liabilities

640,000

320,000

320,000

Total liabilities

640,000

720,000

Total liabilities and shareholders’ equity

$4,200,000

$2,040,000

The separate-entity financial statements for Victory and Sauce at the end of 20X7 are presented below.

Statements of Financial Position

As of December 31, 20X7

Victory Co. Sauce Ltd.

Noncurrent assets:

   Long-term loan receivable

$ 400,000

$ -

   Land

   -

1,080,000

   Building

2,400,000

1,200,000

   Accumulated depreciation

(360,000)

(480,000)

   Machinery

1,600,000

1,040,000

   Accumulated depreciation

(640,000)

(720,000)

   Investment in Sauce Ltd.

1,200,000

____-___

   Total noncurrent assets

4,600,000

2,120,000

Current assets:

   Inventories

1,280,000

480,000

   Amounts receivable

480,000

240,000

   Cash

224,000

80,000

   Total current assets

1,984,000

800,000

Total assets

$6,584,000

$2,920,000

Shareholders’ Equity:

   Common shares

$2,960,000

$ 800,000

   Retained earnings

2,784,000

1,080,000

Total shareholders’ equity

5,744,000

1,880,000

Noncurrent liabilities:

   Long-term loans

520,000

800,000

Current liabilities:

   Accounts payable

320,000

240,000

Total liabilities

840,000

1,040,000

Total liabilities and shareholders’ equity

$6,584,000

$2,920,000

Statements of Comprehensive Income

For the year ended December 31, 20X7


Victory Co. Sauce Ltd.

Sales

$16,000,000

$8,000,000

Dividend income

192,000

-

Other income

56,000

____-____

16,248,000

8,000,000

Cost of sales

8,000,000

4,800,000

Other operating expenses

7,088,000

2,240,000

Interest expense

16,000

80,000

Total expenses

15,104,000

7,120,000

Net income and comprehensive income

$ 1,144,000

$ 880,000

Statements of Change in Equity – Retained Earnings Section

For the year ended December 31, 20X7

Victory Co. Sauce Ltd.

Retained earnings, December 31, 20X6

$1,800,000

$ 520,000

Net income

1,144,000

880,000

Dividends declared

(160,000)

(320,000)

Retained earnings, December 31, 20X7

$2,784,000

$1,080,000

During 20X7, Victory and Sauce had the following transactions between them:

On June 30, 20X7, Sauce borrowed $400,000 from Victory at an interest rate of 10% (simple interest). Interest is to be paid at the end of each calendar year. Sauce did not pay the 20X7 interest.

During 20X7, Sauce sold $3,200,000 of goods to Victory. At the end of 2007, $800,000 of those goods were still in Victory’s ending inventory. Sauce charged Victory the same price it charges all its other customers.

During 20X7, Victory sold $1,600,000 of goods to Sauce. At the end of 20X7, $320,000 of those goods were still in Sauce’s ending inventory. Victory charged
Sauce the same price it charges all its other customers.

There was no impairment of goodwill for 20X7.

The separate-entity financial statements for Victory and Sauce at the end of 20X8 are presented below.

Statements of Financial Position

As of December 31, 20X8

Victory Co.. Sauce Ltd.      

Noncurrent assets:

   Land

$ -

$1,080,000

   Building

3,040,000

1,200,000

   Accumulated depreciation

(449,600)

(560,000)

   Machinery

1,840,000

1,500,000

   Accumulated depreciation

(544,000)

(516,000)

   Investment in Sauce

1,200,000

____-___

   Total noncurrent assets

5,086,400

2,704,000

Current assets:

   Inventories

1,040,000

440,000

   Accounts receivable

960,000

616,000

   Cash

510,400

420,000

   Total current assets

2,512,400

1,476,000

Total assets

$7,598,800

$4,180,000

Shareholders’ Equity:

   Common shares

$2,960,000

$ 800,000

   Retained earnings

2,784,000

1,640,000

Total shareholders’ equity

5,744,000

2,440,000

Noncurrent liabilities:

   Long-term loan

1,440,000

960,000

Current liabilities:

   Accounts payable

414,800

780,000

Total liabilities

1,854,800

1,740,000

Total liabilities and shareholders’ equity

$7,598,800

$4,180,000

Statements of Comprehensive Income

For the year ended December 31, 20X8


  Victory Co. Sauce Ltd.

Sales

$17,600,000

$8,800,000

Dividend income

288,000

-

Gain on sale of machine

80.000

Other income

96,000

____-____

18,064,000

8,800,000

Cost of sales

10,400,000

5,280,000

Other operating expenses

6,912,000

2,336,000

Interest expense

160,000

144,000

Total expenses

17,472,000

7,760,000

Net income and comprehensive income

$ 592,000

$ 1,040,000

Statements of Change in Equity – Retained Earnings Section

For the year ended December 31, 20X8

  Victory Co. Sauce Ltd.

Retained earnings, December 31, 20X7

$2,784,000

$1,080,000

Net income

592,000

1,040,000

Dividends declared

(592,000)

(480,000)

Retained earnings, December 31, 20X8

$2,784,000

$1,640,000

Additional information for 20X8:
   

During 20X8, Victory purchase $1,280,000 in goods from Sauce. At the end of the year, half of these goods were still in Victory’s inventory.

During December 20X8, Sauce purchased $320,000 in goods from Victory. At the end of the year, all of these goods were still in Sauce’s inventory.

Both Victory and Sauce’s gross margins for these goods were unchanged from previous years.

At the end of 20X8, Sauce did not pay the interest due on the loan from Victory, however, both companies had accrued the interest.

Required:

Calculate Victory’s consolidated retained earnings for 20X8. Do not prepare financial statements.

Homework Answers

Answer #1

Statement showing consolidated retained earnings for 2018:

Particulars $
Retained earnings of Victory for the year 20X8 27,84,000
Add: Share in revenue profits of Sauce Ltd. (Working Note 1) 182,400
Less: Unrealised profit on sale of inventory to Sauce Ltd. which is in inventory on 31-Dec-20X8 (320,000*100%*50%) (160,000)
Consolidated Retained Earnings for the year ended 20X8 2,806,400

Working Note 1 - Share in revenue profits of Sauce Ltd.

Particulars $
Revenue Profits (Profits earned by Sauce Ltd. post acquisition) (1,640,000 - 1,080,000) 560,000
Less: Unrealised profit on sale of inventory to Victory Ltd. which is in inventory on 31-Dec-20X8 (1,280,000*50%*40%) (256,000)
Net 304,000
60% of Revenue Profit - Share of VIctory Ltd. 182,400
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