Comprehensive Consolidation Method
Comprehensive Consolidation Method
Advanced Financial Accounting
Chapters 6/7: Intercompany Profits
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Comprehensive Consolidation Question
On December 31, 2021, Pokeman Limited purchased 60% of the outstanding ordinary shares of Surfer Company for $7,400,000 in cash. On acquisition date, the shareholders’ equity of Surfer consisted of $2,000,000 in ordinary shares and $4,000,000 in retained earnings.
Also on this date, Surfer had inventory with a fair value that was $200,000 less than its carrying value. In addition, Surfer had equipment with a fair value that was $300,000 greater than its carrying value. The equipment had an estimated useful life of 8 years on December 31, 2001. Surfer had an unrecorded Patent worth $120,000 and a useful life of 6 years. Finally, Surfer’s long term liabilities valued at $100,000 less than the carrying (book) value. The LT Liabilities had a ten year term ending in 2031.
Each year, consolidated goodwill is tested for impairment. Goodwill had a value of $1,300,000 at December 31, 2025 and $1,000,000 at December 31, 2026.
For the year ended December 31, 2026, the statements of profit or loss for Pokeman and Surfer were as follows:
|Cost of goods sold||18,000,000||8,200,000|
|Depreciation/ amortization expense||3,400,000||1,800,000|
|Income tax expense||1,100,000||500,000|
|At December 31, 2026, the condensed statements of financial position for the two companies were as follows:|
|Investment in Surfer||8,400,000||__________|
|Total liabilities and equity||52,000,000||26,000,000|
- Intercompany sales of goods are made to earn a margin of 30%
- In 2025, Surfer sold merchandise to Pokeman for $500,000, of which Pokeman sold 60% to unrelated third parties during 2025.
- During 2026, Surfer sold merchandise to Pokeman for $400,000, 75% of which remains in Pokeman’s inventory on December 31, 2026.
- In 2025, Pokeman sold merchandise to Surfer for $600,000; Surfer’s 2025 ending inventory contained 40% of this inventory.
- During 2026, Pokeman sold merchandise to Surfer for $750,000; Surfer’s 2026 ending inventory contains 30% of this inventory.
- Surfer owes Pokeman $200,000 as of December 31, 2026 for inventory purchases.
- Pokeman provides management services for various projects operated by Surfer. For 2026, the amount charged was $20,000 per month for a total of $240,000. Payments for these services are made on the 15th of the following month.
- During 2026, Pokeman declared and paid dividends of $1,600,000 while Surfer declared and paid dividends of $700,000.
- On January 1, 2023, Pokeman sold equipment to Surfer for $160,000. Pokeman had acquired the equipment on June 30, 2022 for $240,000 and had estimated a useful life of 6 years. There were no changes made to the remaining useful life when Surfer acquired the equipment.
- Also in 2023, Surfer sold a piece of land to Pokeman at a profit of $120,000. Half of this land was sold in 2026 to an unrelated third party.
- On July 1, 2026 Pokeman sold a building to Surfer for $500,000. The building had a net book value of $400,000 (after updating depreciation to the date of sale) on the books of Pokeman, with a remaining useful life of 5 years.
- Both companies have an income tax at the rate of 15%.
- Prepare Pokeman’s consolidated statement of profit or loss for the year ended and a statement of financial position as at December 31, 2026.