Advanced Accounting Case 5

Points:
Case 5.1 – 40 points
Case 5.2 – 40 points

Total (80 points)

Case 5.1
Europe Inc. acquired 75% of Asia Corp.’s common stock for $20,100,000 paid in cash on January 2, 2017. The estimated fair value of the noncontrolling interest was $5,900,000. Asia’s book value at the date of acquisition was $10,000,000, and its identifiable net assets were fairly stated except for previously unreported completed technology, valued at $4,000,000, with a remaining life of 5 years, straight-line. It is now December 31, 2020, and you are preparing consolidated financial statements for Europe and Asia. Following is information on intercompany transactions:
1. On January 2, 2018, Europe sold equipment to Asia for $6 million and recorded a gain of $2 million. The equipment had a remaining life of 10 years at that time.
2. Asia supplies Europe with component parts for its products, at a markup of 20% on cost. During 2020, Asia made sales totaling $20 million to Europe. Europe had parts purchased for $1.8 million and $2.4 million in its 2020 beginning and ending inventory balances, respectively (Hint: $1.8 million is the unsold inventory from last year and $2.4 million is the unsold inventory of this year).
3. Europe sells materials to Asia for use in its manufacturing processes, with a 20% gross profit ratio. During 2020, Europe made sales totaling $15 million to Asia. Asia had materials purchased for $3 million and $2.8 million in its 2020 beginning and ending inventory balances, respectively. (Hint: $3 million is the unsold inventory from last year and $2.8 million is the unsold inventory of this year).
Goodwill arising from this acquisition was impaired by a total of $3 million during the years 2017-2019, and no further goodwill impairment occurred in 2020. The separate December 31, 2020 trial balances of Europe and Asia appear below, before Europe’s end-year adjustment to record its equity in Asia’s income for 2020.
Balance Sheet at December 31, 2020 (in thousands)
Europe Asia
Cash 1,000 2,500
A/R, net 5,600 10,000
Inventories 70,000 30,000
Plant and Equipment, net 460,000 150,000
Investment in Asia 20,225
Total Assets 556,825 192,500
Current Liabilities 4,000 2,800
Long-term debt 489,825 163,700
Capital Stocks 5,000 2,000
Retained earnings, January 1 90,000 20,000
Dividend (40,000) (3,000)
Net Income 8,000 7,000
Total equities 556,825 192,500
Income Statement 2020 (in thousands)
Europe Asia
Sales 150,000 50,000
Cost of Sales (100,000) (35,000)
Other Expenses (42,000) (8,000)
Income from Asia
Net Income 8,000 7,000

Required:
1. Determine the Goodwill assigned to Non-controlling interest at the acquisition date (2 points).
2. Determine the balance for the account “Investment in Asia” at December 31, 2020 after Europe’s end-year adjustment to record its equity in Asia’s income for 2020 (Hint: Dividend adjustment is already included in the balance of investment). Show your calculations (3 points).
3. Determine the balance of the account “Equity in Asia’s Income” for the year 2020. Show your calculations (2 points).
4. Calculate the balance of NCI at December 31, 2020. Provide detail calculations of the three components of this balance (3 points).
5. Prepare consolidation adjustment entries (20 points).
6. Complete a consolidated worksheet for Europe Inc. and its subsidiary Asia as of December 31, 2020. Use the format provided on the next page (10 points).

Accounts Europe Asia Consolidation Entries Noncontrolling Interest Consolidated Totals
Debit Credit
Sales (150,000) (50,000)
Cost of Sales 100,000 35,000

Operating Expenses (Including Depreciation) 42,000 8,000
Equity in Asia’s Income
Separate company net income (7,000)
Consolidated Net Income
NCI in Asia Income
Net Income to Controlling Interest

Retained Earnings 1/1/20
Europe Inc. (90,000)
Asia Corp. (20,000)

Net Income (above) (7,000)
Dividend paid 40,000 3,000
Retained Earnings 12/31/2020 (24,000)

Cash 1,000 2,500
A/R 5,600 10,000
Inventory 70,000 30,000
Plant and Equipment, net 460,000 150,000
Investment in Asia

Total Assets 192,500
Current Liabilities (4,000) (2,800)
Long-term debt (489,825) (163,700)
Capital Stocks (5,000) (2,000)

NCI in Asia 1/1/2020

NCI in Asia 12/31/2020
Retained Earnings 12/31/2020 (24,000)
Total Liabilities and Equities (192,500)

Case 5.2
On 1/1/2019, America Corp. bought a 15% interest in Australia Corp. The acquisition price of $195,000 reflected an assessment that all of Australia’s accounts were fairly valued within the accounting records. During 2019, Australia reported net income of $100,000 and paid cash dividends of $30,000. America possessed the ability to influence significantly Australia’s operations, and therefore, accounted for this investment using the equity method.
On 1/1/2020, America acquired an additional 80% for $1,500,000 cash. The consideration transferred by America in its second acquisition of Australia represents the best available evidence for measuring the fair value of Australia Corp. at 1/1/2020.
Also, as of 1/1/2020, America assessed a $400,000 value to an unrecorded customer contract recently negotiated by Australia. The customer contract is anticipated to have a remaining life of 4-years. Australia’s other assets and liabilities were judged to have fair values equal to their book values. America elects to continue applying the equity method to this investment for internal reporting purposes.
At December 31, 2020, the following financial information is available for consolidation:
BALANCE SHEET America Australia
December 31, 2020 December 31, 2020

Current Assets 177,500 550,000
Investment in Australia Company ? 0
Property, plant, and equipment 826,000 610,000
Patented Technology 850,000 410,000
Total Assets ? 1,570,000

Liabilities 1,300,000 90,000
Common Stock 900,000 550,000
APIC 180,000 220,000
R/E January 1, 2020 965,000 600,000
Net Income ? 150,000
Dividend Paid (140,000) (40,000)
Total Liabilities + Equity ? 1,570,000

INCOME STATEMENT America Australia
2020 2020
Revenue 931,000 380,000
Operating Expenses (615,000) (230,000)
Income in Australia’s earning ?
Gain(Loss) on revaluation of Investment in Australia to fair value ?
Net Income ? 150,000

Required:
1. Calculate the following amounts on America pre-consolidation 2020 statement (10 points):
a. Investment in Australia
b. Income in Australia’s earnings
c. Gain (Loss) on Revaluation of Investment in Australia to fair value
2. Calculate the balance of NCI at December 31, 2020. Provide detail calculations (5 points).
3. Prepare a worksheet to consolidate the financial statements of these two companies as of December 31, 2020 (25 points).