Better Food Company recently acquired an olive oil processing company that has an annual capacity

Better Food Company recently acquired an olive oil processing company that has an annual capacity of 2,000,000 liters and that processed and sold 1,400,000 liters last year at a market price of $4 per liter. The purpose of the acquisition was to furnish oil for the Cooking Division. The Cooking Division needs 800,000 liters of oil per year. It has been purchasing oil from suppliers at the market price. Production costs at capacity of the olive oil company, now a division, are as follows:

Direct materials per liter $1.00
Direct processing labor 0.50
Variable processing overhead 0.24
Fixed processing overhead 0.40
Total $2.14

Management is trying to decide what transfer price to use for sales from the newly acquired company to the Cooking Division. The manager of the Olive Oil Division argues that $4, the market price, is appropriate. The manager of the Cooking Division argues that the cost of $2.14 should be used, or perhaps a lower price, since fixed overhead cost should be recomputed with the larger volume. Any output of the Olive Oil Division not sold to the Cooking Division can be sold to outsiders for $4 per liter.

Question 1: Compute the operating income for the Olive Oil Division using a transfer price of $4 (5 points).

Question 2: Compute the operating income for the Olive Oil Division using a transfer price of $2.14 (5 points).

Question 3: What transfer price(s) do you recommend? Compute the operating income for the Olive Oil Division using your recommendation (5 points).

Click here for the solution: Better Food Company recently acquired an olive oil processing company that has an annual capacity

If intangible assets are acquired for stock, how is the cost of the intangible determined?

If intangible assets are acquired for stock, how is the cost of the intangible determined?

Click here for the solution: If intangible assets are acquired for stock, how is the cost of the intangible determined?

Wilkins Food Products, Inc. acquired a packaging machine from Lawrence Specialists Corporation

E 20-21 Error in amortization schedule

Wilkins Food Products, Inc. acquired a packaging machine from Lawrence Specialists Corporation. Lawrence completed construction of the machine on January 1, 2009. In payment for the machine Wilkins issued a three-year installment note to be paid in three equal payments at the end of each year. The payments include interest at the rate of 10%. Lawrence made a conceptual error in preparing the amortization schedule which Wilkins failed to discover until 2011. As a result of the error, Wilkins understated interest expense by $45,000 in 2009 and $40,000 in 2010.

Required:
1. Determine which accounts are incorrect as a result of these errors at January 1, 2011, before any adjustments. Explain your answer. (Ignore income taxes.)
2. Prepare a journal entry to correct the error.
3. What other step(s) would be taken in connection with the error?

Click here for the solution: Wilkins Food Products, Inc. acquired a packaging machine from Lawrence Specialists Corporation

American Food Services, Inc., acquired a packaging machine from Barton and Barton Corporation

E 14-18 Installment note; amortization schedule

American Food Services, Inc., acquired a packaging machine from Barton and Barton Corporation. Barton and Barton completed construction of the machine on January 1, 2011. In payment for the $4 million machine, American Food Services issued a four-year installment note to be paid in four equal payments at the end of each year. The payments include interest at the rate of 10%.

Required:
1. Prepare the journal entry for American Food Services' purchase of the machine on January 1, 2011.
2. Prepare an amortization schedule for the four-year term of the installment note.
3. Prepare the journal entry for the first installment payment on December 31, 2011.
4. Prepare the journal entry for the third installment payment on December 31, 2013.

Click here for the solution: American Food Services, Inc., acquired a packaging machine from Barton and Barton Corporation

Glaser Services acquired 30% of the outstanding common stock of Nickels Company on January 1, 2008

Glaser Services acquired 30% of the outstanding common stock of Nickels Company on January 1, 2008, by paying $800,000 for the 45,000 shares. Nickels declared and paid $0.30 per share cash dividends on March 15, June 15, September 15, and December 15, 2008. Nickels reported net income of $320,000 for the year. At December 31, 2008, the market price of Nickels common stock was $24 per share.

Instructions
a) Prepare the journal entries for Glaser Services for 2008 assuming Glaser cannot exercise significant influence over Nickels. (Use the cost method and assume that Nickels common stock should be classified as a trading security.)
b) Prepare the journal entries for Glaser Services for 2008, assuming Glaser can exercise significant influence over Nickels. Use the equity method.
c) In tabular form, indicate the investment and income statement account balances at December 31, 2008, under each method of accounting.


Click here for the solution: Glaser Services acquired 30% of the outstanding common stock of Nickels Company on January 1, 2008

At the beginning of 2009, Metatec Inc. acquired Ellison Technology Corporation for $600 million

P11-12 Depreciation and amortization; impairment

At the beginning of 2009, Metatec Inc. acquired Ellison Technology Corporation for $600 million. In addition to cash, receivables, and inventory, the following assets and their fair values were also acquired:

AND SO ON

The plant and equipment are depreciated over a 10-year useful life on a straight-line basis. There is no estimated residual value. The patent is estimated to have a 5-year useful life, no residual value, and is amortized using the straight-line method.

At the end of 2011, a change in business climate indicated to management that the assets of Ellison might be impaired. The following amounts have been determined:

*After first recording any impairment losses on plant and equipment and the patent.


Click here for the solution: At the beginning of 2009, Metatec Inc. acquired Ellison Technology Corporation for $600 million

Tanner-UNF Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2011

E 12-19 Fair value option; held-to-maturity investments

[This is a variation of Exercise 12-1 focusing on the fair value option.]

Tanner-UNF Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2011. Company management has the positive intent and ability to hold the bonds until maturity, but when the bonds were acquired Tanner-UNF decided to elect the fair value option for accounting for its investment. The market interest rate (yield) was 8% for bonds of similar risk and maturity. Tanner-UNF paid $200 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2011, was $210 million.

Required:
1. Would this investment be classified on Tanner-UNF's balance sheet as held-to-maturity securities, trading securities, available-for-sale securities, significant-influence investments, or other? Explain.
2. Prepare the journal entry to record Tanner-UNF's investment in the bonds on July 1, 2011.
3. Prepare the journal entries by Tanner-UNF to record interest on December 31, 2011, at the effective (market) rate.
4. Prepare any journal entry necessary to recognize fair value changes as of December 31, 2011.
5. At what amount will Tanner-UNF report its investment in the December 31, 2011, balance sheet? Why?
6. Suppose Moody's bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2012, for $190 million. Prepare the journal entry to record the sale.


Click here for the solution: Tanner-UNF Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2011

Crane Mechanics acquired 75 percent of Downey Enterprises on March 31, 2005, for $3,645,000

Exercise 3-14 Crane Mechanics acquired 75 percent of Downey Enterprises on March 31, 2005, for $3,645,000.

Downey’s book value at that date totaled $4,000,000. Appraisal values were greater than book values for identifiable assets in the following amounts: Inventory ($300,000) and Plant and Equipment ($700,000). The purchase differential for Inventory is to be amortized over five months and Plant and Equipment over ten years. For the remainder of 2005 Downey reports $635,000 of income and pays $100,000 in dividends. The following balances exist for Crane at December 31, 2005, and Downey at March 31 and December 31, 2005.

Crain Downey_______
12/31 3/31 12/31
Cash $730,000 $175,000 $180,000
Inventory 1,950,000 260,000 340,000
Plant and Equipment 17,650,000 5,150,000 5,765,000
Accumulated Depreciation (4,655,000) (935,000) (1,250,000)
Investment in Downey 3,886,875
Expenses 6,400,000 1,000,000 4,265,000
Dividends 1,275,000 150,000 250,000
Total Debits $27,236,875 $5,800,000 $9,550,000
Liabilities $3,550,000 650,000 $500,000
Common Stock 350,000 100,000 100,000
Additional Paid-In Capital 2,650,000 850,000 850,000
Retained Earnings 9,720,000 2,800,000 2,800,000
Sales 10,650,000 1,400,000 5,300,000
Extraordinary Gain From
Acquisition of Downey 105,000
Investment Income 211,875
Total Credits $27,236,875 $5,800,000 $9,550,000

Required: Prepare the consolidation worksheet for Crain and Downey at December 31, 2005.


Click here for the solution: Crane Mechanics acquired 75 percent of Downey Enterprises on March 31, 2005, for $3,645,000

Ayres Services acquired an asset for $80 million in 2011

E 16-3 Taxable income given; calculate deferred tax liability

Ayres Services acquired an asset for $80 million in 2011. The asset is depreciated for financial reporting purposes over four years on a straight-line basis (no residual value). For tax purposes the asset's cost is depreciated by MACRS. The enacted tax rate is 40%. Amounts for pretax accounting income, depreciation, and taxable income in 2011, 2012, 2013, and 2014 are as follows:

2011 2012 2013 2014
Pretax accounting Income 330 350 365 400
Depreciation on the income statement 20 20 20 20
Depreciation on the tax return (25) (33) (15) (7)
Taxable income 325 337 370 413

Required:
For December 31 of each year, determine (a) the temporary book–tax difference for the depreciable asset and (b) the balance to be reported in the deferred tax liability account.

Click here for the solution: Ayres Services acquired an asset for $80 million in 2011

Parsons Company acquired 90% of the outstanding common stock of Shea Company on June 30, 2011, for $426,000

Problem 7-7 Parsons Company acquired 90% of the outstanding common stock of Shea Company on June 30, 2011, for $426,000. On that date, Shea Company had retained earnings in the amount of $60,000, and the fair value of its recorded assets and liabilities was equal to their book value. The excess of implied over the fair value of the recorded net assets was attributed to an unrecorded manufacturing formula held by Shea Company, which had an expected remaining useful life of five years from June 30, 2011.

Financial data for 2013 are presented here:
Parsons Company Shea Company
Sales $2,555,500 $1,120,000
Dividend Income 54,000 -0-
Total Revenue 2,609,500 1,120,000
Cost of Goods Sold 1,730,000 690,500
Expenses 654,500 251,000
Total Cost and Expenses 2,384,500 941,500
Net Income $ 225,000 $ 178,500
1/1 Retained Earnings $ 595,000 $ 139,500
Net Income 225,000 178,500
Dividends Declared (100,000) (60,000)
12/31 Retained Earnings $ 720,000 $ 258,000
Cash $ 119,500 $ 132,500
Inventory 362,000 201,000
Other Current Assets 40,500 13,000
Land 150,000 -0-
Investment in Shea Company 426,000 -0-
Property and Equipment 825,000 241,000
Accumulated Depreciation (207,000) (53,500)
Total Assets $2,058,000 $ 659,000
Accounts Payable $ 295,000 $ 32,000
Other Liabilities 43,000 19,000
Capital Stock 1,000,000 300,000
Additional Paid-in Capital -0- 50,000
Retained Earnings 720,000 258,000
Total Liabilities and Equity $2,058,000 $ 659,000

On December 31, 2011, Parsons Company sold equipment (with an original cost of $100,000 and accumulated depreciation of $50,000) to Shea Company for $97,500. This equipment has since been depreciated at an annual rate of 20% of the purchase price. During, 2012 Shea Company sold land to Parsons Company at a profit of $15,000.

The inventory of Persons Company on December 31, 2012, included goods purchased from Shea Company on which Shea Company recognized a profit of $7,500. During 2013, Shea sold goods to Parsons Company for $375,000, of which $60,000 was unpaid on December 31, 2013. The December 31, 2013, inventory of Persons Company included goods acquired from Shea Company on which Shea Company recognized a profit of $10,500.

Required:
A. Prepare a consolidated financial statement workpaper for the year ended December 31, 2013.
B. Prepare a schedule to calculate consolidated retained earnings on December 31, 2013, using an analytical or t-account approach. (Hint: Due to rounding, you may be out of balance by $1. To avoid this, you should carry decimal until the final calculation.)

Click here for the solution: Parsons Company acquired 90% of the outstanding common stock of Shea Company on June 30, 2011, for $426,000

Through a "Type B" reorganization, Golden Corporation acquired 90% of RetrieverCo stock by October 2 of the current tax year ending December 31

Through a "Type B" reorganization, Golden Corporation acquired 90% of RetrieverCo stock by October 2 of the current tax year ending December 31. At the time the 90% was acquired, RetrieverCo was worth $800,000 and the Federal long-term tax-exempt rate was 3%. RetrieverCo holds captial loss carryovers of $50,000. If Golden reports taxable income of $300,000 which includes $30,000 of capital gains, how much of the RetrieverCo capital loss carryover may Golden use in the current year to offset its income?

Click here for the solution: Through a "Type B" reorganization, Golden Corporation acquired 90% of RetrieverCo stock by October 2 of the current tax year ending December 31

On January 1, 20X1, Prange Company acquired 80% of the common stock of Seaman Company for $500,000

On January 1, 20X1, Prange Company acquired 80% of the common stock of Seaman Company for $500,000. On this date Seaman had total owners' equity of $400,000. Any excess of cost over book value is attributable to patent, which is to be amortized over 20 years.

During 20X1 and 20X2, Prange has appropriately accounted for its investment in Seaman using the simple equity method.

On January 1, 20X2, Prange held merchandise acquired from Seaman for $30,000. During 20X2, Seaman sold merchandise to Prange for $100,000, of which $20,000 is held by Prange on December 31, 20X2. Seaman's gross profit on all sales is 40%.

On December 31, 20X2, Prange still owes Seaman $20,000 for merchandise acquired in December.

Required:
Complete the Figure 4-2 worksheet for consolidated financial statements for the year ended December 31, 20X2.

Click here for the solution: On January 1, 20X1, Prange Company acquired 80% of the common stock of Seaman Company for $500,000

(Comprehensive Problem: Majority-Owned Subsidiary) Master Corporation acquired 80 percent ownership of Stanley Wood Products Company on January 1, 20X1, for $160,000

P5-37 (Comprehensive Problem: Majority-Owned Subsidiary) Master Corporation acquired 80 percent ownership of Stanley Wood Products Company on January 1, 20X1, for $160,000. On that date, the fair value of the noncontrolling interest was $40,000, and Stanley reported retained earnings of $50,000 and had $100,000 of common stock outstanding. Master has used the equity method in accounting for its investment in Stanley.

Trial balance data for the two companies on December 31, 20X5, are as follows:

Item
Master
Corporation
Stanley Wood
Products Company
Debit Credit Debit Credit
Cash and Receivables $ 81,000 $ 65,000
Inventory 260,000 90,000
Land 80,000 80,000
Buildings and Equipment 500,000 150,000
Investment in Stanley Wood Products Stock 188,000
Cost of Goods Sold 120,000 50,000
Depreciation Expense 25,000 15,000
Inventory Losses 15,000 5,000
Dividends Declared 30,000 10,000
Accumulated Depreciation $ 205,000 $105,000
Accounts Payable 60,000 20,000
Notes Payable 200,000 50,000
Common Stock 300,000 100,000
Retained Earnings 314,000 90,000
Sales 200,000 100,000
Income from Subsidiary 20,000
$1,299,000 $1,299,000 $465,000 $465,000

Additional Information
1. On the date of combination, the fair value of Stanley’s depreciable assets was $50,000 more than book value. The differential assigned to depreciable assets should be written off over the following 10-year period.
2. There was $10,000 of intercorporate receivables and payables at the end of 20X5.

Required:
1. Prepare all entries recorded by the parent co with respect to its investment in the sub for 20X5
2. Prepare all elimination entries for 20X5
3. Prepare a three-part worksheet as of December 31, 20X5

Click here for the solution: (Comprehensive Problem: Majority-Owned Subsidiary) Master Corporation acquired 80 percent ownership of Stanley Wood Products Company on January 1, 20X1, for $160,000

On January 1, 20X1, Pep Company acquired 80% of the common stock of Sky Company for $195,000

On January 1, 20X1, Pep Company acquired 80% of the common stock of Sky Company for $195,000. On this date Sky had total owners' equity of $200,000 (common stock, other paid-in capital, and retained earnings of $10,000, $90,000, and $100,000 respectively).

Any excess of cost over book value is attributable to inventory (worth $6,250 more than cost), to equipment (worth $12,500 more than book value), and to patents. FIFO is used for inventories. The equipment has a remaining life of five years and straight-line depreciation is used. The excess attributable to the patents is to be amortized over 20 years.

During 20X1 and 20X2, Pep has appropriately accounted for its investment in Sky using the simple equity method.

On January 1, 20X2, Pep held merchandise acquired from Sky for $10,000. During 20X2, Sky sold merchandise to Pep for $50,000, $20,000 of which is still held by Pep on December 31, 20X2. Sky's usual gross profit on affiliated sales is 50%.

On December 31, 20X1, Pep sold equipment to Sky at a gain of $10,000. During 20X2, the equipment was used by Sky. Depreciation is being computed using the straight-line method, a five-year life, and no salvage value.

Required:

a.         Using the information above or on the Figure 4-6 worksheet, prepare a determination and distribution of excess schedule.

b.         Complete the Figure 4-6 worksheet for consolidated financial statements for the year ended December 31, 20X2.

Click here for the solution: On January 1, 20X1, Pep Company acquired 80% of the common stock of Sky Company for $195,000

On January 1, 20x1, Peanut acquired 80% of Salt for $ 200,000

On January 1, 20x1, Peanut acquired 80% of Salt for $ 200,000. On this date, Salt had owners’ equity of $ 200,000 (including Retained earnings of $ 100,000). Any excess cost over book value is attributable to inventory (worth $ 12,500 over book value) equipment (worth $ 25,000 over book value, with a remaining life of 4 years) and to goodwill.

On January 1, 20x2, Peanut held merchandise acquired from Salt for $ 20,000. During 20x2, Salt sold merchandise to Peanut for $ 40,000, $ 10,000 of which is still held by Peanut on December 31, 20x2. Salt’s usual gross profit is 50%

On January 1, 20x1, Peanut sold equipment to Salt at a gain of $ 15,000. Depreciation is computed using the straight line method over 5 years.

This is the trial balance for the two companies on December 31, 20x2

Peanut Salt

Inventory 130,000 50,000

Other Current Assets 241,000 235,000

Investment in Salt 200,000

Other Investments 20,000

Land 140,000 80,000

Bldg and Equip (net) 255,000 170,000

Other intangible assets 20,000

Current Liabilities 150,000 70,000

Bonds Payable 100,000

Other Long term Liabilities 200,000 50,000

Common Stock 200,000 50,000

APIC 100,000 50,000

RE (1/1) 280,000 150,000

Sales 600,000 315,000

COGS 350,000 150,000

Operating expenses 150,000 60,000

Income from Salt 16,000

Dividends declared 60,000 20,000

Provide consolidated financial statements for 20x2.

Click here for the solution: On January 1, 20x1, Peanut acquired 80% of Salt for $ 200,000

At the beginning of 2008, Lehman Company acquired equipment costing $90,000

Problem 10-4A (P10-4A) At the beginning of 2008, Lehman Company acquired equipment costing $90,000. It was estimated that this equipment would have a useful life of 6 years and a residual value of $9,000 at the time. The straight-line method of depreciation was considered the most appropriate to use with this type of equipment. Depreciation is to be recorded at the end of each year.

During 2010 (the third year of the equipment's life), the company's engineers reconsidered their expectations, and estimated that the equipment's useful life would probably be 7 years (in total) instead of 6 years. The estimated residual value was not changed at that time. However, during the estimated 2013 the estimated residual Value was reduced to $5,000.

Instructions:
Indicate how much depreciation expense should be recorded each year for this equipment, by completing the following table.

Click here for the solution: At the beginning of 2008, Lehman Company acquired equipment costing $90,000