O’Sullivan Corp. purchased 75% of the outstanding shares of Rabb Ltd. on January 1, Year 3, at a cost of $214,200. Non-controlling interest was valued at $75,000 by an independent business valuator at the date of acquisition. On that date, Rabb had common shares of $70,000 and retained earnings of $50,000. Fair values were equal to carrying amounts for all the net assets except the following:
Carrying Amount Fair Value
Inventory $ 50,000 $ 29,000
Equipment 49,000 79,000
Software 25,000
The equipment had an estimated remaining useful life of six years on January 1, Year 3, and the software was to be amortized over ten years. Foxx uses the cost method to account for its investment. The testing for impairment at December 31, Year 6, yielded the following fair values:
Software $ 12,000
Goodwill 127,258
The impairment loss on these assets occurred entirely in Year 6. Amortization expense is grouped with administrative expenses, and impairment losses are grouped with miscellaneous expenses. The parent’s share of the goodwill noted above is $92,902.
The following are the financial statements of O’Sullivan Corp. and its subsidiary Rabb Ltd. for Year 6:
BALANCE SHEETS
At December 31, Year 6
O’Sullivan Corp. Rabb Ltd.
Cash $ $ 12,000
Accounts receivable 60,000 50,000
Note receivable 60,000
Inventory 86,000 64,000
Equipment, net 320,000 96,000
Land 250,000 50,000
Investment in Rabb 214,200
$ 930,200 $ 332,000
Bank indebtedness $ 190,000 $
Accounts payable 90,000 80,000
Notes payable 60,000
Common shares 170,000 70,000
Retained earnings 420,200 182,000
$ 930,200 $ 332,000
STATEMENTS OF RETAINED EARNINGS
Year ended December 31, Year 6
O’Sullivan Corp. Rabb Ltd.
Retained earnings, January 1, Year 6 $ 253,000 $ 192,000
Net income 231,250 57,000
Dividends (64,050 ) (67,000 )
Retained earnings, December 31, Year 6 $ 420,200 $ 182,000
INCOME STATEMENTS
For the year ended December 31, Year 6
O’Sullivan Corp. Rabb Ltd.
Sales $ 841,000 $ 380,000
Investment income 50,250 22,600
891,250 402,600
Cost of sales 500,000 220,000
Administrative expenses 50,000 22,000
Miscellaneous expenses 70,000 51,600
Income taxes 40,000 52,000
660,000 345,600
Net income $ 231,250 $ 57,000
Additional Information
The notes payable are intercompany.