Balance Sheet and Sylvan

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QUESTION 1 (43 MARKS, 60 MINUTES)
Note: All numbers are in $000’s for ease of computation.

On January 1 2007, Pillar purchased 60% of the common shares of Sylvan for $4,500. On that date, Sylvan had common shares of $1,250 and retained earnings of $3,000. Fair values were equal to carrying values for all Sylvan’s net assets except inventory, capital assets and notes payable. The fair value of inventory was $60 more than book value, the book value of capital assets was $100 greater than fair value and the Notes payable had a fair value of $150 less than book value. Assume that all shares of Sylvan have the same value and no control premium was paid at the date of acquisition. The Consolidated Financial statements will be prepared using IFRS Entity Method.

The financial statements for Pillar and Sylvan for the year ended December 31, 2010 were as follows: Balance Sheets
December 31, 2010
$000’s

PILLAR
SYLVAN
Cash
$680
$435
Accounts receivable
1,755
1,025
Inventory
2,849
1,790
Capital assets—net
3,976
3,000
Investment in Sylvan
4,500

Total assets
$13,760
$6,250

Current liabilities
$400
$255
Notes payable
5,800
1,185
Common shares
2,000
1,250
Retained earnings
5,560
3,560
Total
$13,760
$6,250

Statements of Income and Retained Earnings
Year Ended December 31, 2010

PILLAR
SYLVAN
Sales and all other Income
$4,040
$2,710
Cost of sales
1,600
1,140

2,440
1,570
Amortization
(480)
(310)
Other expenses and losses including taxes
(500)
(210)
Net income
1,460
1,050

Additional information: numbers in $000’s

1. Capital assets are to be amortized over an average remaining useful life of 8 years at January 1, 2007 and the notes payable mature on December 31, 2011. Goodwill impairment losses for 2008 and 2010 were $240 and $300 respectively. Straight line amortization is acceptable for all acquisition differentials.

2. At December 31, 2010, Sylvan’s inventory included goods purchased from Pillar for $760. Total purchases from Pillar in 2010 were $1000 all priced at mark-up’s averaging 25% of Pillar’s cost.

3. On December 31, 2009, the inventories of Pillar contained $500 of merchandise purchased from Sylvan. Sylvan earns a gross margin of 30% on all sales to Pillar. During December 2010, Pillar purchased merchandise from Sylvan for $900 and did not pay for$250 of the purchases by December 31, 2010. 40% of the inventory was resold by Pillar before the year end.

4. On July 1, 2010, Sylvan sold a new tract of Land to Pillar for $170. On December 1, 2009, Sylvan had bought the land for $200. The fair market value of the land at July 1, 2010 was $220.

5. On September 30, 2008, Pillar sold Land to Sylvan for $100. The land had a book value of $60 on the date of the sale.

6. On December 1, 2010, Pillar and Sylvan declared and paid dividends of $150 and $100 respectively.

7. Both companies pay taxes at the rate of 40%. Assume all intercompany Transactions are taxed at 40%

REQUIRED: Please use a GREEN BOOKLET

1. Prepare a Consolidated Balance Sheet at December 31, 2010. (22 Marks) 2. Prepare an independent calculation of ENDING Consolidated Retained Earnings at December 31, 2010. (11 marks) 3. Assume Pillar wishes to use the equity method in their General Ledger, calculate Investment income from Sylvan for the year ending December 31, 2010 (10 Marks)

NOTE:

This question will help you prepare for the technical question on the midterm. Do more than the question asks so that you are prepared for any possible questions you may be asked: Eg. Prepare a Consolidated Income statement and an independent calculation of Consolidated Net Income attributable to Parent company shareholders Calculate the Investment Income under the equity method: Note the only difference between the equity method used when significant Influence is present and the equity method used...
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