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Pang Inc. (Pang), is a Canadian Controlled Private Company. You are the assistant controller of Pang. On January 1, 2013, after lengthy negotiations, Pang acquired 100% of the shares of Sing Co. (Sing) for $1,500,000. Management of Pang is very excited about the acquisition because of a new process developed by Sing that is expected to substantially improve Sing?s manufacturing capabilities. At the time of acquisition, Sing had applied for, but not yet received approval for, a patent for the new process.
As at January 1, 2013, Sing reported common stock of $ 100,000, and retained earnings of $569,800.
At the time of acquisition the management team analyzed the values of Sing?s assets and liabilities and determined that only three assets had fair values different from book values, as follows:
The fair value of inventory was based on selling prices for inventory close to the December 31, 2012, year-end. The values for depreciable capital assets were based on appraisals. The appraiser provided a range of values, and the values above are based on the average of the range of values. At the time of acquisition, the depreciable capital assets had a remaining useful life of nine years. You have determined that a parcel of land similar to, and adjacent to, the land held by Sing sold for $825,000 in November of 2013.
The acquisition of Sing was financed by debt. A review of the agreement with the bank indicates Pang must maintain a consolidated debt to tangible net worth ratio no greater than 3.6. Tangible net worth is defined as the book value of equity less the book value of intangible assets.
Depreciable capital assets
The financial statements of Pang and Sing at December 31, 2013, are included in Exhibit I.
The controller of Pang has asked you to prepare the consolidated financial statement for the year ended December 31, 2013 as well as answer some additional questions.
a) Prepare all the calculations necessary to complete the consolidated financial statements using the working paper approach as at December 31, 2013 using the template provided in Excel.? Make sure you show your work and feel free to make as many different schedules/calculations as necessary.
b) What issues should the controller be prepared to discuss with the bank at the upcoming meeting? Consider the following (and anything else you feel is pertinent):
i. In the determination of goodwill and the elimination entries, are there any areas that are subject to management?s judgments?
ii. What additional information could be obtained to provide evidence to reduce the uncertainties in judgment?
iii. Assuming you are able to obtain additional evidence to reduce the uncertainties in judgment. Would it be appropriate to adjust the determination of goodwill and the elimination entries?
c) Now assume that instead of acquiring 100% of the shares of Sing, Pang has acquired 40% of the shares of Sing. Calculate equity income for the year ended December 31, 2013 and make the journal entry/entries required to record the equity income and to adjust the investment account for the year.
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