Practice in-class Question

PAINT Inc. purchased 60% of the voting shares of SAINT Inc for $420,000 on
January 1, 2009. On that date, SAINT’s commons stock and retained earnings were
valued at $220,000 and $260,000 respectively. PAINT uses the cost method to
account for its investment in SAINT Inc.

SAINT’s fair values approximated its carrying values with the following exceptions:

• SAINT’s trademark had a fair value which was $40,000 higher than its
carrying value. The trademark had a useful life of exactly ten years remaining
from the date of acquisition.

• SAINT’s inventory had a fair value which was $20,000 higher than their
carrying value, this inventory was sold during 2009.

The Financial Statements of both companies for the Year ended December 31, 2010
are shown below:

Income Statements
PAINT Inc. SAINT Inc.

Sales $947,000 $525,000

Other revenues $83,000 $60,000

Less: Expenses:
Cost of Goods Sold: $310,000 $256,000
Depreciation Expense $28,000 $14,000
Other Expenses $92,000 $40,000
Income Tax Expense $230,000 $130,000

Net Income $370,000 $145,000

Retained Earnings Statements

Balance, January 1, 2010 $133,000 $300,000

Net Income $370,000 $145,000
Less: Dividends ($60,000) ($50,000)

Retained Earnings $443,000 $395,000

Balance Sheet
PAINT Inc. SAINT Inc.
Cash $110,000 $120,000
Accounts Receivable $103,000 $120,000
Inventory $105,000 $140,000
Investment in SAINT Inc. $420,000 -
Equipment (net) $325,000 $260,000
Trademark - $205,000
Land - $20,000

Total Assets $1,063,000 $865,000

Current Liabilities $180,000 $150,000

Bonds Payable $140,000 $100,000
Common Shares $300,000 $220,000
Retained Earnings $443,000 $395,000

Total Liabilities and Equity $1,063,000 $865,000

Other Information:
• During 2010, SAINT sold inventory to PAINT for $30,000. The cost of these
goods to SAINT was $20,000. 30% of this inventory was resold in 2010 to
outside parties, the remaining balance remained in PAINT’s inventory as at year
December 31, 2010. PAINT paid SAINT for the entire invoice in 2011.
• During December 2009, PAINT sold inventory to SAINT for $60,000, the cost of
the inventory to PAINT was $40,000. 40% of these goods remained in SAINT’s
inventory at the end of 2009. SAINT eventually sold the entire remaining
inventory to an outside customer in 2010.
• On January 1, 2010, PAINT sold equipment originally purchased for $90,000 to
SAINT for $70,000. At the time of intercompany sale this equipment had a net
book value of $40,000 and a remaining useful life of 4 years.
• The effective tax rate for both companies is 40%.

Required:
a. Prepare a schedule showing the calculation of goodwill at the date of
acquisition of SAINT, and a purchase price discrepancy amortization
schedule for the period from January 1, 2009 to December 31, 2010.

b) Prepare the consolidated financial statements: Income statement and

Retained Earnings for the year ended December 31st, 2010, and Balance Sheet
as at December 31st, 2010. Show all supporting calculations.

c) Prepare a schedule reconciling non-controlling interests: include calculation

of non-controlling interest at the beginning of the year as well as all changes
during the year