Reference no: EM132673223
Comprehensive Consolidation Question
On December 31, 2021, Pokeman Limited purchased 60% of the outstanding ordinary shares of Surfer Company for $7,400,000 in cash. On acquisition date, the shareholders' equity of Surfer consisted of $2,000,000 in ordinary shares and $4,000,000 in retained earnings.
Also on this date, Surfer had inventory with a fair value that was $200,000 less than its carrying value. In addition, Surfer had equipment with a fair value that was $300,000 greater than its carrying value. The equipment had an estimated useful life of 8 years on December 31, 2021. Surfer had an unrecorded Patent worth $120,000 and a useful life of 6 years. Finally, Surfer's long term liabilities valued at $100,000 less than the carrying (book) value. The LT Liabilities had a ten year term ending in 2031.
Each year, consolidated goodwill is tested for impairment. Goodwill had a value of $1,300,000 at December 31, 2025 and $1,000,000 at December 31, 2026.
For the year ended December 31, 2026, the statements of profit or loss for Pokeman and Surfer were as follows:
Pokeman Surfer
Sales $25,000,000 12,500,000
Other Income 5,000,000 1,000,000
Total revenues 30,000,000 13,500,000
Cost of goods sold 18,000,000 8,200,000
Depreciation/ amortization expense 3,400,000 1,800,000
Other expenses 4,200,000 1,500,000
Income tax expense 1,100,000 500,000
Total expenses 26,700,000 12,000,000
Net income 3,300,000 1,500,000
At December 31, 2026, the condensed statements of financial position for the two companies were as follows:
Pokeman Surfer
Current assets 15,000,000 8,600,000
Non-current assets 29,600,000 17,400,000
Investment in Surfer 7,400,000 __________
Total assets 52,000,000 26,000,000
Liabilities 26,400,000 13,600,000
Common shares 12,400,000 2,000,000
Retained earnings 13,200,000 10,400,000
Total liabilities and equity 52,000,000 26,000,000
Additional information:
1. Intercompany sales of goods are made to earn a margin of 30%
2. In 2025, Surfer sold merchandise to Pokeman for $500,000, of which Pokeman sold 60% to unrelated third parties during 2025.
3. During 2026, Surfer sold merchandise to Pokeman for $400,000, 75% of which remains in Pokeman's inventory on December 31, 2026.
4. In 2025, Pokeman sold merchandise to Surfer for $600,000; Surfer's 2025 ending inventory contained 40% of this inventory.
5. During 2026, Pokeman sold merchandise to Surfer for $750,000; Surfer's 2026 ending inventory contains 30% of this inventory.
6. Surfer owes Pokeman $200,000 as of December 31, 2026 for inventory purchases.
7. Pokeman provides management services for various projects operated by Surfer. For 2026, the amount charged was $20,000 per month for a total of $240,000. Payments for these services are made on the 15th of the following month.
8. During 2026, Pokeman declared and paid dividends of $1,600,000 while Surfer declared and paid dividends of $700,000.
9. On January 1, 2023, Pokeman sold equipment to Surfer for $160,000. Pokeman had acquired the equipment on June 30, 2022 for $240,000 and had estimated a useful life of 6 years. There were no changes made to the remaining useful life when Surfer acquired the equipment.
10. Also in 2023, Surfer sold a piece of land to Pokeman at a profit of $120,000. Half of this land was sold in 2026 to an unrelated third party.
11. On July 1, 2026 Pokeman sold a building to Surfer for $500,000. The building had a net book value of $400,000 (after updating depreciation to the date of sale) on the books of Pokeman, with a remaining useful life of 5 years.
12. Both companies have an income tax at the rate of 0%.
Required:
Problem a) Prepare Pokeman's consolidated statement of profit or loss for the year ended and a statement of financial position as at December 31, 2026.