Combined Financial Statements

Question 1

Nolan owns 100% of the capital stock of both Twill Corp. and Webb Corp. Twill purchases merchandise inventory from Webb at 140% of Webb’s cost. During 2007, merchandise that cost Webb $40,000 was sold to Twill. Twill sold all of this merchandise to unrelated customers for $81,200 during 2007. In preparing combined financial statements for 2007, Nolan’s bookkeeper disregarded the common ownership of Twill and Webb.

What amount should be eliminated from cost of goods sold in the combined income statement for 2007?

$56,000

$40,000

$24,000

$16,000

Answer 1

$56,000

The amount at which Webb sold the inventory to Twill ($40,000 × 1.40 = $56,000) will be the amount of cost of goods sold to Twill and should be eliminated in combining the financial statements of Webb and Twill. The cost of goods to Webb ($40,000) is the cost from an unrelated entity and should be the cost of goods sold for the combined entity. Since both the $40,000 cost of goods to Webb and the $56,000 cost of goods to Twill will be on the combining worksheet, the cost of goods to Twill (from Webb) must be eliminated, leaving only the $40,000 cost from a nonaffiliate.

Question 2

Mr. Allen owns all of the common stock of Astro Company and 80% of the common stock of Bio Company. Astro owns the remaining 20% interest in Bio’s common stock, for which it paid $8,000, and which it carries at cost, because there is no ready market for Bio’s stock. The condensed balance sheets for Astro and Bio as of December 31, 2007, were:

 Astro  Bio  
Assets $300,000  120,000  
Liabilities $100,000 $60,000 
Common Stock 50,000 40,000 
Retained Earnings 150,000  20,000  
Total $300,000  120,000  

What amount should be reported as total owner’s equity in a combined balance sheet for Astro and Bio as of December 31, 2007?

$260,000

$252,000

$212,000

$200,000

Answer 2

$252,000

($50,000 + $150,000 = $200,000) and Astro’s 20% ownership of Bio’s equity ($40,000 + $20,000 = $60,000 × .20 = $12,000), or $200,000 + $12,000 = $212,000. The correct answer would be Astro’s equity of $200,000 plus Bio’s equity of $60,000, less Astro’s investment in Bio of $8,000, or $200,000 + $60,000 − $8,000 = $252,000. Astro’s investment in Bio must be eliminated to prevent double counting of the $8,000 ‐ once as an investment on Astro’s books and again as net assets (to which the investment has a claim) on Bio’s books.

Question 3

Nolan owns 100% of the capital stock of both Twill Corp. and Webb Corp.

Twill purchases merchandise inventory from Webb at 140% of Webb’s cost. During 2004, merchandise that cost Webb $40,000 was sold to Twill. Twill sold all of this merchandise to unrelated customers for $81,200 during 2004. In preparing combined financial statements for 2004, Nolan’s bookkeeper disregarded the common ownership of Twill and Webb.

By what amount was unadjusted revenue overstated in the combined income statement for 2004?

$16,000

$40,000

$56,000

$81,200

Answer 3

$56,000

Since all the goods have been sold outside the combined entity, income recognition is correct.

However, sales and cost of goods sold have been recorded at two different points (i.e., the sale from Webb to Twill and the sale from Twill to outsiders). To the combined entity, Webb’s cost of merchandise (the original cost to the combined entity) is what is needed for cost of goods sold, and Twill’s sales (the amount the merchandise was sold for outside the combined entity) is needed for sales.

This means that the sale from Webb to Twill and the cost of goods recorded by Twill need to be eliminated. That amount is $56,000 (computed as $40,000 cost to Webb × transfer price to Twill of 140% of cost = $56,000).

Question 4

In the preparation of combined financial statements, would the following issues be treated in the same way as when preparing consolidated financial statements or in a different way?

Minority Interest
Foreign Operations
Different Fiscal Periods

Answer 4

Minority Interest Same
Foreign Operations Same
Different Fiscal Periods Same
According to ASC 810, if problems associated with minority interest, foreign operations, different fiscal periods, or income taxes occur in the preparation of combined financial statements, they should be treated in the same manner as in the preparation of consolidated financial statements. Therefore, all three items should be treated in the same manner as in consolidated statements.