Pipe Manufacturing Company

Pipe Manufacturing Company

Instructions/Descriptions

Pipe Manufacturing Company Consolidated Financial Statements

Question Description

Pipe Manufacturing Company acquired 90 percent of Spike Corporation’s outstanding common stock on December 31, 2017, for $2,282,850. At the date of acquisition, the fair value of the noncontrolling interest was $253,650 and Spike reported common stock outstanding of $1,021,250, premium on common stock of $338,580, and retained earnings of $684,000. The book values and fair values of Spike’s assets and liabilities were equal, except for land, which was worth $224,580 more than its book value.

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Since the date it was acquired by Pipe Manufacturing, Spike has sold inventory on account to Pipe on a regular basis. The amount of such intercompany sales totaled $196,365 in 2018 and $347,130 in 2019; the gross profit was 42 percent in both years. All inventory transferred in 2018 had been sold by December 31, 2018, except inventory which Pipe paid $41,325 and did not resell until January 2019.

All 2018 inventory transactions on account had been satisfied prior to the end of the year. Inventory transferred in 2019 had been resold at December 31, 2019, except merchandise for which Pipe had paid $78,850. An account balance of $44,650 remained unpaid on 2019 inventory transactions.

On January 1, 2018, Spike sold equipment to Pipe for $213,750. Spike had purchased the equipment for $352,450 on January 1, 2016 and was depreciating it on a straight-line basis with a 10-year expected life and no anticipated salvage value. The equipment’s total expected life is unchanged as a result of the intercompany sale. Spike reported $50,000 net income for 2018 but declared no dividends.

As of December 31, 2019, Spike had declared fourth-quarter dividend; however 25% of the declared amount had not been paid out, resulting in a receivable. Both Pipe and Spike use straight-line depreciation and amortization. On December 31, 2019, Pipe’s management determined that the carrying value of the reporting unit to which goodwill is assigned is $1,771,750, and the fair value of the reporting unit is $1,616,000. Goodwill impairments, if any, should be shared proportionately between controlling and noncontrolling interests. Pipe uses the basic equity method to account for its investment in Spike.

As a staff of the financial reporting team, your task is to prepare the consolidated financial statements for December 31, 2019.

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Requirements:

1.     Prepare the consolidated financial statements (balance sheet, income statement, retained earnings) using the 3-part worksheet format for December 31, 2019 (1 year only). In an Excel spreadsheet, show your calculations for each of the related accounts. For example, you can have a tab for goodwill impairment calculation, a tab for inventory transfer, another tab for equipment, and so on.

2. explaining to your manager how the intercompany transfers were accounted for including the amount of income assigned to NCI; the differential and the assignment thereof; total NCI; the balance of the investment account, et cetera.
   

   Pipe Manufacturing Company Consolidated Financial Statements

   

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