variable interest entities, segment reporting

(1)

On December 31, 2013, Nanotech Company invests $20,000 in SoftPlus, a variable interest entity. In contractual agreements completed on that date, PanTech established itself as the primary beneficiary of SoftPlus. Previously, PanTech had no equity interest in SoftPlus. Immediately after PanTech’s investment, SoftPlus presents the following balance sheet:

Cash $ 20,000 Long-term debt $120,000

Marketing software 140,000 Non-controlling interest 60,000

Computer equipment 40,000 PanTech equity interest 20,000

Total assets $200,000 Total liabilities and equity 200,000

Each of the above amounts represents an assessed fair value at December 31, 2013, except for the marketing software.

a.If the marketing software was undervalued by $20,000, what amounts for SoftPlus would appear in PanTech’s December 31, 2013, consolidated financial statements?

b.If the marketing software was overvalued by $20,000, what amounts for SoftPlus would appear in PanTech’s December 31, 2013, consolidated financial statements?

(2)

On January 1, 2012, Travers Company acquired 90 percent of Yarrow Company’s outstanding stock for $720,000. The 10 percent non-controlling interest had an assessed fair value of $80,000 on that date. Any acquisition-date excess fair value over book value was attributed to an unrecorded customer list developed by Yarrow with a remaining life of 15 years. On the same date, Yarrow acquired an 80 percent interest in Stookey Company for $344,000. At the acquisition date, the 20 percent non-controlling interest fair value was $86,000. Any excess fair value was attributed to a fully amortized copyright that had a remaining life of 10 years. Although both investments are accounted for using the initial value method, neither Yarrow nor Stookey have distributed dividends since the acquisition date. Travers has a policy to pay cash dividends each year equal to 40 percent of operating earnings. Reported income totals for 2012 follow:

Travers Company . . . . . . . . . . . . . . . $300,000

Yarrow Company. . . . . . . . . . . . . . . 160,000

Stookey Company . . . . . . . . . . . . . . 120,000

Following are the 2013 financial statements for these three companies. Stookey has transferred numerous amounts of inventory to Yarrow since the takeover amounting to $80,000 (2012) and $100,000 (2013). These transactions include the same markup applicable to Stookey’s outside sales. In each year, Yarrow carried 20 percent of this inventory into the succeeding year before disposing of it. An effective tax rate of 45 percent is applicable to all companies.

Travers Yarrow Stookey

Company Company Company

Sales. . . . . . . . . . . . . . . . . . . . . . . . . . $ (900,000) $ (600,000) (500,000)

Cost of goods sold . . . . . . . . . . . . . . . 480,000 320,000 260,000

Operating expenses . . . . . . . . . . . . . . 100,000 80,000 40,000

Net income . . . . . . . . . . . . . . . . . . . $ (320,000) $ (200,000) $(100,000)

Retained earnings, 1/1/13 . . . . . . . . . .$ (700,000) $ (600,000) $(300,000)

Net income (above). . . . . . . . . . . . . . . (320,000) (200,000) (100,000)

Dividends paid . . . . . . . . . . . . . . . . . . 128,000 –0– –0–

Retained earnings, 12/31/13 . . . . . . $ (892,000) $ (800,000) $(400,000)

Current assets . . . . . . . . . . . . . . . . . . $ 444,000 $ 380,000 $ 280,000

Investment in Yarrow Company . . . . . 720,000 –0– –0–

Investment in Stookey Company . . . . . –0– 344,000 -0–

Land, buildings, and equipment (net). 949,000 836,000 520,000

Total assets . . . . . . . . . . . . . . . . . . . $ 2,113,000 $ 1,560,000 $ 800,000

Liabilities. . . . . . . . . . . . . . . . . . . . . $ (721,000) $ (460,000) $(200,000)

Common stock. . . . . . . . . . . . . . . . . . (500,000) (300,000) 200,000)

Retained earnings, 12/31/13. . . . . . . . (892,000) (800,000) (400,000)

Total liabilities and equities . . . . . . . $(2,113,000) $(1,560,000) $(800,000)

a. Prepare the business combination’s 2013 consolidation worksheet; ignore income tax effects.

b.Determine the amount of income tax for Travers and Yarrow on a consolidated tax return for 2013.

c.Determine the amount of Stookey’s income tax on a separate tax return for 2013.

d.Based on the answers to requirements (b) and (c), what journal entry does this combination make to record 2013 income tax?

(3)

Following is financial information describing the six operating segments that make up Fairfield, Inc. (in thousands):

Segments

Red Blue Green Pink Black White

Sales to outside parties . . . . $1,811 $812 $514 $309 $121 $ 99

Intersegment revenues . . . . . . 16 91 109 –0– 16 302

Salary expense . . . . . . . . . . . . 614 379 402 312 317 62

Rent expense . . . . . . . . . . . . . 139 166 81 92 42 31

Interest expense . . . . . . . . . . . 65 59 82 49 14 5

Income tax expense (savings) 141 87 61 (86) (64) –0–

Consider the following questions independently. None of the six segments has a primarily financial nature.

a. What minimum revenue amount must any one segment generate to be of significant size to require disaggregated disclosure?

b. If only Red, Blue, and Green necessitate separate disclosure, is Fairfield disclosing disaggregated data for enough segments?

c. What volume of revenues must a single client generate to necessitate disclosing the existence of a major customer?

d. If each of these six segments has a profit or loss (in thousands) as follows, which warrants separate disclosure?

Red. . . . . . . . . . $1,074 Pink . . . . . . . . $ (94)

Blue . . . . . . . . . . . 449 Black . . . . . . . . . (222)

Green . . . . . . . . . . 140 White. . . . . . . . . 308

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