variable interest entities, segment reporting

| December 13, 2017

(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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