MGT426

Comprehensive Consolidation Question Fall 2015

Pepsi Inc. acquired a 75% share in Sprite Inc. on January 1, 2010 for $937,500. At the
date of acquisition, Sprite had common shares of $1,000,000 and retained earnings of
$250,000. On this date, all assets and liabilities of Sprite were fairly valued, except for
the following items:
Equipment:

Overvalued by $36,000 (9 years useful life

left)

Long-term Bonds Payable:

from date of acquisition)

Undervalued by $21,000 (matures 7 years

Additional information:
1. Pepsi uses the cost method to account for its investment in Sprite.
2. Pepsi sells merchandise to Sprite from time-to-time at a gross profit percentage of
33%. In 2013, Sprite purchased merchandise from Pepsi for $600,000 and had
$60,000 of it left by December 31, 2013. In 2014, Sprite purchased merchandise
from Pepsi for $1,000,000 and had $150,000 of it left by December 31, 2014.
3. Sprite sells merchandise to Pepsi from time-to-time at a markup of 75% on cost.
In 2013, Pepsi purchased merchandise from Sprite for $7,200,000 and had
$75,600 of it left by December 31, 2013. In 2014, Pepsi purchased merchandise
from Sprite for $1,600,000 and had $67,200 of it left by December 31, 2014.
4. Sprite sold a piece of land with a book value of $186,000 to Pepsi during 2010 for
$252,000. During 2014, Pepsi sold a third of this land to a developer for
$100,000.
5. Pepsi sold equipment to Sprite on January 1, 2011 for a loss of $54,000. On the
date of sale, the equipment had a remaining useful life of 6 years and no residual
value. Both companies use straight-line method for depreciation.
6. Pepsi charges Sprite a $10,000 monthly management fee. The management fee for
December was still outstanding on December 31, 2014.
7. Goodwill on acquisition was written down in 2011 by $5,000 and in 2014 by
$8,000.
8. The two companies paid the following dividends in cash during 2014:
Pepsi - $40,000

Sprite - $110,000

9. Both companies have a marginal tax rate of 22%.

10. Any premium or discounts on long-term bonds are amortized on a straight-line

method.
Individual companies financial statements are on the last page.
Required: (SHOW ALL CALCULATIONS CLEARLY)
a)

Prepare the consolidated income statement for the Pepsi Group for the year
ended December 31, 2014, using the entity method.
(32 marks)

b)

Prepare the consolidated balance sheet for the Pepsi Group as at December 31,
2014, using the entity method. (Note: show PP&E separated into cost and
accumulated depreciation, not as a net amount).
(29 marks)

c)

Which amounts in the consolidated financial statements would have been

different had Pepsi used the PCE method for consolidation?
(4 marks)

d)

Which amounts in the consolidated financial statements would have been

different had Pepsi used the equity method to account for its investment in
Sprite?
(4 marks)

Consider all amounts material. Round amounts to the nearest dollar.

The abbreviated financial statements for Pepsi Inc. and Sprite Inc. at year-end December
31, 2014 are set out below:
Income Statement

Pepsi
Sprite

Sales
Other Income

$8,300,000
506,000
8,806,000
5,080,000
732,000
71,000
2,390,000
8,273,000
533,000
117,260
415,740

$ 5,500,000
199,000
5,699,000
4,180,000
438,000
25,000
825,000
5,468,000
231,000
50,900
180,100

Cash
Accounts receivable
Inventory
Investment in Sprite
Property, Plant and Equipment (PP&E)
- Cost
- Accumulated Depreciation

74,000
134,000
457,000
937,500

$ 89,000
248,000
577,000
-

6,076,500
(2,516,000)
5,163,000

2,189,000
(777,000)
2,326,000

Current Liabilities
Non-Current Liabilities
Common Shares
Retained Earnings

Cost of Goods Sold

Depreciation Expense
Interest Expense
Other Operating Expenses
Net Income Before Tax
Tax Expense
Net Income
Balance Sheet

279,000
800,000
2,860,000
1,224,000
5,163,000

$ 366,000
275,000
1,000,000
685,000
2,326,000