Let's break down the requirements into two main steps: **Step 1: Calculate Goodwill on Acquisition** **Step 2: Calculate Intercompany Profit Eliminations for 2023** Each step will include an explanation and the calculations. --- ## **Step 1: Calculate Goodwill on Acquisition** ### **Calculation** Goodwill = Consideration Transferred + Fair Value of NCI – Fair Value of Net Identifiable Assets #### **Given:** - **Consideration Transferred:** $31,256,000 - **Fair Value of NCI:** $9,464,000 - **Book Value of Net Assets:** $2,600,000 - **Fair Value Adjustments:** - Plant & Equipment: +$6,400,000 - Long-term Debt: –$600,000 - Customer Lists: +$1,200,000 - Trade Secrets: +$2,400,000 - Trained Workforce: +$8,000,000 #### **Fair Value of Net Identifiable Assets:** \[ \text{Total Fair Value of Net Assets} = \text{Book Value} + \text{Net FV Adjustments} \] \[ = \$2,600,000 + (6,400,000 - 600,000 + 1,200,000 + 2,400,000 + 8,000,000) \] \[ = \$2,600,000 + \$17,400,000 = \$20,000,000 \] #### **Goodwill Calculation:** \[ \text{Goodwill} = \$31,256,000 + \$9,464,000 - \$20,000,000 = \$20,720,000 \] **Explanation:** We calculated the goodwill by summing the consideration paid and the estimated NCI, then subtracting the fair value of the identifiable net assets (book value plus fair value adjustments). --- ## **Step 2: Calculate Intercompany Profit Eliminations for 2023** Intercompany transactions require eliminating unrealized profits in ending inventory and fixed assets (equipment), and reversing intercompany service profits. ### **A. Upstream Inventory (ShoeSub → ParentCo):** - **Ending inventory (ParentCo):** $380,000 (from ShoeSub) - **Markup:** 25% - **Unrealized profit:** $380,000 × 25/125 = $76,000 ### **B. Downstream Inventory (ParentCo → ShoeSub):** - **Ending inventory (ShoeSub):** $360,000 (from ParentCo) - **Markup:** 25% - **Unrealized profit:** $360,000 × 25/125 = $72,000 ### **C. Downstream Equipment (ParentCo → ShoeSub):** - **Cost:** $6,500,000 (accumulated depreciation $3,000,000) - **Sold for:** $4,200,000 - **Carrying value at sale:** $6,500,000 – $3,000,000 = $3,500,000 - **Intercompany profit on sale:** $4,200,000 – $3,500,000 = $700,000 - **Equipment still held at 12/31/2023:** All unrealized gain remains - **Annual depreciation on excess:** $700,000 / 10 years = $70,000/year - **Years since sale (Jan 2021 to Dec 2023):** 3 years - **Accumulated excess depreciation:** $70,000 × 3 = $210,000 - **Unrealized profit to eliminate at 12/31/2023:** $700,000 – $210,000 = $490,000 ### **D. Intercompany Services:** - **ParentCo billed ShoeSub $640,000 (cost $520,000)** - **Profit:** $640,000 – $520,000 = $120,000 - **Outstanding at 12/31/2023:** $40,000 of receivable remains unpaid - **Unrealized profit in outstanding services:** $40,000 × ($120,000/$640,000) = $7,500 --- ## **Final Answer** ### **Step 1: Goodwill on Acquisition** \[ \boxed{\$20,720,000} \] *This is the goodwill recognized by ParentCo at acquisition, reflecting the premium paid over the fair value of ShoeSub’s net identifiable assets.* --- ### **Step 2: Intercompany Profit Eliminations for 2023** - **Upstream inventory profit to eliminate:** $76,000 - **Downstream inventory profit to eliminate:** $72,000 - **Downstream equipment profit to eliminate:** $490,000 - **Unrealized services profit to eliminate:** $7,500 *These amounts must be eliminated from consolidated net income and assets to avoid overstating group profits and assets due to internal transactions.*