29 Jun …………………………… Net income
Question
2. On January 1, 20X1, Pepper Company purchased 100% of the common stock of Salt Company for $360,000. On this date, Salt had common stock, other paid-in capital, and retained earnings of $50,000, $100,000 and $150,000 respectively. Net income and dividends for two years for Salt Company were:
…………………………….
Net income
20X1
20X2
$60,000
$90,000
Dividends……………………………..
20,000
30,000
On January 1, 20X1, the only tangible assets of Salt which were undervalued were inventory and building. Inventory, for which FIFO is used, was worth $10,000 more than cost. The inventory was sold in 20X1. Buildings had a fair value of $320,000, a remaining life of 10 years and straight-line depreciation is used. The book value of the land and building are $50,000 and $260,000 respectively. Patent, if any, is to be amortized over 10 years.
Pepper uses the simple equity method in accounting for its Investment in Salt Company.
3-10
Chapter 3
Required:
a. Using the information above or on the separate worksheet, prepare a determination and distribution of excess schedule.
b. Complete the Figure 3-2 worksheet for consolidated financial statements for 20X2.
3. On January 1, 20X1, Parent Company acquired 100% of the common stock of Subsidiary Company for a cost of $294,000 in a tax-free combination. On this date, Subsidiary had total owner’s equity of $220,000. The excess of cost over book value is due to the undervaluation of inventory, other long-term investments, equipment, and patent.
The inventory is worth $10,000 more than book value and FIFO is used. The inventory was sold during 20X1. The other long-term investments of Subsidiary are worth $20,000 more than book value and are carried under the cost method. The equipment is worth $30,000 more than book value, has a remaining useful life of 10 years, with no salvage value, and straight-line depreciation is used. The patent is to be amortized over 20 years. The corporate tax rate is 30%.
During 20X1, Subsidiary had net income after taxes of $42,000 and in December, paid dividends of $20,000. As a result, the appropriate entries were made on Parent’s books under the equity method.
Required:
a. Prepare a schedule to determine and distribute the excess of cost over book value to assets and to related deferred taxes. Include computations for the write off of the asset increases and the related tax effect.
b. Complete the worksheet in Figure 3-3 for consolidated financial statements for 20X1.
3-12
Chapter 3
4. On January 1, 20X1, Port Company purchased 80% of the common stock of Star Company for $400,000. On this date, Star had common stock, other paid-in capital, and retained earnings of $10,000, $140,000 and $200,000 respectively. Net income and dividends for two years for Star Company were:
……………………………
Net income
20X1
20X2
$50,000
$90,000
Dividends…………………………….
10,000
30,000
On January 1, 20X1, the only tangible assets of Star which were undervalued were inventory and building. Inventory, for which FIFO is used, was worth $10,000 more than cost. The inventory was sold in 20X1. Building, which was worth $27,500 more than book value, has a remaining life of 10 years, and straight-line depreciation is used. Patent, if any, is to be amortized over 10 years.
3-14
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