- This topic has 3 replies, 2 voices, and was last updated 9 years, 7 months ago by .
-
Topic
-
Hey all, hoping someone can take a look at this for me.
The separate condensed balance sheets and income statements of Purl Corp. and its wholly owned subsidiary, Scott Corp., are as follows:
BALANCE SHEETS
December 31, year 2
Purl Scott
Assets
Current assets:
Cash $ 80,000 $ 60,000
Accounts receivable (net) 140,000 25,000
Inventories 90,000 50,000
Total current assets 310,000 135,000
Property, plant, and equipment (net) 625,000 280,000
Investment in Scott (equity method) 400,000 —
Total assets $1,335,000 $ 415,000
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 160,000 $ 95,000
Accrued liabilities 110,000 30,000
Total current liabilities 270,000 125,000
Stockholders’ equity:
Common stock ($10 par) 300,000 50,000
Additional paid-in capital — 10,000
Retained earnings 765,000 230,000
Total stockholders’ equity 1,065,000 290,000
Total liabilities and stockholders’ equity $1,335,000 $ 415,000
INCOME STATEMENTS
For the year ended December 31, year 2
Purl Scott
Sales $2,000,000 $750,000
Cost of goods sold 1,540,000 500,000
Gross margin 460,000 250,000
Operating expenses 260,000 150,000
Operating income 200,000 100,000
Equity in earnings of Scott 70,000 —
Income before income taxes 270,000 100,000
Provision for income taxes 60,000 30,000
Net income $ 210,000 $ 70,000
Additional information:
• On January 1, year 2, Purl purchased for $360,000 all of Scott’s $10 par, voting common stock. On January 1, year 2, the fair value of Scott’s assets and liabilities equaled their carrying amount of $410,000 and $160,000, respectively, except that the fair values of certain items identifiable in Scott’s inventory were $10,000 more than their carrying amounts. These items were still on hand at December 31, year 2. Goodwill is determined to be unimpaired at December 31, year 2.
• During year 2, Purl and Scott paid cash dividends of $100,000 and $30,000, respectively. For tax purposes, Purl receives the 100% exclusion for dividends received from Scott.
• There were no intercompany transactions, except for Purl’s receipt of dividends from Scott and Purl’s recording of its share of Scott’s earnings.
• Both Purl and Scott paid income taxes at the rate of 30%.
In the December 31, year 2 consolidated financial statements of Purl and its subsidiary, total assets should be
$1,460,000
This answer is correct. In the consolidated balance sheet, the parent company’s investment account is eliminated and replaced with the specific assets of the acquiree. Therefore, the total consolidated assets include Purl’s assets (less the investment account), Scott’s assets (adjusted to reflect FMVs at date of purchase), and any goodwill purchased at time of investment. This computation is illustrated below.
Purl’s assets $ 1,335,000
Less: Investment in Scott (400,000)
$ 935,000
Scott’s assets ($415,000 + $10,000) 425,000
$1,360,000
Goodwill 100,000
$1,460,000
Scott’s assets are increased by $10,000 to reflect the excess market value at 1/1/Y2 of inventory items, purchased as a part of the investment in Scott, which are still on hand at 12/31/Y2. Goodwill purchased at 1/1/Y2 is the excess of the cost of the investment ($360,000) over the FV of the net assets purchased ($410,000 – $160,000 + $10,000), or $100,000.
If the investment in Scott was $360,000, why are we deducting $400,000 from assets? I keep getting 1.5 mil for the answer which isn’t one of the options. ($1.335 mil parents assets – investment $360,000 + $100,000 Goodwill + $425,000 sub’s assets marked up to FV = $1.5mil). I am doing so bad on business combinations in general.. My scores for 3 rounds of 20 MCQs have been 50%, 50%, and 55% 🙁
FAR - 89 (8/19/14) Wiley TB, Wiley Book, Books from School, Ninja Audio/Notes
AUD - 92 (10/14/14) Wiley TB, Wiley Book, Ninja Audio
BEC - 82 (5/8/15) Mostly Ninja MCQ, sprinkles of Becker lectures and Ninja Audio
REG - (8/14/15)
- You must be logged in to reply to this topic.