Question

Use the following data to answer questions in this part:

Suppose that on January 1, 2010, Company P acquires 80% of the common stock of Company S by paying $8,000 in cash to the shareholders of Company S. The pre-acquisition balance sheets and income statements are as follows:

Pre-acquisition B/S January 1, 2010	Company P	Company S
Current assets	$77,000	$24,000
Other assets	102,000	12,000
Total	$179,000	$36,000
Current liabilities	$99,000	$17,000
Common stock	48,000	11,000
Retained earnings	32,000	8,000
Total	$179,000	$36,000

Income statements December 31, 2010	Company P	Company S
Revenue	$110,000	$20,000
Expenses	-90,000	-16,000
Net income	$20,000	$4,000
Dividends paid		$1,000

In September 2010, Company P purchased a new airplane with an all-inclusive cost of $30 million. The estimated life of the airplane is 30 years and the estimated salvage value is $5 million. Company P expects to replace the interior of the aircraft after 20 years. The component cost of the interior is estimated at $5 million.

In 2011, Company P leases a machine for its own use for four years with annual payments of $8,000. At the end of the lease, the machine is returned to the lessor, who will sell it for its scrap value. The appropriate interest rate is 4%.

a)Prepare the balance sheet and income statement for Company P using the equity method. Please explain your calculations.

b)Calculate depreciation expense for the airplane in Year 1 using the straight-line method, both assuming the interior is a separate component and assuming the component method is not used. Please explain your answer.

c)Prepare the amortization table for the first two years of the leased asset. Please explain your calculations.

Answer 1