Question

On January 1, 2010, Parkway, Inc., issued securities with a total fair value of $450,000 for 100 percent of Skyline Corporation’s outstanding ownership shares. Skyline has long supplied inventory to Parkway, which hopes to achieve synergies with production scheduling and product development with this combination.

Although Skyline’s book value at the acquisition date was $300,000, the fair value of its trademarks was assessed to be $30,000 more than their carrying values. Additionally, Skyline’s patented technology was undervalued in its accounting records by $120,000. The trademarks were considered to have indefinite lives, the estimated remaining life of the patented technology was eight years.

In 2010, Skyline sold Parkway inventory costing $30,000 for $50,000. As of December 31, 2010, Parkway had resold only 28 percent of this inventory. In 2011, Parkway bought from Skyline $80,000 of inventory that had an original cost of $40,000. At the end of 2011, Parkway held $28,000 of inventory acquired from Skyline, all from its 2011 purchases.

During 2011, Parkway sold Skyline a parcel of land for $95,000 and recorded a gain of $18,000 on the sale. Skyline still owes Parkway $65,000 related to the land sale.

At the end of 2011, Parkway and Skyline prepared the following statements in preparation for consolidation.

Answer 1

(40 Minutes) (Prepare consolidation worksheet with intra-entity transfer of inventory and land. No outside ownership exists)

a.

Skyline reported income	$(88,000)
Patented technology amortization	15,000
Beginning inventory gross profit recognized	(14,400)
Ending inventory gross profit deferred	14,000
Deferral of land gain on sale	18,000
Equity in Skyline’s earnings	$(55,400)

b.  Acquisition-Date Fair Value Allocation

Consideration transferred (fair value of shares issued)	$450,000
Book value of subsidiary	300,000
Fair value in excess of book value	$150,000
Excess fair over book value assigned to:
Trademarks (indefinite life)	30,000
Patented technology	$120,000
Life of patented technology		8 years
Annual amortization	$15,000
Unrealized Upstream Inventory Gross Profit, 1/1
Inventory being held ($50,000×72%)		$36,000
Gross profit rate ($20,000 ÷ $50,000)		40%
Unrealized gross profit, 1/1		$14,400
Unrealized Upstream Inventory Gross Profit, 12/31
Inventory being held (given)		$28,000
Gross profit rate ($40,000 ÷ $80,000)		50%
Unrealized gross profit, 12/31		$14,000

  CONSOLIDATION ENTRIES

 Entry *G

Retained earnings 1/1 (Skyline)	14,400
Cost of goods sold		14,400

  To remove impact of beginning unrealized gross profit.  Amount computed above.

 Entry S

Common stock (Skyline)	120,000
Additional paid‑in capital (Skyline)	30,000
Retained earnings 1/1 (Skyline, adjusted)	277,600
Investment in Skyline		427,600

  To remove stockholders' equity accounts of subsidiary. Retained earnings is adjusted for elimination of beginning unrealized gross profit in Entry *G.

Entry A

Trademarks	30,000
Patented technology	105,000
Investment in Skyline		135,000

  To recognize excess fair value allocations as of 1/1. Patented technology is adjusted for 4 prior years of amortization at $15,000 per year.

 Entry I

Investment income	55,400
Investment in Skyline		55,400

  To remove intra-entity income accrued by parent using the equity method.

 Entry D

Investment in Skyline	20,000
Dividends distributed		20,000

  To eliminate Intra-entity dividend payments.

 Entry E

Other operating expenses	15,000
Patented technology		15,000

  To recognize current year amortization expense on patented technology

 Entry Tl

Revenues	80,000
Cost of goods sold		80,000

  To eliminate intra-entity inventory transfer for current year.

 Entry G

Cost of goods sold	14,000
Inventory		14,000

  To defer unrealized inventory gross profit. Amount is computed above.

 Entry TL

Gain on sale of land	18,000
Land		18,000

  To remove gain from intra-entity transfer of land during current year.

 Entry P

Accounts payable	65,000
Accounts receivable		65,000

  To remove intra-entity payable and receivable.