Question

p company purchased 85% interest in S company for $7,500,000 on January 1, 2016, s company had c/s of $5,000,000 and R/E of $2,300,000 on that date. The B/S on that date contained: Book Value Inventory$1,500,000 Equipment 1,700,000 Land 1,700,000 2,100,000 3,300,000 3,500,000 The equipment had a useful life of 12 years with straight-line depreciation and inventory will be sold w/in the year. S company had $450,000 of net income in 2016 and declared $100,000 of dividends for the year. Using the cost-method, create the work-paper-entries to: 1.) Eliminate dividends 2.) Eliminate the investment account 3.) Allocate and depreciate the difference between implied value and book value for 2016

Answer 1

(a)	S Company Income Statement
	Particulars	$
	Net Income	450,000
	Less: Dividend	(100,000)
	Balance	350,000
	P Company [85%]	297,500
	Minority [15%]	52,500
(b)	Computation of Cost of Control on 01-01-2016
	Particulars	$
	Investment (85%)	7,500,000
	Less: Common stock	(4,250,000)
	Less: Retained Earnings	(1,955,000)
	Less: Pre-Acquisition Dividend	(297,500)
	Goodwill	997,500
	Computation of Cost of Control on 01-01-2016
	Particulars	$
	Investment (85%)	7,500,000
	Less: Inventory	(1,275,000)
	Equipment	(1,445,000)
	Land	(2,975,000)
	Less: Pre-Acquisition Dividend	(297,500)
	Goodwill	1,507,500
(c)	Calculation of Allocation of Difference between Implied Value and Book Value
	Particulars	Basis of Allocation	Goodwill	Life	Amount of Amortization
	Inventory	1,500,000	337,500	1	337,500
	Equipment	1,700,000	382,500	12	31,875
	Land	3,500,000	787,500	12 [Assumed]	65,625
	Total	6,700,000	1,507,500		435,000