Question

UBetcha Corporation acquired 30 percent of the voting stock of Trunks Corporation on January 2, 2019, for $1.6 million in cash. Trunks’ balance sheet and estimated fair values of its assets and liabilities on January 2, 2019 are as follows (in thousands).

Trunks Corporation
Balance Sheet
January 2, 2019
	Book Value	Fair Value
Assets
Cash and receivables	300	300
Inventory	600	350
Investments	250	250
Land	400	1,000
Property and equipment	2,000	350
Accumulated depreciation	(750)
TOTAL ASSETS	2,800	2,250
Liabilities and Equity
Current liabilities	450	450
Long-term liabilities	1,500	1,500
Common stock, $2.00 par	300
Additional paid-in capital	450
Retained earnings	400
Accumulated other comprehensive income	(300)
TOTAL LIABILITIES AND EQUITY	2,800	1,950

In addition to its reported assets, Trunks has unreported franchise agreements (5‑year life) valued at $500,000. Its property and equipment has a 20‑year average remaining life. Trunks reported income of $750,000 and paid no dividends in 2019. Please note that Trunks uses the FIFO inventory method.

Required

1. How many shares of Trunks stock did Ubetcha acquire? Please show calculations so that partial credit can be granted.
2. Prepare a schedule, in good form, that shows the computation of Ubetcha’s equity in Trunks’ net income for 2019. Please show calculations so that partial credit can be granted.

Answer 1

a	How many shares of Trunk's stock did Ubetcha acquire?
	Common Stock issued and outstanding	$300,000
	Par value per share	$2
	Number of shares outstanding	150,000	($300000/$2)
	Voting stock acquired by Ubetcha	30%
	Number of shares Ubetcha acquired	45,000	(150000 x 30%)
b	Computation of Ubetcha's equity in Trunk's net income for 2019
	Net income of Trunk's	$750,000
	Add: Cost of goods sold fair value adj.	$250,000
	Add: Excess depreciation charged on property and equipment(1250000-350000)	$45,000	(900000/20)
	Less: Amortization of unreported franchise agreement	($100,000)	(500000/5).
	Adjusted net income	$945,000
	Ubetcha's equity in net income-30%	$283,500	(945000*30%)