Problem

Pan Corporation has an 80 percent interest in Sip Corporation, its only subsidiary. The 80...

Pan Corporation has an 80 percent interest in Sip Corporation, its only subsidiary. The 80 percent interest was acquired on July 1, 2011, for $800,000, at which time Sip’s equity consisted of $600,000 capital stock and $200,000 retained earnings. The excess of fair value over book value was assigned to buildings with a 20-year remaining useful life.

On December 31, 2013, Sip sold equipment with a remaining useful life of four years to Pan at a gain of $40,000. Pan Corporation had separate income for 2013 of $1,000,000 and for 2014 of $1,200,000.

Income and retained earnings data for Sip Corporation for 2013 and 2014 are as follows:

 

2013

2014

Retained earnings January 1

$300,000

$400,000

Add: Net income

200,000

220,000

Deduct: Dividends

-100,000

-120,000

Retained earnings December 31

$400,000

$500,000

REQUIRED

1. Compute Pan Corporation’s income from Sip, net income, and consolidated net income for each of the years 2013 and 2014.


2. Compute the correct balances of Pan’s investment in Sip at December 31, 2013 and 2014, assuming no changes in Sip’s outstanding stock since Pan acquired its interest.

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Solutions For Problems in Chapter 6