Watson, Inc., purchased 60 percent of Houston, Inc., on January 1, 2008, for $400,000 in cash. On that date, assets and liabilities of the subsidiary had the following values:
| Book Value | Fair Value |
Current assets | $ 320,000 | $ 320,000 |
Equipment (net) (10-year life) | 410,000 | 380,000 |
Buildings (net) (15-year life) | 300,000 | 455,000 |
Current liabilities | (190,000) | (190,000) |
Bonds payable (due in 10 years) | (370,000) | (350,000) |
On December 31, 2011, these two companies report the following figures:
| Watson | Houston |
Revenues | $ (640,000) | $ (280,000) |
Operating expenses | 480,000 | 210,000 |
Equity in subsidiary earnings | (36,400) | –0– |
Net income | $ (196,400) | $ (70,000) |
| Watson | Houston |
Retained earnings, 1/1/11 | $ (683,400) | $ (380,000) |
Net income | (196,400) | (70,000) |
Dividends paid | 60,200 | 40,000 |
Retained earnings, 12/31/11 | $ (819,600) | $ (410,000) |
Current assets | $ 215,000 | $ 260,000 |
Investment in Houston | 491,600 | –0– |
Equipment (net) | 500,000 | 420,000 |
Buildings (net) | 413,000 | 520,000 |
Total assets | $ 1,619,600 | $ 1,200,000 |
Current liabilities | $ (390,000) | $ (170,000) |
Bonds payable | (100,000) | (370,000) |
Common stock | (310,000) | (250,000) |
Retained earnings, 12/31/11 | (819,600) | (410,000) |
Total liabilities and equities | $(1,619,600) | $(1,200,000) |
Answer each of the following questions using the purchase method:
a. The parent shows a $36,400 balance as its Equity in Subsidiary Earnings. How was this balance calculated?
b. Is an adjustment to the parent’s Retained Earnings as of January 1, 2011, needed? Why or why not?
c. How much total amortization expense should be recognized for consolidation purposes in 2011?
d. What is the noncontrolling interest in the subsidiary’s net income?
e. Prepare a consolidated income statement.
f. What allocations were made as a result of the purchase price? What amount of each allocation remains at the end of 2011?
g. What is the December 31, 2011, amount in Noncontrolling Interest in the Subsidiary? What three components make up this total?
h. Prepare a consolidated balance sheet as of December 31, 2011.
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