Palm Company acquired 100 percent of Storm Company’s voting stock on January 1, 2009, by issuing 10,000 shares of its $10 par value common stock (having a fair value of $14 per share). As of that date, Storm had stockholders’ equity totaling $105,000. Land shown on Storm’s accounting records was undervalued by $10,000. Equipment (with a five-year life) was undervalued by $5,000. A secret formula developed by Storm was appraised at $20,000 with an estimated life of 20 years.
Following are the separate financial statements for the two companies for the year ending December 31,2013. Credit balances are indicated by parentheses.
| Palm Company | Storm Company |
Revenues | $ (485,000) | $(190,000) |
Cost of goods sold | 160,000 | 70,000 |
Depreciation expense | 130,000 | 52,000 |
Subsidiary earnings | (66,000) | -0- |
Net income | $ (261,000) | $ (68,000) |
Retained earnings, 1/1/13 | $ (659,000) | $ (98,000) |
Net income (above) | (261,000) | (68,000) |
Dividends paid | 175,500 | 40,000 |
Retained earnings, 12/31/13 | $ (744,500) | $(126,000) |
Current assets | $ 268,000 | $ 75,000 |
Investment in Storm Company | 216,000 | -0- |
Land | 427,500 | 58,000 |
Buildings and equipment (net) | 713,000 | 161,000 |
Total assets | $ 1,624,500 | $ 294,000 |
Current liabilities | $ (110,000) | $ (19,000) |
Long-term liabilities | (80,000) | (84,000) |
Common stock | (600,000) | (60,000) |
Additional paid-in capital | (90,000) | (5,000) |
Retained earnings, 12/31/13 | (744,500) | (126,000) |
Total liabilities and equity | $(1,624,500) | $(294,000) |
a. Explain how Palm derived the $66,000 balance in the Subsidiary Earnings account.
b. Prepare a worksheet to consolidate the financial information for these two companies.
c. Explain how Storm’s individual financial records would differ if the push-down method of accounting had been applied.
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