Problem

Palm Company acquired 100 percent of Storm Company’s voting stock on January 1, 2009, by i...

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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