Palm Company acquired 100 percent of Storm Company’s voting stock on January 1, 2009, by issu¬ ing 10,000 shares of its $10 par value common stock (having a fair value of $14 per share). As ofthat 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. LO1 Palm Storm Company Company Revenues.

$(190,000)

Cost of goods sold . . .

70,000 Depreciation expense .

130,000 52,000 Equity in subsidiary earnings .. .

. (66,000)

-0-

Net income .......

$ (68,000)

Retained earnings, 1/1/13 ....

. $ (659,000)

$ (98,000)

Net income (above) . .

. (261,000)

(68,000)

Dividends paid .........

40,000 Retained earnings, 12/31/13 .....

...... $ (744,500)

$(126,000)

Current assets.. .

$ 75,000 Investment in Storm Company .....

...... 216,000

-o.

Land.

58,000 Buildings and equipment (net) .......

. 713,000 161,000 Iota! assets ...

$ 294,000 Current liabilities ...

. $ (110,000)

$ (19,000)

Long-term liabilities .............

. (80,000)

(84,000)

Common stock..

(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)

eXeel

a. Explain how Palm derived the $66,000 balance in the Equity in 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.