COMPREHENSIVE: Analyzing the Investment; Applying the Equity Method; Consolidation Worksheet PDQ Inc. acquired 60% of SAS Inc.’s outstanding common stock for cash of $503,000 on 1/1/06. PDQ also incurred $25,000 of direct out-of-pocket costs in connection with the acqui¬
sition. Information with respect to SAS as of the acquisition date follows:
Book Value Current Value Remaining Life Cash . . $ 74,000 $ 74,000 Accounts receivable, net . . 266,000 266,000 Inventory . . 280,000 260,000 6 months Land . . 780,000 780,000 Indefinite Buildings and equipment . . 900,000 675,000 15 years Accumulated depreciation . . (300,000) Patent . . 40,000 165,000 5 years Goodwill . . 60,000 Indefinite Total Assets . . $2,100,000 $2,220,000 Payables and accruals . . $ 380,000 $ 380,000 Long-term debt . . 1,200,000 1,040,000 4 years Common stock . . 200,000 800,000 Retained earnings . . 320,000 Total Liabilities and Equity . . $2,100,000 $2,220,000 PDQ intends to use the equity method to account for its investment. The only entry it has made to the Investment account since the acquisition date, however, is to reflect the receipt of its share of $55,000 of dividends that SAS declared and paid during 2006.
Each company’s financial statements for the year ended 12/31/06, one year after the acquisi¬ tion date, follow:
Income Statement (2006)
Sales Cost of .
sales .
Expenses .
Net Income .
Balance Sheet (as of 12/31/06)
Cash Accounts .
receivable, net .
Investment Inventory .
in SAS .
Land Buildings .
and equipment .
Accumulated depreciation . . . .
Goodwill Patent .
.
Total Assets .
Payables and accruals .
Common Long-term stock debt . .
Retained earnings .
Total Liabilities and Equity .
Dividends declared during 2006 PDQ SAS $ 9,000,000 $ 870,000 (5,000,000) (470,000)
(2,800,000) (190,000)
$ 1,200,000 $ 210,000 $ 665,000 $ 138,000 840,000 270,000 1,200,000 560,000 495,000 1,000,000 780,000 4,800,000 1,050,000 (1,700,000) (390,000)
300,000 32,000 60,000 $ 7,600,000 $2,500,000 $ 1,100,000 S 625,000 2,600,000 1,200,000 2,000,000 200,000 1,900,000 475,000 $ 7,600,000 $2,500,000 $ 900,000 $ 55,000 Required 1. Analyze the Investment account as of the acquisition date.
2. Update the analyses of the Investment account to reflect activity under the equity method through 12/31/06.
3. Adjust the parent’s statements as of 12/31/06 to reflect the equity method of accounting.
4. Prepare the consolidation entries at 12/31/06.
5. Prepare a consolidation worksheet at 12/31/06.