COMPREHENSIVE: Recording the Acquisition; Analyzing the Investment Account; Applying the Equity Method; Consolidation Worksheet On 1/1/06, Pina Inc. acquired 100% of Sina Inc.’s out¬

standing common stock by issuing 6,000 shares of $10 par value common stock (which was trad¬

ing at $20 per share on that date). In addition, Pina incurred direct costs of $95,000 relating to the acquisition, $25,000 of which was for registering the shares issued with the SEC. (All these direct costs were charged to the Investment account.) The balances in the subsidiary’s capital accounts as of the acquisition date follow;

Common stock . $100,000 Retained earnings . 102,000

$202,000 All of the subsidiary’s assets and liabilities have a current value equal to their book value, except for the following:

Additional Information 1. Sina is a real estate development company that owns several parcels of land. None of the land owned was developed during 2006. One parcel acquired eight years ago was sold, however, in its undeveloped stage. This was the only sale for 2006.
2. Pina is privately owned, and it chose to use nor !-push-down accounting.
3. The only entry Pina made in its books relating to the subsidiary was at the acquisition date.
4. Sina’s buildings and equipment were fully depreciated at the acquisition date.
Each company’s financial statements for the year ended 12/31/06 follow: Pina Sina Income Statement (2006)
Sales .
$ 950,000 $ 330,000 Cost of sales . (520,000) (200,000)
Expenses . (204,000) (45,000)
Net Income .
$ 226,000 $ 85,000 Balance Sheet (as of 12/31/06)
Cash .
$ 28,000 $ 22,000 Accounts receivable, net . 70,000 Notes receivable . 50,000 Inventory . 130,000 Investment in Sina . 215,000 Land . 88,000 Buildings and equipment . 700,000 Accumulated depreciation . 5,000 (600,000) (5,000) Land held for development . 400,000 Deferred charges . 28,000 Total Assets . $ 631,000 $ 500,000 Payables and accruals . $ 26,000 Dividends payable . $ 13,000 35,000 Long-term debt . 200,000 Common stock . 10,000 100,000 Additional paid-in capital . 155,000 Retained earnings . 440,000 152,000 Total Liabilities and Equity . $ 631,000 $ 500,000 Dividends declared during 2006 . $ 100,000 $ 35,000 1. Analyze the Investment account by the components of the major conceptual elements as of the acquisition date. Make any appropriate adjusting entries.
2. Update the analysis of the Investment account to reflect activity under the equity method through 12/31/06.
3. Prepare the consolidation entries as of 12/31/06.
4. Adjust Pina’s financial statements as shown above to reflect the equity method, and then pre¬
pare a consolidation worksheet at 12/31/06.