COMPREHENSIVE: Recording the Acquisition; Selecting Relevant Data; Consolidation Workcommon stock (which was trading at $65 per share on that date). In addition, Pepsi incurred di¬

rect costs of $92,000 relating to the acquisition, $60,000 of which was for registering the shares issued with the SEC. Selected relevant data follow:

sheet On 7/1/06, m a business combination that did not qualify as a pooling of interests, Pepsi Inc.

acquired 80% of Sprite Inc.’s outstanding common stock by issuing 8,000 shares of its $5 par value June 30, 2006 Book Current Remaining Value Value Life Sprite Inventory .

Buildings and equipment Patents .

Long-term debt . Common stock .

Retained earnings .

Pepsi Common stock .

Additional paid-in capital Retained earnings .

$110,000 $120,000 2 months 700,000=

770,000 14 years 90,000 60,000 3 years 500,000 300,000 225,000 475,000 1 year

$500,000 500,000 367,000 Additional Information 1. Assume that any goodwill arising from the combination has a three-year life.
2. The equity method of accounting is to be used.
3. For 2006, Sprite had the following earnings and dividends:
Jan. 1-
June 30, 2006 July 1-
Dec. 31, 2006 Total Sales . . $ 600,000 $ 800,000 $1,400,000 Cost of sales . . (320,000) (430,000) (750,000)
Expenses . . (240,000) (310,000) (550,000)
Net Income . . $ 40,000 $ 60,000 $ 100,000 Dividends declared . . $ 25,000 $ 35,000"
Dividends paid . . 25,000 -0- $ 70,000 25,000 ® This dividend was paid 1/5/07.
4. During 2006, Pepsi declared and paid $80,000 of dividends each quarter. Also, Pepsi reported a net income of $200,000 for the six months ended 6/30/06.
Required 1. Prepare the entry to record the business combination on 7/1/06.
2. Complete Pepsi’s and Sprite’s financial statements that follow for consolidation purposes:
Pepsi Sprite Income Statement (2006)
Sales Cost of .
sales .
Expenses .
Net Income .
Statement of Retained Earnings Balances, beginning .
+ Net income .
- Dividends declared .
Balances, 12/31/06 .
Balance Sheet (as of 12/31/06)
Current assets .
Investment in Sprite .
Land Buildings .
and equipment. . . .
Accumulated depreciation . . .
Patents .
$ 2,200,000 (1,100,000)
(600,000)
$ 1,356,000 700,000 3,000,000 (600,000)
-0-
$ 475,000 200,000 900,000 (250,000)
75,000 Total Assets . $1,400,000 Accounts payable . $ 913,000 $ 350,000 Long-term debt . 2,100,000 500,000 Common stock . 300,000 Additional Retained earnings paid-in .
capital .
250,000 Total Liabilities and Equity . $1,400,000 3. Prepare an analysis of the Investment account updated through 12/31/06.
4. Prepare the consolidation entries at 12/31/06.
5. Prepare a consolidation worksheet at 12/31/06.