On January 1, 2020, Pruitt Company issued 25,500 shares of its common stock ($2 par) in exchange for 85% of the outstanding common stock of Shah Company. Pruitt?s common stock had a fair value of $28 per share at that time. Pruitt Company uses the cost method to account for its investment in Shah Company and files a consolidated income tax return. A schedule of the Shah Company assets acquired and liabilities assumed at book values (which are equal to their tax bases) and fair values follows.

Additional Information:

1. Pruitt?s income tax rate is 35%.

2. Shah?s beginning inventory was all sold during 2020.

3. Useful lives for depreciation and amortization purposes are:

Plant assets...................................10 years

Patents.............................................8 years

Bond premium.............................10 years

4. Pruitt uses the straight-line method for all depreciation and amortization purposes.

Required:

A. Prepare the stock acquisition entry on Pruitt Company?s books.

B. Assuming Shah Company earned $216,000 and declared a $90,000 dividend during 2020, prepare the eliminating entries for a consolidated statements workpaper on December 31, 2020.

C. Assuming Shah Company earned $240,000 and declared a $100,000 dividend during 2021, prepare the eliminating entries for a consolidated statements workpaper on December 31, 2021.

Transcribed Image Text:

Book Value/Tax Basis Fair Value $ 125,000 Excess Item Receivables (net) $ -0- 28,000 $125,000 Inventory 167,000 195,000 120,000 Land Plant assets (net) Patents 86,500 33,500 467,000 567,000 100,000 105,000 95,000 $940,500 200,000 $1,207,000 Total $266,500 Excess Item Book Value/Tax Basis Fair Value Current liabilities Bonds payable |Common stock Other contributed capital Retained earnings Total $ 89,500 $ 89,500 $ -0- 300,000 360,000 60,000 120,000 164,000 267,000 $940,000