P8-1 Mid year acquisition, overvalued inventory, upstream sale of land On July 1, 2014, Adnan SAL acquired 75 percent of Rayan SAL for $3,750,000. Rayan SAL stockholders’

equity on July 1, 2014 was $4,850,000. The trial balance for both companies for the year ended December 31, 2014 is as follows (in thousands):

Debits Adnan SAL Rayan SAL Cash $ 1,200 $900 Accounts receivable 2,000 1,100 Dividend receivable 112.5 0 Inventory 300 1,300 Land 1,200 2,400 Equipment 3,000 350 Investment in Rayan SAL 3,637.5 Cost of sales 3,900 2,700 Other expenses 1,100 950 Dividends 0 250 Total $16,450 $ 9,950 Credits Accounts payable $2,200 $550 Dividend payable 0 150 Common stock 5,000 3,000 Retained Earnings 1,850 1,300 Sales 7,400 4,800 Gain on sale of land 0 150 Total $16,450 $9,950 ADDITIONAL INFORMATION 1. The book value of Rayan SAL’s net identifiable assets at the acquisition date was equal to the fair value, except for inventory that was overvalued by $100,000. The inventory was sold in 2014.