1) SHOW ALL YOUR WORK

2) PRESENTATION OF YOUR WORK

Question 3 INTERCOMPANY TRANSFERS.

On January 1, 2015, HeCo Corp. purchased an 80% interest in Hest, Inc. by issuing 32,000 shares of its $2

par value stock. HeCo's stock had a market value of $30 per share on January 1. There was no control

premium paid for the acquisition of Hest.

Hest's balances at January 1, 2015 were as follows:

Account Book Value Fair Market Value Remaining Useful Life

Cash $ 75,000 $ 75,000

Accounts Receivable 80,000 80,000

Inventory 120,000 120,000

Land 200,000 300,000

Buildings 250,000 320,000 10 years

Equipment 400,000 360,000 5 years

Accounts Payable 40,000 40,000

Long-Term Notes Payable 85,000 85,000

Common Stock 200,000

Paid-in Capital 635,000

Retained Earnings 1/1/15 165,000

During 2015, Hest sold inventory to HeCo for $150,000. The inventory originally cost Hest $80,000. At

12/31/15, 30% of the inventory was still on hand and this was all sold the next year. During 2016, Hest

sold inventory to HeCo for $200,000. The inventory cost Hest $120,000. At 12/31/16, 60% of the

inventory was still on hand.

The following are the account balances at December 31, 2016 for both companies.

HeCo Hest

Revenues $ 9,800,000 $ 2,350,000

Operating expenses 9,250,000 2,165,000

Equity in earnings of Hest Inc. 127,200 0

Net income $ 677,200 $ 185,000

Retained earnings, January 1, 2016 $ 823,500 $ 215,000

Net income 677,200 185,000

Dividends paid 500,000 200,000

Retained earnings, December 31, 2016 $ 1,000,700 $ 200,000

Cash $ 304,000 $ 72,000

Accounts Receivable 286,000 63,000

Inventory 400,000 137,000

Land 430,000 200,000

Buildings (net) 606,000 250,000

Equipment (net) 450,000 400,000

Investment in Hest, Inc. 951,200

Total assets $ 3,427,200 $ 1,122,000

Accounts Payable $ 156,500 $ 87,000

Long-Term Notes Payable 300,000

Common stock 380,000 200,000

Additional paid-in capital 1,590,000 635,000

Retained earnings, December 31, 2016 1,000,700 200,000

Total claims $ 3,666,100 $ 1,122,000

Required:

Show how the $127,200 balance in Equity income was determined.