Arlington purchased 500,000 common shares of Edgemont on January 1, 20X1 when the shares were trading at $10 each. Brokers charged commissions on the purchase of these shares of $50,000. When Arlington purchased its shares in Edgemont, that company had assets of $36,000,000 and liabilities of $20,000,000 on its balance sheet. At that time, the fair value of the assets was $4,000,000 higher than the amount shown on the balance sheet because the fair value of a building with a 20-year remaining life exceeded its carrying amount. By December 31, the shares were trading at $12 each. For the year ending December 31, 20X1 Edgemont reported net income of $2,000,000. On December 20, Edgemont declared an annual dividend of $0.60 per common share, payable on all of its 2,000,000 outstanding common shares in early 20X2.
Provide a memo showing support for any adjusting entries that the company needs to record.
EXHIBITI ARLINGTON LTD. DRAFT INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 20X1' Sales Cost of goods sold Gross profit $ 24,000,0001 14,400,000 Operating expenses:l General and administrative Depreciation main warehouse Depreciation small warehouse Depreciation equipment and trucks Depreciation-furniture 3,600,000 780,0001 160,000 280,0001 20,000 4,840,000 Operating income Rental-revenue small warehouse Rental expenses-small warehouse Interest expense on bank loan Commission expense Unrealized gain on investment in associate Bond interest revenue Bond purchase expense Miscellaneous revenue- furniture sale 4,760,000 100,0001 (3,804,896) 1,000,000 (46,0001 (50,000) 40,000 (109,075)1 54,000 (2,815,9711 Net income before income taxes Income tax expense Net income 1,944,0291 240,000 EXHIBIT ARLINGTON LTD. DRAFT BALANCE SHEET DECEMBER 31, 20X1l Current assets:l Cash Investment in associate Bond investment Accounts receivable from retailers Inventory $ 200,0001 6,000,0001 675,588 2,760,000 72355881 Property, plant and equipment:l Land Main warehouse Accumulated depreciation Small warehouse Accumulated depreciation Equipment and trucks Accumulated depreciation Furniture Accumulated depreciation 3,600,000 15,600,0001 (780,000) 2,400,0001 (160,000) 2,800,000 (280,000) 200,0001 (20,000) 23,360,000 Current liabilities: l Accounts payable $-2,891,559 Noncurrent liabilities: Bank loan 14,000,000 16,891,559 Shareholders' equity: Common shares Retained earnings -18,000,000 1,704,029 19,704,029 EXHIBITI ARLINGTON LTD. DRAFT INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 20X1' Sales Cost of goods sold Gross profit $ 24,000,0001 14,400,000 Operating expenses:l General and administrative Depreciation main warehouse Depreciation small warehouse Depreciation equipment and trucks Depreciation-furniture 3,600,000 780,0001 160,000 280,0001 20,000 4,840,000 Operating income Rental-revenue small warehouse Rental expenses-small warehouse Interest expense on bank loan Commission expense Unrealized gain on investment in associate Bond interest revenue Bond purchase expense Miscellaneous revenue- furniture sale 4,760,000 100,0001 (3,804,896) 1,000,000 (46,0001 (50,000) 40,000 (109,075)1 54,000 (2,815,9711 Net income before income taxes Income tax expense Net income 1,944,0291 240,000 EXHIBIT ARLINGTON LTD. DRAFT BALANCE SHEET DECEMBER 31, 20X1l Current assets:l Cash Investment in associate Bond investment Accounts receivable from retailers Inventory $ 200,0001 6,000,0001 675,588 2,760,000 72355881 Property, plant and equipment:l Land Main warehouse Accumulated depreciation Small warehouse Accumulated depreciation Equipment and trucks Accumulated depreciation Furniture Accumulated depreciation 3,600,000 15,600,0001 (780,000) 2,400,0001 (160,000) 2,800,000 (280,000) 200,0001 (20,000) 23,360,000 Current liabilities: l Accounts payable $-2,891,559 Noncurrent liabilities: Bank loan 14,000,000 16,891,559 Shareholders' equity: Common shares Retained earnings -18,000,000 1,704,029 19,704,029
