Question
Case 1.3 Georgia Corporation acquired 25% of the outstanding voting shares of Atlanta Corporation for $400,000 in cash on January 1, 2018, when Atlanta Corporation
Case 1.3
Georgia Corporation acquired 25% of the outstanding voting shares of Atlanta Corporation for $400,000 in cash on January 1, 2018, when Atlanta Corporation had a book value of $1,500,000. An additional 10% of the stock is purchased on January 1, 2019, for $217,000.
The following information is available for Atlanta Corporation:
| 2018 | 2019 | 2020 |
Net Income | 700,000 | 750,000 | 900,000 |
Dividends | 150,000 | 100,000 | 100,000 |
The Fair Value of Atlanta Corporations stock at December 31, 2018 was $2,300,000.
The book values of Atlanta Corporations asset and liability accounts are considered as equal to fair values except for a Customer List whose value accounted for Georgia Corporations excess cost in each purchase. The Customer List had a remaining life of 10 years at January 1, 2018.
Required (treat each scenario as independent of the other!):
- If Georgia Corporation sells its entire investment in Atlanta Corporation on January 1, 2020, for $1,300,000 cash, what is the impact on Georgia Corporations income? Show all your calculations (4 points)
- Assume that Georgia Corporation sells inventory to Atlanta Corporation during 2019 and 2020 as follows:
| Cost to Georgia | Price to Atlanta | Year-End Balance (at transfer price) |
2019 | 35,000 | 50,000 | 20,000 (sold in following year) |
2020 | 33,000 | 60,000 | 40,000 (sold in following year) |
What amount of equity income should Georgia recognize for the year 2020? Show all your calculations (2 points) |
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