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 Corporation's stock at December 31, 2018 was $2,300,000.

The book values of Atlanta Corporation's asset and liability accounts are considered as equal to fair values except for a Customer List whose value accounted for Georgia Corporation's 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!):

1.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 Corporation's income? Show all your calculations (4 points)

2.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)