Chapter 1 Homework

SolacCompany acquires 30% of the voting stock of TalgoCorporation on January 1, 2020 for $ 25,000,000. The book value of Talgo's stock at the time of purchase was $ 40,000,000. Book values approximated fair values except for a building that was overvalued by $ 10,000,000 (10 year life), equipment that was undervalued by $ 4,000,000 (4 year life) and previously unrecorded intangibles of $ 20,000,000(indefinite life). It is now Decemer31, 2022. Solac sells merchandise to Talgo at a markup of 25% on cost. Talgosells merchandise to Solacat a markup of 20% on cost. Below are the inventory balances :

Talgo reports net income of $ 1,300,000 in 2020; $ 1,500,000 in 2021 and $ 1,600,000 in 2022.

Talgo pays no dividends during this period.

Required:

a. Calculate equity in net income of Talgo, reported on Solac's2022 income statement [A]

b. Calculate the balance in Investment in Talgoas of December 31, 2022[B]

\begin{tabular}{|l|l|l|} \hline Date & Inventory held by Solac & Inventory held by Talgo \\ \hline December 31, 2021 & 3,000,000 & 1,000,000 \\ \hline December 31, 2022 & 3,120,000 & 1,025,000 \\ \hline \end{tabular}