Question
Fargus Corporation owned 51% of the voting common stock of Sanatee, Inc. The parent's interest was acquired several years ago on the date that the
Fargus Corporation owned 51% of the voting common stock of Sanatee, Inc. The parent's interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the acquisition price. On January 1, 2017, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a 10% interest rate every December 31. Fargus acquired 40% of these bonds on January 1, 2019, for 95% of the face value. Both companies utilized the straight-line method of amortization. Skipen Corp. had the following stockholders' equity accounts:
Preferred stock (8% cumulative dividend) | $ | 700,000 |
Common stock | 1,050,000 | |
Additional paid -in capital | 420,000 | |
Retained earnings | 1,330,000 | |
Total | $ | 3,500,000 |
The preferred stock was participating and is therefore considered to be equity. Vestin Corp. acquired 90% of this common stock for $2,250,000 and 70% of the preferred stock for $1,120,000. All of the subsidiary's assets and liabilities were determined to have fair values equal to their carrying amounts except for land, which is undervalued by $130,000. | ||
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