Henderson Window Company was a privately held corporation until January 1, 20X1. On January 1, 20X1, Cool Glass Company purchased a 70% interest in Henderson at a price well in excess of book value. There were some minor differences between book and fair values, but the bulk of the excess was attributed to goodwill. In its consolidated statements, Cool Glass is amortizing the goodwill over 10 years.

Harvey Henderson did not sell his shares to Cool Glass as a part of the January 1, 20X1, Cool Glass purchase. He wanted to remain a Henderson shareholder since he felt Henderson was a more profitable and stable company than was Cool Glass. Harvey remains an employee of Henderson Window, working in an accounting capacity.

Harvey is concerned about some accounting issues that he feels are detrimental to his ownership interest. Harvey told you that Henderson always bought most of its glass from Cool Glass. He never felt the prices charged for the glass were unreasonable. Since the purchase of Henderson by Cool Glass, he feels the price charged to Henderson by Cool Glass has risen dramatically and that it is out of step with what would be paid to other glass suppliers.

The second concern is the sale of a large Henderson warehouse to Cool Glass for less than what Harvey would consider to be the market value. Harvey agrees that the sale is rea- sonable since the new just-in-time order system has made the space unnecessary. He just feels the sale price is below market.

Harvey did make his concerns known to the president of Cool Glass. The president made several points. First, she said that the price charged for the glass was a little high, but Harvey should consider its high quality. She went on to say that the transfer price washes out in the annual report, and it has no impact on reported net income of the corporation. She also stated that the warehouse sale was at a low price, but there was a reason. It was a good year, and a large gain wasnt needed. She would rather have lower depreciation in future years. Her last point was: we paid a big price for Henderson, and we are stuck with big goodwill amortization expenses. We should get some benefits from it!

Write a memo to Harvey Henderson suggesting how he might respond to the presidents comments.