Question
In January 1, 2019, Strolle Company acquired an 70% interest in Hailey Company for a purchase price that was $500,000 over the book value
In January 1, 2019, Strolle Company acquired an 70% interest in Hailey Company for a purchase price that was $500,000 over the book value of Hailey's Stockholders' Equity on the acquisition date. Spring uses the equity method to account for its investment in Hailey. Strolle assigned the acquisition-date AAP as follows: 30 Points AAP Items Patent Goodwill Initial Fair Value Useful Life (years) 350,000 10 150,000 Indefinite $500,000 Hailey sells inventory to Strolle (upstream) which includes that inventory in products that it (Strolle), ultimately, sells to customers outside of the controlled group. You have compiled the following data as of 2024 and 2025: 2024 2025 Transfer price for inventory $305,500 $500,000 sale Cost of goods sold -259,675 -440,000 Gross profit $45,825 60,000 % inventory remaining 50% 40% Gross profit deferred $22,913 $24,000 EOY Receivable/Payable $42,000 $18,000 The inventory not remaining at the end of the year has been sold outside of the controlled group. Strolle and Hailey report the following financial statements at December 31, 2025: + Income Statement Sales Strolle $4,500,000 Hailey $750,000 Cost of goods sold -3,825,000 (660,000) Gross Profit 675,000 90,000 Income (loss) from subsidiary 13,939 Operating expenses -323,000 -34,000 Net income $365,939 $56.000 Statement of Retained Earnings BOY Retained Earnings Net income Dividends EOY Retained Earnings Strolle Hailey $4,465,000 $440,000 365,939 56,000 -105,400 -10,000 $4,725,539 $486,000
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