Question
McKinney Enterprises acquired Pottsboro, Inc. as a wholly-owned subsidiary on January 1, 2019 paying $1,750,000. The $440,000 excess of cost over book value of Pottsboros
McKinney Enterprises acquired Pottsboro, Inc. as a wholly-owned subsidiary on January 1, 2019 paying $1,750,000. The $440,000 excess of cost over book value of Pottsboros net assets was partly attributable to a patent undervalued by $210,000. The patent has a 10-year life. The remaining excess is considered goodwill. The parent uses the cost method of pre-consolidation Equity investment bookkeeping. The separate financial statements of the two companies for 2022 are presented below. Neither company issued additional shares after the acquisition Pottsboro by McKinney.
| McKinney Enterprises | Pottsboro, Inc. |
Sales revenue | $3,100,000 | $440,000 |
Cost of goods sold | -1,580,000 | -252,000 |
Gross profit | 1,520,000 | 188,000 |
Operating expenses | -485,000 | -68,000 |
Dividend income | 42,000 | 0 |
Net Income | $1,077,000 | $120,000 |
|
|
|
Retained Earnings, 1/1/22 | $1,700,000 | $750,000 |
Net income | 1,077,000 | 120,000 |
Dividends | -65,000 | -42,000 |
Retained Earnings, 12/31/22 | $2,712,000 | $828,000 |
|
|
|
Cash and receivables | $535,000 | $501,000 |
Inventory | 758,000 | 840,000 |
Equity investment | 1,750,000 |
|
Property, plant & equipment (Net) | 4,596,000 | 1,205,480 |
Total Assets | $7,639,000 | $2,546,480 |
|
|
|
Accounts payable | $265,000 | $182,430 |
Accrued liabilities | 458,000 | 272,390 |
Notes payable | 780,000 | 603,500 |
Common stock | 460,000 | 204,540 |
Additional paid-in capital | 2,964,000 | 455,620 |
Retained Earnings, 12/31/22 | 2,712,000 | 828,000 |
Total Liabilities and Equities | $7,639,000 | $2,546,480 |
Required:
a. What was Pottsboro, Inc.s retained earnings balance on the acquisition date?
b. Prepare all necessary consolidation entries for 2022 consolidated financial statements.
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