Question
Padre, Inc., buys 80 percent of the outstanding common stock of Sierra Corporation on January 1, 2015, for $802,720 cash. At the acquisition date, Sierras
Padre, Inc., buys 80 percent of the outstanding common stock of Sierra Corporation on January 1, 2015, for $802,720 cash. At the acquisition date, Sierras total fair value, including the noncontrolling interest, was assessed at $1,003,400 although Sierras book value was only $690,000. Also, several individual items on Sierras financial records had fair values that differed from their book values as follows: |
Book Value | Fair Value | |||||
Land | $ | 65,000 | $ | 290,000 | ||
Buildings and equipment (10-year remaining life) | 287,000 | 263,000 | ||||
Copyright (20-year life) | 122,000 | 216,000 | ||||
Notes payable (due in 8 years) | (176,000 | ) | (157,600 | ) | ||
For internal reporting purposes, Padre, Inc., employs the equity method to account for this investment. The following account balances are for the year ending December 31, 2015, for both companies. |
Padre | Sierra | |||||
Revenues | $ | (1,394,980 | ) | $ | (684,900 | ) |
Cost of goods sold | 774,000 | 432,000 | ||||
Depreciation expense | 274,000 | 11,600 | ||||
Amortization expense | 0 | 6,100 | ||||
Interest expense | 52,100 | 9,200 | ||||
Equity in income of Sierra | (177,120 | ) | 0 | |||
Net income | $ | (472,000 | ) | $ | (226,000 | ) |
Retained earnings, 1/1/15 | $ | (1,275,000 | ) | $ | (530,000 | ) |
Net income (above) | (472,000 | ) | (226,000 | ) | ||
Dividends declared | 260,000 | 65,000 | ||||
Retained earnings, 12/31/15 | $ | (1,487,000 | ) | $ | (691,000 | ) |
Current assets | $ | 856,160 | $ | 764,700 | ||
Investment in Sierra | 927,840 | 0 | ||||
Land | 360,000 | 65,000 | ||||
Buildings and equipment (net) | 909,000 | 275,400 | ||||
Copyright | 0 | 115,900 | ||||
Total assets | $ | 3,053,000 | $ | 1,221,000 | ||
Accounts payable | $ | (275,000 | ) | $ | (194,000 | ) |
Notes payable | (541,000 | ) | (176,000 | ) | ||
Common stock | (300,000 | ) | (100,000 | ) | ||
Additional paid-in capital | (450,000 | ) | (60,000 | ) | ||
Retained earnings (above) | (1,487,000 | ) | (691,000 | ) | ||
Total liabilities and equities | $ | (3,053,000 | ) | $ | (1,221,000 |
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