Question
Primadonna Company acquired 75 percent of the stock of Slacks Inc. on January 1, 2015, for $280,000. On this date, the balances of Slacks' stockholders'
Primadonna Company acquired 75 percent of the stock of Slacks Inc. on January 1, 2015, for $280,000. On this date, the balances of Slacks' stockholders' equity accounts were Common Stock, $195,000, and Retained Earnings, $45,000. As of that date, the fair market value for the 25% of shares not purchased by Primadonna was $90,000.
On January 1, 2015, Slacks' recorded book values were equal to fair values for all items except four: (1) accounts receivable had a book value of $55,000 and a fair value of $48,000, (2) property, plant & equipment, net, had a book value of $150,000 and a fair value of $168,000, (3) a previously unrecorded customer list intangible asset had a book value of $0 and a fair value of $30,000, and (4) notes payable had a book value of $30,000 and a fair value of $25,000. Both companies use the FIFO inventory method and sell all of their inventories at least once a year. The year-end net balance of accounts receivables are collected in the following year. On the acquisition date, Slacks' PP&E, net had a remaining life of 10 years, the customer list had a remaining life of four years, and the note payable had a remaining term of five years.
On January 1, 2018, Primadonna sold a building to Slacks for $80,000. On this date, the building was carried on Primadonna's books at a cost of $100,000 with accumulated depreciation of $45,000. Both companies estimated that the building has a remaining life of 10 years on the intercompany sale date, with no salvage value.
Each company routinely sells merchandise to the other company, with a profit margin of 40 percent of selling price (regardless of the direction of the sale). During 2019, intercompany sales amount to $50,000, of which $20,000 remains in the ending inventory of Slacks. On December 31, 2019, $10,000 of these intercompany sales remain unpaid. Additionally, Primadonna's December 31, 2018 inventory includes $15,000 of merchandise purchased in the preceding year from Slacks. During 2018, intercompany sales amount to $40,000, and on December 31, 2018, $8,000 of these intercompany sales remain unpaid.
Primadonna accounts for its investment in Slacks using the equity method. Unconfirmed profits are allocated pro-rata.
Required
1. In one worksheet, consolidation spreadsheet using the December 31, 2019 pre-closing trial balance information for Primadonna and Slacks provided at the following page.
2. Program formulas in additional worksheets that result in the following consolidated financial statements: Income Statement; Statement of Retained Earnings; Balance Sheet (see format, Exhibit 4.7 on p. 171)
3. Prepare schedules that compute the following:
a. Goodwill (as computed on January 1, 2015) (see formats on p. 57 and p. 161)
b. Equity income from Slacks (for 2019) (see format on p. 242)
c. Investment in Slacks as of December 31, 2019 (see partial solution to problem 5-31)
d. Income attributable to the noncontrolling interest (for 2019)
e. Noncontrolling interest as of December 31, 2019 (see format on p. 243)
4. separate list of the consolidating entries, properly labeled, that are included in the consolidation spreadsheet
Debits
Primadonna
Slacks
Cash
$58,080
$42,500
Accounts receivable
81,000
60,000
Inventories
195,000
91,500
Property, plant & equipment, net
189,000
135,000
Other assets
85,500
150,000
Investment in Slacks
325,500
--
Cost of goods sold
432,000
162,000
Depreciation & amortization expense
18,000
14,400
Operating expenses
226,000
54,100
Interest expense
8,000
3,500
Dividends
90,000
21,000
Total debits
$1,708,080
$734,000
Credits
Accounts payable
$168,000
$35,000
Notes payable
80,980
30,000
Other liabilities
33,000
39,000
Common stock
360,000
195,000
Retained earnings (Jan. 1, 2019)
322,200
165,000
Sales
720,000
270,000
Equity income (loss) from Slacks
23,900
--
Total credits
$1,708,080
$734,000
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