Problem 1 Part A Davis Company is formed with $5,000 in equity and is expected to generate the following cash flows (all occurring at the end of one year):

Cash Flows Probability $63,000 0.3 39,000 0.5 28,000 0.2

(inflow or outflow indications are not given but they are "generating cashflows" assume inflows**)

Determine if the equity is high enough to absorb the expected losses assuming the appropriate discount rate of 6%

Part B Paul Corporation paid $205,000 to buy 25% of Slide Companys common stock on Jan 1, 2015 and paid $459,000 to buy 60% of Slides stock on December 31, 2015. There is no control premium. On December 31, 2015, Slides stockholders equity was Common Stock at $50,000 and Retained Earnings at $657,000. Differences between book value and fair value of the net identifiable assets of Slide Company on December 31, 2015, were limited to the following:

Book Value Fair Value Copyrights $ 32,000 $ 30,200 Long-term debt 26,000 23,700

How much, if any, gain or loss did Paul Corporation recognize on December 31, 2015? Prepare working paper entry R (in journal entry format) for Paul Corporation and subsidiary on December 31, 2015.