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Problem 5-19 Pcost Company purchased 85% of the common stock of Scost Company on April 1, Year 1 for total consideration of $534,455 cash plus

Problem 5-19

Pcost Company purchased 85% of the common stock of Scost Company on April 1, Year 1 for total consideration of $534,455 cash plus $50,600 of contingent consideration as measured according to GAAP at fair value. Both companies have a December 31 year-end. December 31, Year 1, trial balances for Pcost and Scost were:

At December 31, Year 1
Pcost Scost
Cash $30,400 $25,000
Accounts Receivables 171,100 135,800
Inventory 235,400 131,800
Treasury Stock at Cost, 500 Shares 48,200
Investment in Scost Company 585,055
Property and Equipment (net) 927,700 522,300
Cost of Goods Sold 1,513,900 558,800
Selling, General, & Administration 322,400 221,100
Other Expenses 94,500 67,900
Dividends Declared 0 49,100
Total $3,880,455 $1,760,000
Accounts Payable $111,720 $137,800
Contingent Consideration 60,700
Dividends Payable 0 49,100
Common Stock, $5 par value 271,500 39,300
Other Contributed Capital 908,300 254,900
Retained Earnings, 1/1 358,000 319,000
Sales 2,128,500 959,900
Dividend Income 41,735 0
Total $3,880,455 $1,760,000

Scost Company declared a $50,600 cash dividend on December 20, Year 1, payable on January 10, Year 2, to stockholders of record on December 31, Year 1. Pcost Company recognized the dividend on its declaration date. Pcost includes dividend income receivable in the accounts receivable account. On the acquisition date, the book values and fair values of Scosts assets and liabilities were equal with the following exceptions.

Book Value Fair Value
Inventory 115,100 143,900
Property and Equipment 472,300 504,500

Any difference between book value and fair value for property and equipment is depreciated over seven years. Depreciation expense is reported on the income statement in Selling, General, and Administration expense. The entire amount of inventory acquired was sold in Year 1. No payments were made for the earn-out at the end of year 1, and the adjustment to contingent consideration included only interest adjustments (no change in fair value was expected since the actual and target levels for revenue were equal at the end of year 1). Both companies report depreciation expense as a component of Selling, General, and Administration expense on the income statement. For the year ending December 31, Year 1, Pcost and Scost reported depreciation expense of $96,800 and $54,600, respectively. Both companies use straight-line and use the full-year option in computing depreciation expense (i.e., they take a full years depreciation on any asset acquired during the year). The following balance sheet is available for both companies at the beginning of the year of acquisition and the acquisition date.

Pcost Scost Pcost Scost
Balance Sheet 1/1/Year 1 1/1/Year 1 4/1/Year 1 4/1/Year 1
Cash $101,300 $15,100 28,200 11,100
Accounts Receivables 171,900 114,700 121,700 122,900
Inventory 225,700 120,400 227,100 115,100
Investment in Scost Company 0 0 585,055
Property and Equipment 833,000 449,500 833,000 472,300
Total $1,331,900 $699,700 1,795,055 $721,400
Accounts and Notes Payable $43,300 $85,600 181,355 156,400
Contingent Consideration 50,600
Dividends Payable 49,100
Common Stock, $5 par value 223,800 39,300 271,500 39,300
Other Contributed Capital 706,800 254,900 908,300 254,900
Retained Earnings 358,000 319,000 383,300 319,000
Treasury Stock (48,200 ) (48,200 )
Total $1,331,900 $699,700 $1,795,055 $721,400

(a)

Prepare a consolidated statements workpaper at the end of year 1. (List items that increase retained earnings first.)

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