Problem 5-19 Pcost Company purchased 85% of the common stock of Scost Company on April 1, Year 1 for total consideration of $538,745 cash plus $49,200 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 $29,800 $25,500

Accounts Receivables 169,700 134,100

Inventory 230,700 128,100

Treasury Stock at Cost, 500 Shares 48,900

Investment in Scost Company 587,945

Property and Equipment (net) 940,600 513,400

Cost of Goods Sold 1,552,400 563,900

Selling, General, & Administration 316,100 216,400

Other Expenses 97,900 66,400

Dividends Declared 0 50,700

Total $3,925,145 $1,747,400

Accounts Payable $225,650 $111,900

Contingent Consideration 60,900

Dividends Payable 0 50,700

Common Stock, $5 par value 268,200 39,800

Other Contributed Capital 906,800 254,100

Retained Earnings, 1/1 356,900 312,900

Sales 2,063,600 978,000

Dividend Income 43,095 0

Total $3,925,145 $1,747,400

Scost Company declared a $49,200 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 115,000 148,200

Property and Equipment 469,800 497,800

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 $95,200 and $53,700, 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 $101,500 $15,100 27,400 11,100

Accounts Receivables 171,800 112,900 124,800 121,000

Inventory 220,800 119,900 232,000 115,000

Investment in Scost Company 0 0 587,945 0

Property and Equipment 863,500 445,500 863,500 469,800

Total $1,357,600 $693,400 1,835,645 $716,900

Accounts and Notes Payable $89,600 $84,800 223,345 159,000

Contingent Consideration 0 0 49,200 0

Dividends Payable 0 50,700 0 0

Common Stock, $5 par value 220,200 39,800 268,200 39,800

Other Contributed Capital 690,900 254,100 906,800 254,100

Retained Earnings 356,900 312,900 388,100 312,900

Treasury Stock 0 (48,900 ) 0 (48,900 )

Total $1,357,600 $693,400 $1,835,645 $716,900

a) Prepare a consolidated workpaper at the end of year 1