Separate Balance Sheets

January 1, 20X1

Solo Company

Polo Carrying Current

Corporation Amounts Amounts

Assets

Cash $ 2,800,000 $ 621,486 $ 621,486

Accounts Receivable (net) 3,200,000 1,785,491 1,785,491

Inventory 6,000,000 4,770,490 5,200,490

Land... 18,000,000 7,000,000 8,000,000

Building.. 40,000,000 22,000,000 24,000,000

Machinery.. 10,000,000 2,496,996 3,600,000

Patent.. 500,000 600,000

Total Assets $80,000,000 $39,174,463

Liabilities and Stockholders Equity

Current Liabilities$ 2,900,000 $ 1,428,000 $ 1,428,000

Long Term Note Payable. 17,100,000

Bonds Payable (See note). 20,000,000 21,346,463

Premium on Bonds Payable. 1,346,463

Common Stock $10 Par.20,000,000

Common Stock $2 Par.. 2,000,000

Paid in Capital in Excess of Par 12,000,000 6,000,000

Retained Earnings 28,000,000 8,400,000

Total Liabilities and Stockholders Equity $80,000,000 $39,174,463

Note the Bond is a 10% semi-annual note payable in 5 years. It was issued on January 1, 20X0.

On January 1, 20X1 Polo acquired all of Solos outstanding common stock by issuing 1,500,000 shares of its common stock when the market price was $16. Out of pocket costs paid by Polo were as follows:

Legal fees for registration of the stock $ 9,000

Finders fees 14,000

SEC registration fees 20,000

Accountants fees (half for registration, balance for consultation) 16,000

The building has an additional useful life of 40 years, there was no salvage value estimated, and the company uses the straight-line method of depreciation. The machinery has an additional useful life of 6 years, the salvage value is estimated to be $2,196, and the company uses the sum-of-the-years-digits depreciation method. The patent has an additional life of 10 years. Both companies use FIFO perpetual for accounting for inventories. Consider depreciation and amortization as operating expenses.

The year of 20X1:

The Solo Company had a very bad year and they reported a loss of $3,000,000

Even though it was a year with a loss the Company manages to declare and pay a dividend of $0.10 per share. The Solo Company records dividends through a dividends account.

A calculation showed that goodwill was impaired by $500,000.

Solo sold 2,000,000 units of merchandise costing $4,000,000 to Polo for $4,600,000. Cash was paid.

Polo sold 1,500,000 of the 2,000,000 units purchased from Solo to an outside customer.

The year of 20X2:

On January 1 Polo realized that Solo did not disclose the market rate of interest on the bond. They did not even know what it was. One of our bright accountants figured it out. When they found out the rate they bought the bonds that very day at a market rate of 4%.

Under the management of Polo, Solo had a good year and reported a profit of $6,000,000.

Solo declared and paid a dividend of $0.70 per share.

Solo sold 2,400,000 units of merchandise costing $5,040,000 to Polo for $6,000,000. Cash was not paid yet.

Polo sold 2,700,000 units purchased from Solo to an outside customer.

The year of 20X2:

Solo continues to be very profitable. This year they reported a profit of $10,000,000.

Solo declared and paid a dividend of $1 per share. Polo is thrilled!

On January 1 Solo sold land and a building to Polo at a price of $12,000,000. The book value on Solos books is $11,000,000. It was agreed that the fair value of the total Solo properties at January 1, 20X1 would be used as an aid to record this entry. The remaining life of the building is 40 years with no salvage. While Solo uses straight-line method of depreciation Polo decided to use double declining balance. The building cost Solo $9,750,000 10 years ago.

Sold 3,000,000 units of merchandise costing $6,000,000 to Polo for $7,800,000. Cash was paid.

The entire inventory sold to Polo from Solo was sold to outside customers.

Required: Prepare the following journal entries in good form. Round off all numbers to the nearest whole dollar. Each entry has a stated point value, (5) at the end of the entry means it is worth 5 points. Number each entry. If there are two entries then make one A and the other B.

1. Record the out of pocket costs.
2. Record the investment on the books of Polo as of 1/1/20x1.
3. Prepare the elimination entry as of 1/1/20X1.
4. Record Solos loss on the books of Polo as of 12/31/20X1.
5. Record the adjustment to the loss on the books of Polo as of 12/3120X1.
6. Record the sale of inventory to Polo on the books of Solo for 20X1.
7. Record the purchase of inventory from Solo on the books of Polo for 20X1.
8. Record the accrued interest expense on the books of Solo for 20X1.
9. Record the dividend on the books of Polo for 20X1.
10. Record the dividend on the books of Solo for 20X1.
11. Prepare the elimination entry as of 12/31/20X1
12. Prepare the elimination entry for the sales to Solo as of 12/31/20X1.
13. Prepare the re-class entry for the purchase of the bonds.
14. Record Solos profit on the books of Polo as of 12/31/20X2.
15. Record the adjustment to the profit on the books of Polo as of 12/31/20X2.
16. Prepare the elimination entry as of 12/31/20X2.