P 2-1 Computations for a midyear purchase (investee has a discontinued operations gain)Pop Corporation paid $686,000 for a 30 percent interest in Son Corporation’s outstanding voting stock on April 1, 2016. At December 31, 2015, Son had net assets of $2,000,000 and only common stock outstanding. During 2016, Son declared and paid dividends of $40,000 each quarter on March 15, June 15, September 15, and December 15 ($160,000 in total). At April 1, 2016, the book value of assets and liabilities equals the fair value. Son’s 2016 income was reported as follows:Income from continuing operations$240,000Discontinued operations gain, December 2016  80,000 Net income$320,000RequiredDetermine the following items for Pop:Goodwill from the investment in SonIncome from Son for 2016Investment in Son account balance at December 31, 2016Pop’s equity in Son’s net assets at December 31, 2016The amount of discontinued operations gain that Pop will show on its 2016 income statement

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Asked Nov 19, 2019
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P 2-1 Computations for a midyear purchase (investee has a discontinued operations gain)

  • Pop Corporation paid $686,000 for a 30 percent interest in Son Corporation’s outstanding voting stock on April 1, 2016. At December 31, 2015, Son had net assets of $2,000,000 and only common stock outstanding. During 2016, Son declared and paid dividends of $40,000 each quarter on March 15, June 15, September 15, and December 15 ($160,000 in total). At April 1, 2016, the book value of assets and liabilities equals the fair value. Son’s 2016 income was reported as follows:

    Income from continuing operations

    $240,000

    Discontinued operations gain, December 2016

      80,000

     Net income

    $320,000

    Required

    Determine the following items for Pop:

    1. Goodwill from the investment in Son

    2. Income from Son for 2016

    3. Investment in Son account balance at December 31, 2016

    4. Pop’s equity in Son’s net assets at December 31, 2016

    5. The amount of discontinued operations gain that Pop will show on its 2016 income statement

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Expert Answer

Step 1

1.

Book value Asset on Dec. 31 +Income - Dividend received
3 month
-x$320,000-$40,000
-S2,000,000+
12 month
=$2,040,000
Goodwill Cost - (Percentage ownershipxValue of assets
=S686, 000-(30%x $2,040, 000)
=S74,000
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Book value Asset on Dec. 31 +Income - Dividend received 3 month -x$320,000-$40,000 -S2,000,000+ 12 month =$2,040,000 Goodwill Cost - (Percentage ownershipxValue of assets =S686, 000-(30%x $2,040, 000) =S74,000

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Step 2

2.

Pop income from son for 2016 Total income x Period adjustment x Percentage ownership
-S240,000 xx30%
12
=S54,000
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Pop income from son for 2016 Total income x Period adjustment x Percentage ownership -S240,000 xx30% 12 =S54,000

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Step 3

3.

...
Pop's investment in son account
Cost Income earned - Dividend received
balance at Dec. 31, 2016
3
$686,000+30%x 240,000 x+80,000-($40,000x 3x30%)
4
S686, 000 S78, 000-S36,000
-S728,000
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Pop's investment in son account Cost Income earned - Dividend received balance at Dec. 31, 2016 3 $686,000+30%x 240,000 x+80,000-($40,000x 3x30%) 4 S686, 000 S78, 000-S36,000 -S728,000

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