P 4-5 Workpapers in year of acquisition (excess recorded for inventory, building, equipment, trademarks, and goodwill)Pam Corporation acquired a 70 percent interest in Sun Corporation’s outstanding voting common stock on January 1, 2016, for $980,000 cash. The stockholders’ equity (book value) of Sun on this date consisted of $1,000,000 capital stock and $200,000 retained earnings. The differences between the fair value of Sun and the book value of Sun were assigned $10,000 to Sun’s undervalued inventory, $28,000 to undervalued buildings, $42,000 to undervalued equipment, and $80,000 to previously unrecorded trademarks. Any remaining excess is goodwill.The undervalued inventory items were sold during 2016, and the undervalued buildings and equipment had remaining useful lives of seven years and three years, respectively. The trademarks have a 40-year life. Depreciation is straight line.At December 31, 2016, Sun’s accounts payable include $20,000 owed to Pam. This $20,000 account payable is due on January 15, 2017. Separate financial statements for Pam and Sun for 2016 are summarized as follows (in thousands): PamSunCombined Income and Retained Earnings Statements for the Year Ended December 31  Sales$ 1,600$1,400Income from Sun119—Cost of sales(600)(800)Depreciation expense(308)(120)Other expenses(320)(280) Net income491200Add: Retained earnings January 1600200Deduct: Dividends(400)(100) Retained earnings December 31$ 691$ 300Balance Sheet at December 31  Cash$ 172$ 120Accounts receivable—net200140Dividends receivable28—Inventories300200Other current assets14060Land100200Buildings—net280320Equipment—net1,140660Investment in Sun1,029 –  Total assets$ 3,389$1,700Accounts payable$ 400$ 170Dividends payable20040Other liabilities98190Capital stock, $20 par2,0001,000Retained earnings691300 Total equities$ 3,389$1,700RequiredPrepare consolidation workpapers for Pam Corporation and Subsidiary for the year ended December 31, 2016. Use an unamortized excess account.

Question
Asked Dec 3, 2019
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P 4-5 Workpapers in year of acquisition (excess recorded for inventory, building, equipment, trademarks, and goodwill)

  • Pam Corporation acquired a 70 percent interest in Sun Corporation’s outstanding voting common stock on January 1, 2016, for $980,000 cash. The stockholders’ equity (book value) of Sun on this date consisted of $1,000,000 capital stock and $200,000 retained earnings. The differences between the fair value of Sun and the book value of Sun were assigned $10,000 to Sun’s undervalued inventory, $28,000 to undervalued buildings, $42,000 to undervalued equipment, and $80,000 to previously unrecorded trademarks. Any remaining excess is goodwill.

    The undervalued inventory items were sold during 2016, and the undervalued buildings and equipment had remaining useful lives of seven years and three years, respectively. The trademarks have a 40-year life. Depreciation is straight line.

    At December 31, 2016, Sun’s accounts payable include $20,000 owed to Pam. This $20,000 account payable is due on January 15, 2017. Separate financial statements for Pam and Sun for 2016 are summarized as follows (in thousands):

     

    Pam

    Sun

    Combined Income and Retained Earnings Statements for the Year Ended December 31

     

     

    Sales

    $ 1,600

    $1,400

    Income from Sun

    119

    Cost of sales

    (600)

    (800)

    Depreciation expense

    (308)

    (120)

    Other expenses

    (320)

    (280)

     Net income

    491

    200

    Add: Retained earnings January 1

    600

    200

    Deduct: Dividends

    (400)

    (100)

     Retained earnings December 31

    $ 691

    $ 300

    Balance Sheet at December 31

     

     

    Cash

    $ 172

    $ 120

    Accounts receivable—net

    200

    140

    Dividends receivable

    28

    Inventories

    300

    200

    Other current assets

    140

    60

    Land

    100

    200

    Buildings—net

    280

    320

    Equipment—net

    1,140

    660

    Investment in Sun

    1,029

     – 

     Total assets

    $ 3,389

    $1,700

    Accounts payable

    $ 400

    $ 170

    Dividends payable

    200

    40

    Other liabilities

    98

    190

    Capital stock, $20 par

    2,000

    1,000

    Retained earnings

    691

    300

     Total equities

    $ 3,389

    $1,700

Required

Prepare consolidation workpapers for Pam Corporation and Subsidiary for the year ended December 31, 2016. Use an unamortized excess account.

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Expert Answer

Step 1

Consolidated financial statements: These financial statements are consolidated financial statements of both parent and the subsidiary companies. Parent company is the company holding over 50% share of the subsidiary company.

Step 2

Prepare the consolidated income statement of P Corporation and subsidiary or the year ended December 31, 2016.

Pam Corporation (A) Sun Corporation (B) Consolidated Statement (A+ B)
$ 3,000,000
Particualrs
$1,600,000
$119,000
$1,400,000
Sales
$0
($ 800,000)
($ 120,000)
($ 280,000)
Income from Sun Corporation
$119,000
($ 600,000)
($ 308,000)
($ 320,000)
($ 1,400,000)
($ 428,000)
($ 600,000)
($ 119,000)
($ 10,000)
($ 4,000)
($ 14,000)
($ 2,000)
($ 51,000)
$ 491,000
Cost of sales
Depreciation
Other expenses
Income from Sun Corporation
Inventory undervalued
Additional depreciation on building
Additional depreciation on Equipment
Amortization cost of trademark
Non-Controlling interest
Consolidated net income
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Pam Corporation (A) Sun Corporation (B) Consolidated Statement (A+ B) $ 3,000,000 Particualrs $1,600,000 $119,000 $1,400,000 Sales $0 ($ 800,000) ($ 120,000) ($ 280,000) Income from Sun Corporation $119,000 ($ 600,000) ($ 308,000) ($ 320,000) ($ 1,400,000) ($ 428,000) ($ 600,000) ($ 119,000) ($ 10,000) ($ 4,000) ($ 14,000) ($ 2,000) ($ 51,000) $ 491,000 Cost of sales Depreciation Other expenses Income from Sun Corporation Inventory undervalued Additional depreciation on building Additional depreciation on Equipment Amortization cost of trademark Non-Controlling interest Consolidated net income

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Step 3

Working notes:

&...

Calculate the excess fair value over book value using the equation as follows:
Purchase price of Sun
Share of Pam
Excess fair value
(Capital stock+Retained earnings)
$980,000
($1,000,000+$200,000)
70%
=$200,000
Calculate goodwill amount
Particulars
Amount
Excess fair value over book value
$200,000
Less: Inventory undervalued
Building undervalued
Equipment undervalued
Trademarks
$10,000
$28,000
$ 42,000
S 80,000
Goodwill
S 40,000
Calculate non-Controlling interest share:
Particulars
Amount
Workings
Net income of Sun
$200,000
Under valuation of Inventory
Additional depreciation on building
Additional depreciation on equipment
Amortization cost of trademark
Adusted and realized income (A)
Non-Controlling interest rate (B)
Non-Controlling interest share (A* B)
($10.000)
(S4,000) ($28.000/7 years)
($ 14.000) ($42,000/3 Years)
($2,000) ($80,000/40 years)
$170,000
30%
$51,000
help_outline

Image Transcriptionclose

Calculate the excess fair value over book value using the equation as follows: Purchase price of Sun Share of Pam Excess fair value (Capital stock+Retained earnings) $980,000 ($1,000,000+$200,000) 70% =$200,000 Calculate goodwill amount Particulars Amount Excess fair value over book value $200,000 Less: Inventory undervalued Building undervalued Equipment undervalued Trademarks $10,000 $28,000 $ 42,000 S 80,000 Goodwill S 40,000 Calculate non-Controlling interest share: Particulars Amount Workings Net income of Sun $200,000 Under valuation of Inventory Additional depreciation on building Additional depreciation on equipment Amortization cost of trademark Adusted and realized income (A) Non-Controlling interest rate (B) Non-Controlling interest share (A* B) ($10.000) (S4,000) ($28.000/7 years) ($ 14.000) ($42,000/3 Years) ($2,000) ($80,000/40 years) $170,000 30% $51,000

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