Question - Pappy, Inc. acquired a 60 percent interest in the common stock of Sammy, for $372,000 on January 1, 2015. Sammy's book value on that date consisted of common stock of $100,000 and retained earnings of $220,000. Sammy held patents (10-year remaining life) that were undervalued within the company's accounting records by $70,000 and an unrecorded customer list (15-year remaining life) assessed at a $45,000 fair value. Any remaining excess acquisition-date fair value was assigned to goodwill. Pappy uses the equity method. At year end, Sammy owed Pappy $20,000.
In the course of ordinary business, Pappy sells inventory to Sammy. In 2015, Pappy sold $150,000 to Sammy. This inventory had an original cost of $120,000. At December 31, 2015, the ending balance (at the transfer price) in Sammy's ending inventory was $50,000. In 2016, Pappy sold $160,000 to Sammy. This inventory cost Pappy $112,000 and $40,000 at the transfer price remained unsold at the end of 2016.
In addition, during 2016, Pappy sold land to Sammy for $100,000 with an original cost of $80,000.
The individual financial statements for these two companies as of December 31, 2016, and the year then ended follow:
|
|
PAPPY
|
SAMMY
|
|
Sales
|
$ 700,000
|
$ 335,000
|
|
Cost of goods sold
|
(460,000)
|
(205,000)
|
|
Gain on sale of land
|
20,000
|
-
|
|
Operating expenses
|
(208,000)
|
(70,000)
|
|
Income from Sammy
|
28,000
|
-
|
|
Net income
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$ 80,000
|
$ 60,000
|
|
|
|
|
|
Retained earnings, 1/1
|
$ 695,000
|
$ 280,000
|
|
Net income (above)
|
80,000
|
60,000
|
|
Dividends declared
|
(45,000)
|
(15,000)
|
|
Retained earnings, 12/31
|
$ 730,000
|
$ 325,000
|
|
|
|
|
|
Cash and receivables
|
$ 248,000
|
$ 148,000
|
|
Inventory
|
233,000
|
129,000
|
|
Investment in Sammy
|
411,000
|
-
|
|
Land
|
-
|
100,000
|
|
Buildings (net)
|
308,000
|
102,000
|
|
Equipment (net)
|
220,000
|
86,000
|
|
Patents (net)
|
-
|
20,000
|
|
Total assets
|
$ 1,420,000
|
$ 585,000
|
|
|
|
|
|
Liabilities
|
$ 390,000
|
$ 160,000
|
|
Common stock
|
300,000
|
100,000
|
|
Retained earnings, 12/31
|
730,000
|
325,000
|
|
Total liabilities and equities
|
$ 1,420,000
|
$ 585,000
|
Required: Prepare the elimination entries and consolidation worksheet.