Perry Company purchased 100% of Starling Company on 1/1/20X1. At the date of acquisition, the following...

Perry Company purchased 100% of Starling Company on 1/1/20X1. At the date of acquisition, the following differences existed:

Starling had a 20-year loan for $500,000. The fair value of the loan was $540,000.

Starling had an unrecorded Patent with an estimated remaining life of 5 years. The fair value of the patent was $800,000.

Any other differences between book value and fair value were attributable o goodwill.

At 12/31/20X4, Starling still had the loan and patent that existed at the date of acquisition. The following balances are on the separate company's records (4 years have passed). Both accounts are normal balances.

Perry. Starling. Mathematical Total

Patents. 150,000. -0- 150,000

Loans payable 350,000. 580,000. 930,000

In the year ended 12/31/20X4, Starling reports net income of $820,000 on its separate income statement.

1. On its separate income statement, what will Perry report as equity in income of Starling for the year ended 12/31/20X4?

2. What will be the balance in the Patents account on the consolidated balance sheet at 12/31/20X4?

3. What will be the balance in the Loans payable account on the consolidated balance sheet at 12/31/20X4?

Expert Solution

	Perry has acquired 100% share of Starling and has reported $820000 for the year ended 31/12/2004.

1	Perry will report $820000 as equity in income in it's separate income statements
2 & 3	Balance of patent & Loans payable in consolidated balance sheet :


	Normal balances as on 31/12/2004	Explanation	Perry	Starling	Total
	Patents (150000+160000)	1	310000	0	310000
	Loans Payable (350000+32000)	2	382000	580000	962000

	Explanation 1
	patent has been recorded in the books of perry at $800000 with estimated life of 5 years, now the value after 4 years would be

	Fair Value (a)	800000
	Estimated life (b)	5
	Value after 4 years (a/b)	160000	*

	* This has been added in the consolidated value of patent

	Explanation 2
	Fair Value of loan as on 01/01/2001	540000
	Already booked	500000
	Difference	40000
	( to be paid in 20 installments)

	Value after 4 years	32000

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