In: Accounting
UBetcha Corporation acquired 30 percent of the voting stock of Trunks Corporation on January 2, 2019, for $1.6 million in cash. Trunks’ balance sheet and estimated fair values of its assets and liabilities on January 2, 2019 are as follows (in thousands).
Trunks Corporation |
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Balance Sheet |
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January 2, 2019 |
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Book Value |
Fair Value |
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Assets |
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Cash and receivables |
300 |
300 |
Inventory |
600 |
350 |
Investments |
250 |
250 |
Land |
400 |
1,000 |
Property and equipment |
2,000 |
350 |
Accumulated depreciation |
(750) |
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TOTAL ASSETS |
2,800 |
2,250 |
Liabilities and Equity |
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Current liabilities |
450 |
450 |
Long-term liabilities |
1,500 |
1,500 |
Common stock, $2.00 par |
300 |
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Additional paid-in capital |
450 |
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Retained earnings |
400 |
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Accumulated other comprehensive income |
(300) |
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TOTAL LIABILITIES AND EQUITY |
2,800 |
1,950 |
In addition to its reported assets, Trunks has unreported franchise agreements (5‑year life) valued at $500,000. Its property and equipment has a 20‑year average remaining life. Trunks reported income of $750,000 and paid no dividends in 2019. Please note that Trunks uses the FIFO inventory method.
Required
a | How many shares of Trunk's stock did Ubetcha acquire? | ||
Common Stock issued and outstanding | $300,000 | ||
Par value per share | $2 | ||
Number of shares outstanding | 150,000 | ($300000/$2) | |
Voting stock acquired by Ubetcha | 30% | ||
Number of shares Ubetcha acquired | 45,000 | (150000 x 30%) | |
b | Computation of Ubetcha's equity in Trunk's net income for 2019 | ||
Net income of Trunk's | $750,000 | ||
Add: Cost of goods sold fair value adj. | $250,000 | ||
Add: Excess depreciation charged on property and equipment(1250000-350000) | $45,000 | (900000/20) | |
Less: Amortization of unreported franchise agreement | ($100,000) | (500000/5). | |
Adjusted net income | $945,000 | ||
Ubetcha's equity in net income-30% | $283,500 | (945000*30%) |