Question

In: Accounting

UBetcha Corporation acquired 30 percent of the voting stock of Trunks Corporation on January 2, 2019,...

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

Balance Sheet

January 2, 2019

Book Value

Fair Value

Assets

Cash and receivables

300

300

Inventory

600

350

Investments

250

250

Land

400

1,000

Property and equipment

2,000

350

Accumulated depreciation

(750)

TOTAL ASSETS

2,800

2,250

Liabilities and Equity

Current liabilities

450

450

Long-term liabilities

1,500

1,500

Common stock, $2.00 par

300

Additional paid-in capital

450

Retained earnings

400

Accumulated other comprehensive income

(300)

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

  1. How many shares of Trunks stock did Ubetcha acquire? Please show calculations so that partial credit can be granted.
  2. Prepare a schedule, in good form, that shows the computation of Ubetcha’s equity in Trunks’ net income for 2019. Please show calculations so that partial credit can be granted.

Solutions

Expert Solution

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%)

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