Question

Jims Place. acquires Pams PR Corporation on January 1, 2019 by issuing 50,000 shares of $1 par common stock with a market price of $30 per share on the acquisition date and paying $250,000 cash. The assets and liabilities on Pams PR’s balance sheet were valued at fair values except equipment that was undervalued by $225,000 (9-year life), an unrecorded patent of $100,000 (10-year life), and an unrecorded trademark of $240,000 (10-year life). All depreciation/ amortization is straight-line and Jims Place uses the equity method to account for the investment.

The pre-consolidated 2019 financial statements are below.

12/31/19 Financial Statements
	Jims Place.	Pams PR Corporation
Income Statement:
Sales	$         1,750,000	$              750,000
CoGS	(600,000)	(400,000)
Gross Profit	1,150,000	350,000
Equity Income	166,000
Operating Expenses	(200,000)	(125,000)
Net Income	$         1,116,000	$              225,000
Statement of Retained Earnings:
Beginning Retained Earnings	$            901,900	$              149,800
Net Income	1,116,000	225,000
Dividends	(100,000)	(25,000)
Ending Retained Earnings	$         1,917,900	$              349,800
Balance Sheet:
Assets
Cash	$            100,600	$                 75,400
Accounts Receivable	195,000	132,000
Inventory	131,000	201,000
PPE	2,003,500	406,500
Equity Investment	1,916,000
Total Assets	$         4,346,100	$              814,900
Liabs and SE
Accounts Payable	$               40,500	$                 32,700
Salaries and Taxes Payable	37,600	45,900
Notes Payables	510,100	220,000
Common Stock	260,000	60,000
APIC	1,580,000	106,500
Retained Earnings	1,917,900	349,800
Total Liabs and SE	$         4,346,100	$              814,900

1) What amount of the AAP is allocated to Goodwill?

2) Which of the following equity method journal entries does Jims Place make in 2019?

3) Assume during 2020, Pams PR records net income of $300,000 and pays dividends of $70,000. What is Jims Place.'s total equity income in 2020?

Answer 1

1)

Total asset & libilities of Pams PR Corporation

Total Assets	$ AMOUNT
Cash	75,400
Accounts Receivable	1,32,000
Inventory	2,01,000
PPE	4,06,500
equipment	2,25,000
unrecorded patent	1,00,000
unrecorded trademark	2,40,000
	13,79,900

LIBILITES	$ AMOUNT
Accounts Payable	32,700
Salaries and Taxes Payable	45,900
Notes Payables	2,20,000
Common Stock	60,000
APIC	1,06,500
	4,65,100

Net Asset => Total asset - Total Libilites

=> 13,79,900 - 4,65,100

= > 9,14,800

Particulars	Amount($)
Cash	2,50000
50,000 shares of $1 par common stock with a market price of $30 per share	15,00,000
Purchase Consideration	17,50,000

Therefore :

Goodwill =  Purchase Consideration - Net Asset

= 1750000-914800

= 835200

2)

Journal Entries
Particulars	Debit ($)	Credit ($)
Cash	75,400
Accounts Receivable	1,32,000
Inventory	2,01,000
PPE	4,06,500
equipment	2,25,000
unrecorded patent	1,00,000
unrecorded trademark	2,40,000
GOOD WILL ( PC -Net asset )	8,35,200
Accounts Payable		32,700
Salaries and Taxes Payable		45,900
Notes Payables		2,20,000
Common Stock		60,000
APIC		1,06,500
PURCHASE CONSIDERATION		17,50,000

3)

Jims Place.'s total equity income in 2020	$ AMOUNT
Profit	230000
Dividends	70000
Total Equity Income in 2020	300000

Note : assume that 100% share with Jims company.