Question

Exercise 5-1

On January 1, 2013, Pam Company purchased an 85% interest in Shaw Company for $541,800. On this date, Shaw Company had common stock of $398,100 and retained earnings of $143,700.

An examination of Shaw Company’s assets and liabilities revealed that their book value was equal to their fair value except for marketable securities and equipment:

		Book Value		Fair Value
Marketable securities		$19,800		$44,600
Equipment (net)		120,200		140,000

(b)

Determine the amounts at which the above assets (plus goodwill, if any) will appear on the consolidated balance sheet on January 1, 2013.

Answer 1

Determination of amounts at which the above assets (plus goodwill, if any) will appear on the consolidated balance sheet on January 1, 2013:	Amount
1. Under corporate accounting standards, when a company acquires an asset, it puts that asset on its balance sheet with a value equal to its "historical cost" – what the company paid for it. If it's a fixed asset with a limited lifespan, such as a building or a piece of equipment, the company gradually depreciates that asset over time, which reduces its balance sheet value. Even if the company has good reason to believe that an asset has risen in value, it still cannot increase that asset's "book value," the value reported on the balance sheet. 2. Tradable securities, such as stocks and bonds, are an exception, however, are "marked to market," or reported at their current market price.
1.Hence as per above Explnation Assets otherthan Securities should be vlaued at Book value -Equipment (net)	$ 1,20,200.00
2.Tradable securities, such as stocks and bonds, are an exception, however, are "marked to market," or reported at their current market price	$     44,600.00
Calculation of Good will:
common stock of $398,100 and retained earnings of $143,700.
Common Stock	$ 3,98,100.00
Retained Earnings	$ 1,43,700.00
Net Assets	$ 5,41,800.00
85% of Above Assets	$ 4,60,530.00
Purchase Considertion Paid	$ 5,41,800.00
Hence Good will as excess paid over 85% value of assets	$     81,270.00
Less: Difference in Book Value and Fair value of Securities
$19,800 - $44,600	$     24,800.00
Net Good will	$     56,470.00
Hence amounts at which the above assets (plus goodwill, if any) will appear on the consolidated balance sheet on January 1, 2013.
Marketable securities at Fair Market Value	$44,600
Equipment (net) at Book Value	$120200