Question

Pavin acquires all of Stabler’s outstanding shares on January 1, 2015, for $600,000 in cash. Of this amount, $44,000 was attributed to equipment with a 10-year remaining life and $54,000 was assigned to trademarks expensed over a 20-year period. Pavin applies the partial equity method so that income is accrued each period based solely on the earnings reported by the subsidiary.

On January 1, 2018, Pavin reports $440,000 in bonds outstanding with a carrying amount of $406,400. Stabler purchases half of these bonds on the open market for $211,600.

During 2018, Pavin begins to sell merchandise to Stabler. During that year, inventory costing $136,000 was transferred at a price of $170,000. All but $24,000 (at sales price) of these goods were resold to outside parties by year-end. Stabler still owes $47,000 for inventory shipped from Pavin during December.

The following financial figures are for the two companies for the year ending December 31, 2018. Dividends were both declared and paid during the current year.

	Pavin				Stabler
Revenues	$	(782,000	)		$	(533,000	)
Cost of goods sold		469,000				254,000
Expenses		139,000				172,500
Interest expense—bonds		50,000				0
Interest income—bond investment		0				(20,100	)
Loss on extinguishment of bonds		0				0
Equity in Stabler’s income		(126,600	)			0
Net income	$	(250,600	)		$	(126,600	)
Retained earnings, 1/1/18	$	(359,000	)		$	(389,000	)
Net income		(250,600	)			(126,600	)
Dividends paid		169,000				91,000
Retained earnings, 12/31/18	$	(440,600	)		$	(424,600	)
Cash and receivables	$	231,000			$	49,000
Inventory		189,000				101,000
Investment in Stabler		656,600				0
Investment in Pavin bonds		0				216,500
Land, buildings, and equipment (net)		259,000				555,000
Trademarks		0				0
Total assets	$	1,335,600			$	921,500
Accounts payable	$	(146,000	)		$	(248,900	)
Bonds payable		(440,000	)			(114,000	)
Discount on bonds		14,000				0
Common stock		(323,000	)			(134,000	)
Retained earnings (above)		(440,600	)			(424,600	)
Total liabilities and stockholders’ equity	$	(1,335,600	)		$	(921,500	)

Note: Credits are indicated by parentheses.

Prepare a worksheet to produce consolidated balances. (For accounts where multiple consolidation entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet. Amounts in the Debit and Credit columns should be entered as positive. Negative amounts for the Consolidated Totals column should be entered with a minus sign.)

Answer 1

Other eliminations

1. Interest income - bonds investments of Stabler would be eliminated against interest expenses - bonds of Pavin

2. Dividends paid by Stabler, Common Stock and retained earnings of Stabler would be eliminated against the Investment in Stabler by Pavin.

3. Land,building and equipments and Trademarks would be adjusted to include the net value of equipments and trademarks attributed to the acquisition price of the shares of Stabler.

4. Accounts payables and receivables would be adjusted by the intercompany payable/receivable amounts.

5. The beginning retained values of would be adjusted as under :

	Pavin	Stabler	Consolidated
Retained earnings, 1/1/18	$359,000	$389,000	$748,000
Less: Retained earning of Stabler		($389,000)	($389,000)
Less: Accumulated depreciation/amortixation on equipments & trademark attributed to acquisitio costs	($21,300)		($21,300)
Retained earnings, 1/1/18 for consolidation	$337,700	$0	$337,700