Question

On January 1, 2015, Pruitt Company issued 25,500 shares of its common stock in exchange for 85% of the outstanding common stock of Shah Company. Pruitt’s common stock had a fair value of $28 per share at that time (par value of $2 per share). Pruitt Company uses the cost method to account for its investment in Shah Company and files a consolidated income tax return. A schedule of the Shah Company assets acquired and liabilities assumed at book values (which are equal to their tax bases) and fair values follows.

Item		Book Value/ Tax Basis		Fair Value		Excess
Receivables (net)		$125,000		$125,000		$ —0—
Inventory		167,000		195,000		28,000
Land		86,500		120,000		33,500
Plant assets (net)		467,000		567,000		100,000
Patents		95,000		200,000		105,000
Total		$940,500		$1,207,000		$266,500
Current liabilities		$89,500		$89,500		$—0—
Bonds payable		300,000		360,000		60,000
Common stock		120,000
Other contributed capital		164,000
Retained earnings		267,000
Total		$940,500

Additional Information:

1.		Pruitt’s income tax rate is 35%.
2.		Shah’s beginning inventory was all sold during 2015.
3.		Useful lives for depreciation and amortization purposes are:

Plant assets		10 years
Patents		8 years
Bond premium		10 years

4.

Pruitt uses the straight-line method for all depreciation and amortization purposes.

Part A) Prepare the stock acquisition entry on Pruitt Company’s books. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Part B) Prepare the elimination entries for a consolidatd statements workpaper on January 1, 2005, immediately after acquisition.

Answer 1

A.

Net assets at book value (940,500 - 389,500)	551000
Excess of fair value (266,500 - 60,000)	206500
Total value of the company	757500
85% interest acquired	643875
Price paid (25,500 * 28)	714000
Goodwill (714,000 - 643,875)	70125
Non controlling interest (757,500 - 643,875)	113625

B. PRUITT COMPANY
1. Entry to record acquisiton of interest in Shah company
Date	Account Title	Debit	Credit
Jan.1, 2015	Investment in Shah Company	714000
	Common Stock		51000
	(Issue of 25,500 shares of $2 par with value of $28 per share)
2. Eliminating entries for consolidation
Date	Account Title	Debit	Credit
Jan.1,2015	Common Stock - Shah Company	120000
	Other Contributed Capital - Shah Company	164000
	Retained earnings - Shah company	267000
	Inventory	28000
	Land	33500
	Plant Assets	100000
	Patents	105000
	Goodwill	70125
	Bonds Payable		60000
	Investment in Shah Company		714000
	Non-controlling interest in Shah Company		113625