Question

The separate condensed balance sheets and income statements of Purl Corp. and its wholly owned subsidiary, Scott Corp., are as follows:

BALANCE SHEETS

December 31, 20X0

	Purl	Scott
Assets
Current assets
Cash	$80,000	$60,000
Accounts receivable (net)	$140,000	$25,000
Inventories	$90,000	$50,000
Total current assets	$310,000	$135,000
Property plant, and equipment (net)	$625,000	$280,000
Investment in Scott (equity method)	$390,000	----
Total assets	$1,325,000	$415,000
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable	$160,000	$95,000
Accrued liabilities	$110,000	$30,000
Total current liabilties	$270,000	$125,000
Stockholders' equity
Common stock ($10 par)	$300,000	$50,000
Additional paid-in capital	----	$10,000
Retained earnings	$755,000	$230,000
Total stockholders' equity	$1,055,000	$290,000
Total liabilities and stockholders' equity	$1,325,000	$415,000

INCOME STATEMENTS

For the Year Ended December 31, 20X0

	Purl	Scott
Sales	$2,000,000	$750,000
Cost of goods sold	$1,540,000	$500,000
Gross margin	$460,000	$250,000
Operating expense	$260,000	$150,000
Operating income	$200,000	$100,000
Equity in earnings of Scott	$60,000	---
Income before income taxes	$260,000	$100,000
Provision for income taxes	$60,000	$30,000
Net income	$200,000	$70,000

Additional information:

On January 1, 20X0, Purl purchased for $360,000 all of Scott's $10 par, voting common stock. On January 1, 20X0, the fair value of Scott's assets and liabilities equaled their carrying amount of $410,000 and $160,000, respectively, except that the fair values of certain items identifiable in Scott's inventory were $10,000 more than their carrying amounts. These items were still on hand at December 31, 20X0. Purl's policy is to amortize intangible assets over a 10-year period, unless a definite life is ascertainable.

During 20X0, Purl and Scott paid cash dividends of $100,000 and $30,000, respectively. For tax purposes, Purl receives the 100% exclusion for dividends received from Scott.

There were no intercompany transactions, except for Purl's receipt of dividends from Scott and Purl's recording of its share of Scott's earnings.

Both Purl and Scott paid income taxes at the rate of 30%.

In the December 31, 20X0, consolidated financial statements of Purl and its subsidiary:

Answer 1