Question

Pawn Corporation purchased 30 percent of Shop Company’s common stock on January 1, 20X5, by issuing preferred stock with a par value of $50,000 and a market price of $120,000. The following amounts relate to Shop's balance sheet items at that date:

	Book Value					Fair Value
Assets
Cash & Receivables		$	200,000				$	200,000
Buildings & Equipment			400,000					360,000
Less: Accumulated Depreciation			(100,000	)
Total Assets		$	500,000
Liabilities & Equities
Accounts Payable		$	50,000					50,000
Bonds Payable			200,000					200,000
Common Stock			100,000
Retained Earnings			150,000
Total Liabilities & Equities		$	500,000

Shop purchased buildings and equipment on January 1, 20X0, with an expected economic life of 20 years. No change in overall expected economic life occurred as a result of the acquisition of Pawn's stock. The amount paid in excess of the fair value of Shop's reported net assets is attributed to unrecorded copyrights with a remaining useful life of eight years. During 20X5, Shop reported net income of $40,000 and paid dividends of $10,000.

Required:
Prepare all journal entries to be recorded on Pawn Corporation’s books during 20X5, assuming it uses the equity method in accounting for its ownership of Shop Company.

Answer 1