Question

Pavin acquires all of Stabler’s outstanding shares on January 1, 2015, for $520,000 in cash. Of this amount, $36,000 was attributed to equipment with a 10-year remaining life and $46,000 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 $360,000 in bonds outstanding with a carrying amount of $339,600. Stabler purchases half of these bonds on the open market for $174,900.

During 2018, Pavin begins to sell merchandise to Stabler. During that year, inventory costing $78,000 was transferred at a price of $104,000. All but $16,000 (at sales price) of these goods were resold to outside parties by year-end. Stabler still owes $39,000 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                                                   $ (758,000 )                    $ (517,000 )

Cost of goods sold                                         461,000                            246,000

Expenses                                                      131,000                             164,500

Interest expense—bonds                               42,000                                   0

Interest income—bond investment                     0                                  (20,400 )

Loss on extinguishment of bonds                       0                                       0

Equity in Stabler’s income                             (126,900 )                              0

Net income                                                  $ (250,900 )                   $ (126,900 )

Retained earnings, 1/1/18                           $ (351,000 )                   $ (373,000 )

Net income                                                      (250,900 )                      (126,900 )

Dividends paid                                                   161,000                          83,000

Retained earnings, 12/31/18                          $ (440,900 )                  $ (416,900 )

Cash and receivables                                     $ 223,000                      $ 41,000

Inventory                                                           181,000                         93,000

Investment in Stabler                                        624,900                              0

Investment in Pavin bonds                                    0                                175,500

Land, buildings, and equipment (net)                251,000                        547,000

Trademarks                                                            0                                    0

Total assets                                                   $ 1,279,900                      $ 856,500

Accounts payable                                          $ (182,000 )                     $ (207,600 )

Bonds payable                                                 (360,000 )                         (106,000 )

Discount on bonds                                               18,000                               0

Common stock                                                    (315,000 )                        (126,000 )

Retained earnings (above)                                   (440,900 )                       (416,900 )

Total liabilities and stockholders’ equity             $ (1,279,900 )                  $ (856,500 )

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

Acquisition-date fair-value allocation and amortization

                                                                                                                                                         

Equipment	36000	10‑year life	$3600 annual amortization
Trademarks	46000	20‑year life	$2300 annual amortization

Entry *C = Amortization expense ($5900 × 3 years) = $17700

Unrealized gain in ending inventory (downstream):
Ending balance	16000
Markup (104000-78000)/104000	25%
Unrealized gain to be eliminated	$4000

Loss on extinguishment of bonds:
Book value at date of repurchase	339600
Percentage repurchased	50%
Equivalent book value	169800
Amount paid	174900
Loss on extinguishment of bonds	$5100

Pavin and Stabler Consolidation Worksheet Year Ending December 31, 2018
			Consolidation entries
Accounts	Pavin	Stabler	Debit	Credit	Consolidated Totals
Revenues	(758000)	(517000)	104000		-1171000
Cost of goods sold	461000	246000	4000	104000	607000
Expenses	131000	164500	5900		301400
Interest expense-bonds	42000	0		21000	21000
Interest income – bond investment	0	(20400)	20400		0
Loss on extinguishment of bonds	0	0	5100		5100
Equity in income of Stabler	(126900)	0	126900		0
Net income	-250900	-126900			-236500
Retained earnings, 1/1/18	(351000)		20400		(330600)
Retained earnings, 1/1/18		(373000)	373000		0
Net income	-250900	-126900			-236500
Dividend paid	161000	83000		83000	161000
Retained earnings, 12/31/18	-440900	-416900			(406100)
Cash receivables	223000	41000		39000	225000
Inventory	181000	93000		4000	270000
Investment in stabler	624900	0	83000	707900	0
Investment in pavin	0	175500		175500	0
Land, buildings and equipment (net)	251000	547000	25200	3600	819600
trademarks	0	0	39100	2300	36800
Total	1279900	856500			1351400
Accounts payable	(182000)	(207600)	39000		-350600
Bonds payable	(360000)	(106000)	180000		-286000
Discount on bonds	18000	0		9000	9000
Common stock	(315000)	(126000)	126000		-315000
Retained earnings	-440900	-416900			-406100
Total liabilities and stockholders’ equity	-1279900	-856500	1480000	1480000	-1348700

36000-(3600*3) = 34300

46000-(2300*3) = 39100