Question

In: Accounting

P Company S Corporation Revenues $(700,000) $(400,000) Expenses 400,000 300,000 Investment Income Not given -0- Dividends...

	P Company	S Corporation
Revenues	$(700,000)	$(400,000)
Expenses	400,000	300,000
Investment Income	Not given	-0-
Dividends declared	80,000	60,000
Retained Earnings, 1/1/18	(600,000)	(200,000)
Current Assets	400,000	500,000
Equipment	700,000	300,000
Copyrights	900,000	405,000
Royalty Agreements	600,000	1,000,000
Investment in S	Not given	-0-
Liabilities	(500,000)	(1,380,000)
Common Stock	(600,000) ($20 par)	(200,000) ($10 par)
Additional Paid-in-Capital	(150,000)	(80,000)

On January 1, 2018, P acquired all of S's outstanding stock for $680,000 cash. At the date of acquisition, copyrights (with a 10-year remaining life) have a $450,000 book value but a fair value of $550,000. P company uses the equity method to account for its investment in S. Investment income is not included in P's Revenues.

Required:

a. As of December 31, 2018, what is the investment in S balance?

b. As of December 31, 2018, what is the consolidated copyright balance?

c. As of December 31, 2018, what is the consolidated Royalty Agreements balance?

d. As of December 31, 2018, what is the consolidated balance for goodwill?

e. For the year ending December 31, 2018, what is the consolidated net income?

Expert Solution

1. Investment in S Balance as of Dec 31, 2018

Particulars	$
Purchase price of outstanding stock of S	680,000
Less: Dividend income received from S (It is assumed that dividend declared is a pre-acquisition income that is required to be adjusted against the purchasse price of the investment.)	(60,000)
Investment in S Balance as of Dec 31, 2018	620,000

2. Balance of Consolidated Copyright as of Dec 31, 2018

Particulars	$
Fair value of copyrights as of Jan 1, 2018	550,000
Less: Depreciation for the year (550,000/10)	(55,000)
Fair value of copyrights as of Dec 31, 2018 (A)	495,000
Fair value of copyrights of P as of Dec 31, 2018 (B)	900,000
Consolidated Balance of Copyrights (A + B)	1,395,000

3. Consolidated Royalty Agreement balance as of Dec 31, 2018

Particulars	$
Fair value of royalty agreements of S as of Dec 31, 2018 (A)	600,000
Fair value of royalty agreements of P as of Dec 31, 2018 (B)	1,000,000
Consolidated Balance of Royalty agreements (A + B)	1,600,000

4. Consolidated Balance of Goodwill as on Dec 31, 2018

Particulars	$
Cost of Investment in S (680,000 - 60,000)	620,000
Less: Share in Capital (200,000 + 80,000)	(280,000)
Less: Share in Pre-acquisition profits (Retained earnings as on 1/1/2018)	(200,000)
Less: Difference between fair value and book value of copyrights as on date of acquisition (550,000 - 450,000)	(100,000)
Goodwill	40,000

5. Calculation of Consolidated Net income for the year ending Dec 31, 2018

Particulars	P	S	Total
Revenue	700,000	400,000	1,100,000
Less: Expenses	(400,000)	(300,000)	(700,000)
Net income	300,000	100,000	400,000

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