Palm Company acquired 100 percent of Storm Company’s voting stock on January 1, 2009, by issuing 10,000 shares of its $10 par value common stock (having a fair value of $14 per share). As of that date, Storm had stockholders’ equity totaling $105,000. Land shown on Storm’s accounting records was undervalued by $10,000. Equipment (with a five year life) was undervalued by $5,000. A secret formula developed by Storm was appraised at $20,000 with an estimated life of 20 years. Following are the separate financial statements for the two companies for the year ending December 31, 2013. Credit balances are indicated by parentheses.
|
Palm Company |
Storm Company |
|
|
Revenues |
($485,000) |
($190,000) |
|
Cost of goods sold |
160,000 |
70,000 |
|
Depreciation expense |
130,000 |
52,000 |
|
Subsidiary earnings |
66,000 |
–0– |
|
Net income |
($261,000) |
($68,000) |
|
Retained earnings, 1/1/13 |
($659,000) |
($98,000) |
|
Net income (above) |
261,000 |
68,000 |
|
Dividends paid |
175,500 |
40,000 |
|
Retained earnings, 12/31/13 |
($744,500) |
($126,000) |
|
Current assets |
$268,000 |
$75,000 |
|
Investment in Storm Company |
216,000 |
–0– |
|
Land |
427,500 |
58,000 |
|
Buildings and equipment (net) |
713,000 |
161,000 |
|
Total assets |
$1,624,500 |
$294,000 |
|
Current liabilities |
($110,000) |
($19,000) |
|
Long term liabilities |
80,000 |
84,000 |
|
Common stock |
600,000 |
60,000 |
|
Additional paid in capital |
90,000 |
5,000 |
|
Retained earnings, 12/31/13 |
744,500 |
126,000 |
|
Total liabilities and equity |
($1,624,500) |
($294,000) |
a. Explain how Palm derived the $66,000 balance in the Subsidiary Earnings account.
b. Prepare a worksheet to consolidate the financial information for these two companies.
c. Explain how Storm’s individual financial records would differ if the push down method of accounting had been applied.