D&D and income statement for nontaxable exchange. Lucy Company issued securities with a fair value of $465,000 for a 90% interest in Desmond Company on January 1, 20X1, at which time Desmond Company had the following balance sheet:
|
Assets |
Liabilities and Equity |
||
|
Accounts receivable |
$50,000 |
Current liabilities |
$70,000 |
|
Inventory |
80,000 |
Common stock ($5 par) |
100,000 |
|
Land |
20,000 |
Paid in capital in excess of par |
130,000 |
|
Building (net) |
200,000 |
Retained earnings |
50,000 |
|
Total assets |
$350,000 |
Total liabilities and equity |
$350,000 |
It was believed that the inventory and the building were undervalued by $20,000 and $50,000, respectively. The building had a 10 year remaining life; the inventory on hand January 1, 20X1, was sold during the year. The deferred tax liability associated with the asset revaluations was to be reflected in the consolidated statements. Each company has an income tax rate of 30%. Any remaining excess is goodwill.
The separate income statements of the two companies prepared for 20X1 are as follows:
|
Lucy |
Desmond |
|
|
Sales |
$400,000 |
$150,000 |
|
Cost of goods sold |
200,000 |
90,000 |
|
Gross profit |
$200,000 |
$60,000 |
|
General expenses |
50,000 |
25,000 |
|
Depreciation expense |
60,000 |
15,000 |
|
Operating income |
$90,000 |
$20,000 |
|
Subsidiary income |
18,000 |
|
|
Net income before income tax |
$108,000 |
$20,000 |
|
Provision for tax (does not include tax on subsidiary income) |
27,000 |
6,000 |
|
Net income |
$81,000 |
$14,000 |
1. Prepare a determination and distribution of excess schedule for the investment.
2. Prepare the 20X1 consolidated income statement and its related income distribution schedules.