Historical comparison—income effect of purchase versus pooling. World Corporation acquired the net assets of Globe Company on July 1, 1998. In exchange for Globe’s net assets, World issued 10,000 shares of its $5 par common stock, which had a $40 fair value on the date of acquisition. Globe Company had the following balance sheet on the date of acquisition:
|
Globe Company |
|||
|
Assets |
Liabilities and Equity |
||
|
Accounts receivable |
$50,000 |
125,000 |
$450,000 |
|
Inventory |
100,000 |
25,000 |
125,000 |
|
Buildings (net) |
300,000 |
50,000 |
25,000 |
|
Equipment (net) |
200,000 |
$650,000 |
50,000 |
|
Total assets |
$650,000 |
Total liabilities and equity |
$650,000 |
Appraisals have determined that fair values agree with the book values of the net assets. Reported income amounts for both World and Globe for the year ended December 31, 1998, are as follows:
|
Income Statement |
||
|
World |
Globe |
|
|
Sales |
$800,000 |
$500,000 |
|
Less: Cost of goods sold |
400,000 |
300,000 |
|
Operating expenses |
150,000 |
75,000 |
|
Other expenses |
50,000 |
25,000 |
|
Net income |
$200,000 |
$100,000 |
No goodwill is reflected in the above income statement. Assuming that income is earned evenly throughout the year, compare combined current year income using the purchase method and the pooling method.