On January 1, 2014, DeSpain Company acquired Lawrence Corporation, a company that manufactures small medical parts. DeSpain paid $440,000 cash in exchange for 80% of Lawrence’s common stock. On the date of acquisition, Lawrence had the following balance sheet:
Lawrence Corporation Balance Sheet January 1, 2014
Assets
Accounts Receivable 82,000
Inventory 40,000
Land 60,000
Buildings 200,000 Accumulated Depreciation (50,000)
Equipment 100,000 Accumulated Depreciation (30,000)
Total Assets 402,000
Liabilities and Equity
Current Liabilities?90,000
Bonds Payable?100,000
Common Stock ($1 par) 10,000
Paid-in-Capital in excess of par 90,000
Retained Earnings 112,000
Total Liabilities and Equity 402,000
At the time of the acquisition, the fair value of Lawrence’s Corporation based on the market value of Lawrence’s stock was $550,000. DeSpain Company requested that an appraisal be done to determine whether the book value of Lawrence’s net assets reflect their fair values. Appraisal values for identifiable assets and liabilities are as follows:
Accounts Receivable 82,000
Inventory (sold during 2014) 38,000
Land?150,000
Building (20-year life) 280,000
Equipment (5-year life) 100,000
Current Liabilities?90,000
Bonds Payable (5-year life) 96,000
Any remaining excess is attributed to goodwill.
DeSpain Company uses the equity method to account for its investment in Lawrence Corporation. DeSpain Company and Lawrence Corporation have the following trial balances on December 31, 2016:
DeSpain Lawrence
Cash?138,000 110,000
Accounts Receivable?90,000 55,000
Inventory?120,000 86,000
Land?100,000 60,000
Investment in Lawrence?444,080 0
Buildings?800,000 250,000
Accumulated Depreciation (220,000) (80,000)
Equipment? 150,000 100,000
Accumulated Depreciation?(90,000) (72,000)
Current Liabilities? (60,000) (102,000)
Bonds Payable?0 (100,000)
Common Stock? (100,000) (10,000)
Paid-in-Capital in excess of Par (900,000) (90,000)
Retained Earnings, January 1, 2016 (309,720) (182,000)
Sales?(800,000) (350,000)
Cost of Goods Sold? 450,000 210,000
Depreciation Expense - Buildings 30,000 15,000
Depreciation Expense - Equipment 15,000 14,000
Other Expenses?140,000 68,000
Interest Expense?0 8,000
Subsidiary Income?(17,360) 0
Dividends Declared 20,000 10,000
Totals 0 0
Required:?1) Prepare a value analysis and a determination and distribution of excess schedule for the investment in Lawrence Corporation as of January 1, 2014. Prepare any additional schedules if required.
2) Prepare consolidation entries (S,A,I,D,E) for DeSpain Company for the year ended December 31, 2016.