On January 1, 2014, Pontiac Company acquired an 80% interest in the common stock of Stark Company for $400,000. Stark had the following balance sheet on the date of acquisition:
|
Stark Company
Balance Sheet
January 1, 2014
|
|
Assets
|
|
Liabilities and Equity
|
|
|
Accounts receivable
|
$ 40,000
|
Accounts payable
|
$ 42,297
|
|
Inventory
|
20,000
|
Bonds payable
|
100,000
|
|
Land
|
35,000
|
Discount on bonds payable
|
(2,297)
|
|
Buildings
|
250,000
|
Common stock ($10 par)
|
10,000
|
|
Accumulated depreciation
|
(50,000)
|
Paid-in capital in excess of par
|
90,000
|
|
Equipment
|
120,000
|
Retained earnings
|
115,000
|
|
Accumulated depreciation
|
(60,000)
|
|
|
|
Total assets
|
$355,000
|
Total liabilities and equity
|
$355,000
|
Buildings (20-year life) are undervalued by $80,000. Equipment (5-year life) is undervalued by $50,000. Any remaining excess is considered to be goodwill.
Stark issued $100,000 of 8%, 10-year bonds for $96,719 on January 1, 2011. Annual interest is paid on December 31. Pontiac purchased the bonds on January 1, 2015, for $104,770. Both companies use the straight-line method to amortize the premium/discount on the bonds. Pontiac and Stark used the following bond amortization schedules:
|
Stark
|
Pontiac
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|
Period
|
Cash
|
Interest
|
Balance
|
Period
|
Cash
|
Interest
|
Balance
|
|
1/2011
|
|
|
$ 96,719
|
1/2011
|
|
|
|
|
1/2012
|
$8,000
|
$8,328
|
97,047
|
1/2012
|
|
|
|
|
1/2013
|
8,000
|
8,328
|
97,375
|
1/2013
|
|
|
|
|
1/2014
|
8,000
|
8,328
|
97,703
|
1/2014
|
|
|
|
|
1/2015
|
8,000
|
8,328
|
98,031
|
1/2015
|
|
|
$104,770
|
|
1/2016
|
8,000
|
8,328
|
98,359
|
1/2016
|
$8,000
|
$7,205
|
103,975
|
|
1/2017
|
8,000
|
8,328
|
98,687
|
1/2017
|
8,000
|
7,205
|
103,180
|
|
1/2018
|
8,000
|
8,328
|
99,015
|
1/2018
|
8,000
|
7,205
|
102,385
|
|
1/2019
|
8,000
|
8,328
|
99,343
|
1/2019
|
8,000
|
7,205
|
101,590
|
|
1/2020
|
8,000
|
8,328
|
99,671
|
1/2020
|
8,000
|
7,205
|
100,795
|
|
1/2021
|
8,000
|
8,328
|
100,000*
|
1/2021
|
8,000
|
7,205
|
100,000
|
*Adjusted for rounding
Problem 5-4 (LO 2) 80%, equity, straight-line bonds purchased this year, inventory profits.
Refer to the preceding facts for Pontiac's acquisition of 80% of Starks common stock and the bond transactions. Pontiac uses the simple equity method to account for its investment in Stark. On January 1, 2015, Stack held merchandise acquired from Pontiac for $15,000. During 2015, Pontiac sold $50,000 worth of merchandise to Stark. Stark held $20,000 of this merchandise at December 31, 2015. Stark owed Pontiac $10,000 on December 31 as a result of these intercompany sales. Pontiac has a gross profit rate of 30%. Pontiac and Stark had the trial balances on December 31, 2015, shown on next page.
|
|
Pontiac Company
|
Stark Company
|
|
Cash
|
17,870
|
32,031
|
|
Accounts Receivable
|
90,000
|
60,000
|
|
Inventory
|
100,000
|
30,000
|
|
Land
|
150,000
|
45,000
|
|
Investment in Stark
|
435,738
|
|
|
Investment in Stark Bonds
|
103,975
|
|
|
Buildings
|
500,000
|
250,000
|
|
Accumulated Depreciation
|
(300,000)
|
(70,000)
|
|
Equipment
|
200,000
|
120,000
|
|
Accumulated Depreciation
|
(100,000)
|
(84,000)
|
|
Accounts Payable
|
(55,000)
|
(25,000)
|
|
Bonds Payable
|
|
(100,000)
|
|
Discount on Bonds Payable
|
|
1,641
|
|
Common Stock
|
(100,000)
|
(10,000)
|
|
Paid-In Capital in Excess of Par
|
(600,000)
|
(90,000)
|
|
Retained Earnings, January 1, 2015
|
(400,000)
|
(145,000)
|
|
Sales
|
(600,000)
|
(220,000)
|
|
Cost of Goods Sold
|
410,000
|
120,000
|
|
Depreciation Expense-Buildings
|
30,000
|
10,000
|
|
Depreciation Expense-Equipment
|
15,000
|
12,000
|
|
Other Expenses
|
109,360
|
45,000
|
|
Interest Revenue
|
(7,205)
|
|
|
Interest Expense
|
|
8,328
|
|
Subsidiary Income
|
(19,738)
|
|
|
Dividends Declared
|
20,000
|
10,000
|
|
Totals
|
0
|
0
|
Required
Prepare the worksheet necessary to produce the consolidated financial statements for Pontiac Company and its subsidiary Stark Company for the year ended December 31, 2015. Include the determination and distribution of excess and income distribution schedules.