Pappy, Inc. acquired a 60 percent interest in the

Subject: Business / Accounting
Question
Pappy, Inc. acquired a 60 percent interest in the common stock of Sammy, for $372,000 on January 1, 2015. Sammy’s book value on that date consisted of common stock of $100,000 and retained earnings of $220,000. Sammy held patents (10-year remaining life) that were undervalued within the company’s accounting records by $70,000 and an unrecorded customer list (15-year remaining life) assessed at a $45,000 fair value. Any remaining excess acquisition-date fair value was assigned to goodwill. Pappy uses the equity method. At year end, Sammy owed Pappy $20,000.

In the course of ordinary business, Pappy sells inventory to Sammy. In 2015, Pappy sold $150,000 to Sammy. This inventory had an original cost of $120,000. At December 31, 2015, the ending balance (at the transfer price) in Sammy’s ending inventory was $50,000. In 2016, Pappy sold $160,000 to Sammy. This inventory cost Pappy $112,000 and $40,000 at the transfer price remained unsold at the end of 2016.

In addition, during 2016, Pappy sold land to Sammy for $100,000 with an original cost of $80,000.

The individual financial statements for these two companies as of December 31, 2016, and the year then ended follow:

PAPPY

SAMMY

Sales

$ 700,000

$ 335,000

Cost of goods sold

(460,000)

(205,000)

Gain on sale of land

20,000

Operating expenses

(208,000)

(70,000)

Income from Sammy

28,000

Net income

$ 80,000

$ 60,000

Retained earnings, 1/1

$ 695,000

$ 280,000

Net income (above)

80,000

60,000

Dividends declared

(45,000)

(15,000)

Retained earnings, 12/31

$ 730,000

$ 325,000

Cash and receivables

$ 248,000

$ 148,000

Inventory

233,000

129,000

Investment in Sammy

411,000

Land

100,000

Buildings (net)

308,000

102,000

Equipment (net)

220,000

86,000

Patents (net)

20,000

Total assets

$ 1,420,000

$ 585,000

Liabilities

$ 390,000

$ 160,000

Common stock

300,000

100,000

Retained earnings, 12/31

730,000

325,000

Total liabilities and equities

$ 1,420,000

$ 585,000

Required: Prepare the elimination entries and consolidation worksheet

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