Problem:
Pauly Corporation purchased for cas 6,000 shares of voting common stock of Stapleton Corporation for $16 per share on July 1, 2006. On this date, Stapleton's equity consisted of $100,000 of $10 par capital stock, $20,000 retained earnings from prio periods, and $10,000 current earnings (for one-half of 2006).
Stapleton's income for 2006 was $20,000 and it paid dividends of $12,000 on November 11, 2006.
All of Stapleton's assets and liabilities were stated at their fair values at July 1, 2006 and any differences between investment cost and book value acquired should be assigned to equipment and amortized over a 10 year period.
Compute the correct amounts for each of the following items using the equity method of acccounting for Pauly's investment:
1. Pauly Corporation's income from its investment in Stapleton for the year ended December 31, 2006.
2. The balance of Pauly's investment in Stapleton account at December 31, 2006.
Take in consideration the following assumptions:
1. An excess of investment cost over book value of the net assets acquired is goodwill.
2. Goodwill is not amortized.
3. Income is earned evely throughout each accounting period.
4. Inventory items on hand at the end of an accounting period are sold in the immediately succeeding fiscal period.
5. an equity interest purchased from the stockholders of the investee company rather than directly from the investee corporation(that is, the todal outstanding stock of the investee corporation does not change).