Problem:
Earth-Q Corporation paid $1,680,000 for a 30 interest in Tremor Corporation's outstanding voting stock on January 1, 2006. The book values and fair values of Tremor's assets and liabilities on January 1, along with amortization data, are as follows:
Book Value Fair Value
Cash $400,000 $400,000
AR-net 700,000 700,000
Inventories (sold in 2006) 1,000,000 1,200,000
Other current assets 200,000 200,000
Land 900,000 1,700,000
Buildings-net (10 yr remaining life) 1,500,000 2,000,000
Equipment-net (7 yr remaining life) 1,200,000 500,000
Total Assets 5,900,000 6,700,000
AP 800,000 800,000
Other current liabilities 200,000 200,000
Bonds payable (due Jan. 1, 2013) 1,000,000 1,100,000
Capital stock $10 par 3,000,000
Retained earnings 900,000
Total equities 5,900,000
Tremor Corporation reported net income of $1,200,000 for 2006 and paid dividends of $600,000.
1. Prepare a schedule to allocate the investment cost/book value differentials relating to Earth-Q's investment in Tremor.
2. Calculate Earth-Q's income fom Tremor for 2006.
3. Determine the balance of Earrth-Q investment of Tremor account at December 31, 2006.