Swallow Corporation paid $62,000 to acquire 100% of Gully Corporation's outstanding voting common stock at book value on May 1, 2006. The stockholders' equity of Gully on January 1, 2006 consisted of $40,000 Capital Stock and $20,000 Retained Earnings. Gully's total dividends for 2006 were $6,000, paid equally on April 1 and October 1. Gully's net income was earned uniformly throughout 2006.
During 2006, Swallow made sales of $10,000 to Gully at a gross profit of $3,000. One-half of this merchandise was inventoried by Gully at year-end, and one-half of the 2006 intercompany sales were unpaid at year-end 2006.
Swallow sold equipment with a ten-year remaining useful life to Gully at a $2,000 gain on December 31, 2006. The straight-line depreciation method is used.
Financial statements of Swallow and Gully Corporations for 2006 appear in the first two columns of the partially completed consolidation working papers.