Problem 1-1
Sells Corporation acquired 45 percent of the common shares of Peat Company on January 1, 2010 for $1,125,000 in cash. On this date the net book value of Peat was $2,000,000. The excess of the purchase consideration over the net book value was attributable to a patent with a remaining useful life of ten years. For the year ending December 31, 2010 Peat reported net income of $141,000 and they paid dividends of $23,000.
Required:
Prepare the journal entries to record the investment by Sells Corporation in Peat Company for 2010.
Problem 1-2
Neis Company, one of nine shareholders in InTea Company, owns 12,000 of the 100,000 common shares of InTea. The other eight shareholders each own 11,000 shares of InTea. Neis has entered into a long-term contract with InTea for substantially all of InTea’s output. Because of this arrangement, Neis appoints two of the directors of InTea.
Required:
Prepare a memo justifying whether Neis should account for its investment in InTea under the equity method. Include in your discussion any additional information you would like to have and the reason why this information is important in aiding your decision.
Problem 1-3
On January 1, 2008 Vider Corporation purchased 90,000 shares of Elcove Company for $30 per share in cash and also paid $40,000 in direct costs to acquire these shares. The acquisition gave Vider a 45 percent ownership stake in Elcove and resulted in Viper being able to exercise significant influence over Elcove.
On January 1, 2008 the owners’ equity of Elcove was $5,000,000. On this date equipment with a remaining useful life of five years was undervalued by $500,000, inventory to be sold in 2008 was undervalued by $240,000, and liabilities, with a settlement date in 2017, were undervalued by $60,000. The remaining excess of the purchase consideration is attributable to goodwill.
The balance of Elcove’s owners’ equity on December 31, 2010 was $5,500,000 and the company had not issued any additional shares during its existence. During 2011 Elcove had net income of $575,000 and paid a dividend of $2 per share.
Required:
Compute the balance of Vider’s investment in Elcove at December 31, 2011.