Question

Computations for investee when excess allocated to inventories, building, and goodwill Pop Company acquired a 30 percent interest in the voting stock of Son Company for $331,000 on January 1, 2016, when Son's stockholders' equity consisted of capital stock of $600,000 and retained earnings of $400,000. At the time of Pop's investment, Son's assets and liabilities were recorded at fair values, except for inventories that were undervalued by $30,000 and a building with a 10-year remaining useful life that was overvalued by $60,000. Son has income for 2016 of $100,000 and pays dividends of $50,000. Assume undervalued inventories are sold in 2016.

REQUIRED
1. Compute Pop's income from Son for 2016.
2. What is the balance of Pop's Investment in Son account at December 31, 2016?
3. What is Pop's share of Son's recorded net assets at December 31, 2016?

Answer 1

1. Pop's income from Son for 2016 is $30,000. 2. The balance of Pop's Investment in Son account at December 31, 2016 is $361,000. 3. Pop's share of Son's recorded net assets at December 31, 2016 is $240,000.

Step-by-step explanation:

1. To compute Pop's income from Son for 2016, we need to determine Pop's share of Son's net income. Since Pop acquired a 30% interest in Son, Pop's share of the net income would be 30% of Son's net income. Son's net income for 2016 is $100,000, so Pop's income from Son would be 30% × $100,000 = $30,000.

2. The balance of Pop's Investment in Son account at December 31, 2016 can be calculated by adding the initial investment of $331,000 to Pop's share of Son's net income, which is $30,000. Thus, the balance of Pop's Investment in Son account at December 31, 2016 would be $331,000 + $30,000 = $361,000.

3. To determine Pop's share of Son's recorded net assets at December 31, 2016, we need to adjust Son's recorded net assets for the undervalued inventories and the overvalued building. The undervalued inventories of $30,000 would reduce Son's net assets, while the overvalued building of $60,000 would increase Son's net assets. Therefore, Pop's share of Son's recorded net assets at December 31, 2016 would be (30% × ($600,000 + $400,000)) - ($30,000 - $60,000) = $240,000.