Reference no: EM131903484
Problem - Computations and journal entries with excess of book value over fair value
Sun Corporation became a subsidiary of Pam Corporation on July 1, 2016, when Pam paid $1,980,000 cash for 90 percent of Sun's outstanding common stock. The price paid by Pam reflected the fact that Sun's inventories were undervalued by $50,000, and Sun's plant assets were overvalued by $500,000. Sun sold the undervalued inventory items during 2016 but continues to hold the overvalued plant assets that had a remaining useful life of nine years from July 1, 2016.
During the years 2016 through 2018, Sun's paid-in capital consisted of $1,500,000 capital stock and $500,000 additional paid-in capital. Sun's retained earnings statements for 2016, 2017, and 2018 were as follows (in thousands):
Year Ended December 31, 2016;
Year Ended December 31, 2017;
Year Ended December 31, 2018
Retained earnings January 1 Add: $525 $600 $700
Net income Deduct: $250 $300 $200
Dividends (declared in December) (175) (200) (150)
Retained earnings December 31 $600 $700 $750
Pam uses the equity method in accounting for its investment in Sun.
REQUIRED
1. Compute Pam's income from its investment in Sun for 2016.
2. Determine the balance of Pam's Investment in Sun account at December 31, 2017.
3. Prepare the journal entries for Pam to account for its investment in Sun.
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