Reference no: EM131268054
Problem 5A-1 the the advance accounting book, ASAP
Problem 5A-1- 80% equity, financing leases with unguaranteed residual value, fixed asset profit.
Steven Truck Company has been an 80%-owned subsidiary of Paulz Heavy Equipment since January 1, 2013, when Paulz acquired 128,000 shares of Steven common stock for $832,000, an amount equal to the book value of Steven’s net assets at that date. Steven’s net income and dividends paid since acquisition are as follows:
Year Net Income Dividends
2013 $70,000 $25,000
2014 75,600 25,000
2015 81,650 30,000
Totals $227,250 $80,000
On January 1, 2015, Paulz leased a truck from Steven. The 3-year financing-type lease provides for payments of $10,000 each January 1 (including present value of unguaranteed residual value of $4,763). On January 1, 2015, the present value of the truck at Steven’s 80% implicit rate, including the unguaranteed residual value of $6,000 at the end of the third year, was $32,596. Paulz has used the 8% implicit rate to record the lease. The truck is being depreciated over three years on a straight-line basis.
On January 1, 2016, Steven signed a 4-year financing-type lease with Paulz for the rental of specialized production machinery with an 8-year life. There is a $7,000 purchase option at the end of the fourth year. The lease agreement requires lease payments of $30,000 each January 1 plus $1,500 for maintenance of the equipment. It also calls for contingent payments equal to 10% of Steven’s cost savings through the use of this equipment, as reflected in any increase in net income (excluding gains or losses on sale of assets) above the previous growth rate of Steven’s net income. The present value of the equipment on January 1, 2016, at Paulz’s 10% implicit rate was $109,388.
On October 1, 2016, Steven sold Paulz a warehouse having a 20-year remaining life, a book value of $135,000, and an estimated salvage value of $20,000. Paulz paid $195,000 for the building, which is being depreciated on a straight-line basis.
The trial balances were prepared by the separate companies on Dec. 31, 2016 as follows:
Paulz Heavy Equip. Steven Truck Co.
Cash………………………………………………………………………90,485 123,307
Accounts Receivable (net)………………………………………………..228,000 120,000
Inventory………………………………………………………………..200,000 140,000
Minimum Lease Payments Receivable………………………………..97,000 10,000
Unguaranteed Residual Value…………………………………………….. 6,000
Unearned Interest Income…………………………………………………… (9,673) (444)
Assets Under Capital Lease…………………………………………………27,833 109,388
Accumulated Depreciation- Assets Under Capital Lease………. (18,556) (13,674)
Property, Plant, & Equipment……………………………………………..2,075,000 1,145,000
Accumulated Depreciation- Property, Plant & Equipment…….. (713,000) (160,000)
Investment in Steven Truck Company…………………………………1,045,800
Accounts Payable……………………………………………………. (100,000) (85,000)
Interest Payable……………………………………………………… (740) (7,939)
Obligations Under Capital Lease………………………………………….. (9,260) (79,388)
Common Stock ($5 par)………………………………………………. (1,800,000) (800,000)
Retained Earnings, Jan. 1, 2016…………………………………….. (864,834) (387,250)
Sales………………………………………………………………… (3,200,000) (1,400,000)
Gain on Sale of Assets…………………………………………………………… (60,000)
Interest Income………………………………………………………. (7,939) (1,152)
Rent Income………………………………………………………….. (2,182)
Cost of Goods Sold………………………………………………..1,882,000 770,000
Interest Expense……………………………………………………..740 7,939
Depreciation Expense……………………………………………….135,000 45,000
Other Expenses……………………………………………………..924,326 483,213
Subsidiary Income………………………………………………….. (124,000)
Dividends Declared…………………………………………………144,000 35,000
Totals…………………………………………………………….0 0
Prepare the worksheet necessary to produce the consolidated financial statements of Paulz Heavy Equipment and its subsidiary for the year ended December 31, 2016. Include income distribution schedules.