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Problem - Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2010. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date.
Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired.
Demers earns income and pays dividends as follows:
2010
2011
2012
Net income
$100,000
$120,000
$130,000
Dividends
40,000
50,000
60,000
Assume the initial value method is applied.
How much does Pell record as Income from Demers for the year ended December 31, 2010?
A. $32,000.
B. $74,400.
C. $73,000.
D. $42,400.
E. $41,000.
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