Reference no: EM132506542
Par Corporation acquired a 70 percent interest in Sol Corporation's common stock on January 1, 2011, for $490,000 cash. The stockholders' equity of Sol on this date consisted of $500,000 capital stock and $100,000 retained earnings. The difference between the fair value of Sol and the underlying equity acquired in Sol was assigned $5,000 to Sol's undervalued inventory, $14,000 to overvalued buildings, $21,000 to undervalued equipment, and remaining amount to goodwill.
The undervalued inventory items were sold during 2011, and the overvalued buildings and undervalued equipment had remaining useful lives of seven years and three years, respectively. Depreciation is straight line. At December 31, 2011, Sol's accounts payable include $10,000 owed to Par. Separate financial statements for Par and Sol for 2011 are summarized as follows (in thousands):
income and Retaind earning statement:
Parent subsidiary
Sales 800 700
income for sub 60.2
gain on equipment 10
cost of sales (300) (400)
Depreciation exp (155) (60)
other expenses (160) (140)
net income 255.2 (100)
Add: RE 300 100
Deduct: dividends (200) (50)
RE 355.2 150
Balance sheet :
cash 96 60
account receivable 100 70
dividends receivable 14
inventories 150 100
other current assets 70 30
land 50 100
buliding-net 140 160
equipment- net 570 330
investment in sub 512.2
total assets 1,705.2 850
Account payable 200 85
dividends payable 100 20
other liabilities 50 95
capital stock, 10$ par 1,000 500
Retained Earnings 355.2 150
total equities 1,705.2 850
Question1 : Using equity method, Prepare the required elimination entries on December 31, 2011. Show your computations