Accounting Problems-Solutions, homework help

Use the following information for Problems 5-4 and 5-5:

On January 1, 2014, Pontiac Company acquired an 80% interest in the common stock of Stark Company for $400,000. Stark had the following balance sheet on the date of acquisition:

Stark Company

Balance Sheet

January 1, 2014


Assets

Liabilities and Equity

Accounts receivable

$ 40,000

Accounts payable

$ 42,297

Inventory

20,000

Bonds payable

100,000

Land

35,000

Discount on bonds payable

(2,297)

Buildings

250,000

Common stock ($10 par)

10,000

Accumulated depreciation

(50,000)

Paid-in capital in excess of par

90,000

Equipment

120,000

Retained earnings

115,000

Accumulated depreciation

(60,000)

Total assets

$355,000

Total liabilities and equity

$355,000

Buildings (20-year life) are undervalued by $80,000. Equipment (5-year life) is undervalued by $50,000. Any remaining excess is considered to be goodwill.

Stark issued $100,000 of 8%, 10-year bonds for $96,719 on January 1, 2011. Annual interest is paid on December 31. Pontiac purchased the bonds on January 1, 2015, for $104,770. Both companies use the straight-line method to amortize the premium/discount on the bonds. Pontiac and Stark used the following bond amortization schedules:

Stark


Pontiac


Period

Cash

Interest

Balance

Period

Cash

Interest

Balance

1/2011

$ 96,719

1/2011

1/2012

$8,000

$8,328

97,047

1/2012

1/2013

8,000

8,328

97,375

1/2013

1/2014

8,000

8,328

97,703

1/2014

1/2015

8,000

8,328

98,031

1/2015

$104,770

1/2016

8,000

8,328

98,359

1/2016

$8,000

$7,205

103,975

1/2017

8,000

8,328

98,687

1/2017

8,000

7,205

103,180

1/2018

8,000

8,328

99,015

1/2018

8,000

7,205

102,385

1/2019

8,000

8,328

99,343

1/2019

8,000

7,205

101,590

1/2020

8,000

8,328

99,671

1/2020

8,000

7,205

100,795

1/2021

8,000

8,328

100,000*

1/2021

8,000

7,205

100,000

*Adjusted for rounding

Problem 5-4 (LO 2) 80%, equity, straight-line bonds purchased this year, inventory profits.

Refer to the preceding facts for Pontiac’s acquisition of 80% of Starks common stock and the bond transactions. Pontiac uses the simple equity method to account for its investment in Stark. On January 1, 2015, Stack held merchandise acquired from Pontiac for $15,000. During 2015, Pontiac sold $50,000 worth of merchandise to Stark. Stark held $20,000 of this merchandise at December 31, 2015. Stark owed Pontiac $10,000 on December 31 as a result of these intercompany sales. Pontiac has a gross profit rate of 30%. Pontiac and Stark had the trial balances on December 31, 2015, shown on next page.

Pontiac Company

Stark Company

Cash

17,870

32,031

Accounts Receivable

90,000

60,000

Inventory

100,000

30,000

Land

150,000

45,000

Investment in Stark

435,738

Investment in Stark Bonds

103,975

Buildings

500,000

250,000

Accumulated Depreciation

(300,000)

(70,000)

Equipment

200,000

120,000

Accumulated Depreciation

(100,000)

(84,000)

Accounts Payable

(55,000)

(25,000)

Bonds Payable

(100,000)

Discount on Bonds Payable

1,641

Common Stock

(100,000)

(10,000)

Paid-In Capital in Excess of Par

(600,000)

(90,000)

Retained Earnings, January 1, 2015

(400,000)

(145,000)

Sales

(600,000)

(220,000)

Cost of Goods Sold

410,000

120,000

Depreciation Expense—Buildings

30,000

10,000

Depreciation Expense—Equipment

15,000

12,000

Other Expenses

109,360

45,000

Interest Revenue

(7,205)

Interest Expense

8,328

Subsidiary Income

(19,738)

Dividends Declared

20,000

10,000

Totals

0

0

Required

Prepare the worksheet necessary to produce the consolidated financial statements for Pontiac Company and its subsidiary Stark Company for the year ended December 31, 2015. Include the determination and distribution of excess and income distribution schedules.

Please see attached Excel spreadsheet to complete Problem 5-4

 
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