Question

Pratt Company acquired all of the voting stock of Swank Company on January 1, 2016 for...

Pratt Company acquired all of the voting stock of Swank Company on January 1, 2016 for $60,000. Swank Company’s book value at the date of acquisition totaled $8,000. Swank had previously unrecorded identifiable intangibles with a total fair value of $20,000, and plant assets were overvalued by $15,000. All of Swank’s other identifiable net assets had book values that approximated fair value at the date of acquisition. Goodwill arising from this acquisition equaled $47,000.

The identifiable intangibles have an estimated life of 5 years as of the date of acquisition, and the plant assets have an estimated life of 20 years, straight-line. There is no goodwill impairment.

It is now December 31, 2018 (three years since the date of acquisition). The December 31, 2018 preclosing trial balances of both companies appear on the consolidation working paper below. Pratt uses the complete equity method to account for its investment in Swank.

Information on intercompany transactions is as follows:

1. Pratt sells merchandise to Swank at a markup of 25% on cost. Swank’s inventory at January 1, 2018 contains $875 in merchandise purchased from Pratt. Swank’s inventory at December 31, 2018 contains $1,125 in merchandise purchased from Pratt. Total sales from Pratt to Swank during 2018 were $20,000.

Swank Dr Cr Consol
Pratt
Dr (Cr) Dr (Cr)
Dr (Cr)
Current assets $ 16,000 $ 6,600
Plant assets (net) 124,000 72,000
Investment in Swank 65,225 -- A
Identifiable intangibles -- --                B
Goodwill -- -- C D
Liabilities -161,025 -55,000
Capital stock -14,000 -2,000 E
Retained earnings,    Jan. 1 -30,000 -16,500 F
AOCI, Jan. 1 -2,000 -1,500
Sales revenue -95,000 -35,000 G
Equity in net income of Swank -400 -- H --
Equity in OCI of Swank -100 -- --
Cost of goods sold 62,000 23,000
Operating expenses 35,000 8,500 I
Other comprehensive (income) loss         300         (100)
Total $           0 $            0 $           0

1) Fill in the missing letters as noted on the consolidation working paper at December 31, 2018.

2) Briefly explain the rationale for the numbers selected in part 1.

Homework Answers

Answer #1
Pratt Swank Dr. Cr. Consolidated
Dr (Cr) Dr (Cr) Dr (Cr)
Current Assets $16,000 $6,600 -900 $21,700
Plant assets (net) $124,000 $72,000 750 -13500 $183,250
Investment in Swank $65,225 ($65,225) $0
Identifiable Intangibles 12000 -4000 $8,000
Goodwill 47000 $47,000
Liabilities ($161,025) ($55,000) ($216,025)
Capital Stock ($14,000) ($2,000) 2000 ($14,000)
Retained Earnings, Jan 1 ($30,000) ($16,500) 16675 ($29,825)
AOCI, Jan 1 ($2,000) ($1,500) 1500 ($2,000)
Sales Revenue ($95,000) ($35,000) 20000 ($110,000)
Equity in net income of Swank ($400) 400 $0
Equity in OCI of Swank ($100) ($100)
Cost of goods sold $62,000 $23,000 -19950 $65,050
Operating expenses $35,000 $8,500 3250 $46,750
Other comprehensive (income)/loss $300 ($100) $200
Total $0 $0 $103,575 ($103,575) $0
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