Question

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.

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