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On January 2, 2012, Pal acquired 75% of the outstanding stock of Sim Company for $2,100,000...

On January 2, 2012, Pal acquired 75% of the outstanding stock of Sim Company for $2,100,000 cash. On that date Sim’s stockholders equity included common stock of $1,000,000 and retained earnings of $1,560,000.   As part of the merger agreement, Sim’s former management team signed a contract not to compete with Pal for the next 8-years. The difference between the cost and book value of Sim’s net assets was assigned to these noncompetition agreements.

On January 2, 2014, Pal Corporation purchased warehouse equipment from Sim Company for $150,000 when the equipment had a book value to Sim of $100,000. The equipment had a five-year useful life at the time of the intercompany sale. Both Pal and Sim depreciate equipment on the straight-line method assuming no salvage value.

Pal separate income for 2014 was $470,000 (excluding income from Sim), and Sim reported net income of $180,000.

Consolidated income for 2014 was:

$630,000

$580,000

$610,000

$570,000

Business   Accounting   
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Answer #1

1. Consolidated Income:

Sr No Particulars Amount ($)
a Pal Income*        490,000
b Sim's Income (200000** x75%)        150,000
c Total Income (a+b) 640,000
d Less: Depreciation on equipment (150000/5)           30,000
e Consolidated Income (c-d) 610,000
2. Working:
Particulars Pal ($) Sim ($)
Income after depreciation on equipment        470,000 180,000
Add: depreciation (100000/5)           20,000      20,000
Income before depreciation 490,000* 200,000**
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