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Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common...

Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired.

Demers earns income and pays dividends as follows:

2014 2015 2016

Net income $100,000 $120,000 $130,000

Dividends 40,000 50,000 60,000

Assume the PARTIAL EQUITY method is applied.

4. Compute Pell's investment in Demers at December 31, 2016.

A) $780,000.

B) $660,000.

C) $785,000.

D) $676,000.

E) $620,000.

5. How much does Pell record as income from Demers for the year ended December 31, 2015?

A) $90,400.

B) $89,000.

C) $50,400.

D) $96,000.

E) $56,000.

Business   Accounting   
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Answer #1

Investment on 1 January 2018

500000

During 2014

Add: net income (100000*80%)

80000

Less: dividend (40000*80%)

32000

Investment on 31 December 2014

548000

During 2015

Add: net income (120000*80%)

96000

Less: dividend (50000*80%)

40000

Investment on 31 December 2015

604000

During 2016

Add: net income (130000*80%)

104000

Less: dividend (60000*80%)

48000

At 31 December 2016

660000

Answer 4: (b) $66000

Answer 5: (D) $96000    

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