Problem 3-1 (LO 1) Alternative investment account methods, effect  on  elimina- tions. On January 1, 20X1, Peter Company acquires an 80% interest in Sardine Company by issuing 10,000 of its common stock shares with a par value of $10 per share and a fair value of

$72 per share. At the time of the purchase, Sardine has the following balance sheet:

 

Assets	Â	Liabilities and Equity	Â
Current assets . . . . . . . . . . . . . .	$100,000	Current liabilities . . . . . . . . . . . . . . .	$  80,000
Investments . . . . . . . . . . . . . . . .	150,000	Bonds payable . . . . . . . . . . . . . . . .	250,000
Land. . . . . . . . . . . . . . . . . . . . . .	120,000	Common stock ($10 par). . . . . . . . .	100,000
Building (net) . . . . . . . . . . . . . . .	350,000	Paid-in capital in excess of par . . . .	200,000
Equipment (net) . . . . . . . . . . . . .	160,000	Retained earnings . . . . . . . . . . . . . .	250,000
Total assets. . . . . . . . . . . . . . .	$880,000	Total liabilities and equity . . . . . .	$880,000

 

                                                                                                                                                                                                                            

 

Appraisals indicate that book values are representative of fair values with the exception of land and buildings. The land has a fair value of $190,000, and the building is appraised   at

 

 

 

$450,000. The building has an estimated remaining life of 20 years. Any remaining excess is goodwill.

The following summary of Sardine’s retained earnings applies to 20X1 and 20X2:

 

Balance, January 1, 20X1. . . . . . . . . . . . . . . . . . .	$250,000
Net income for 20X1 . . . . . . . . . . . . . . . . . . . . .	60,000
Dividends paid in 20X1 . . . . . . . . . . . . . . . . . . .	(10,000)
Balance, December 31, 20X1 . . . . . . . . . . . . . . .	$300,000
Net income for 20X2 . . . . . . . . . . . . . . . . . . . . .	45,000
Dividends paid in 20X2 . . . . . . . . . . . . . . . . . . .	(10,000)
Balance, December 31, 20X2 . . . . . . . . . . . . . . .	$335,000

 

 

1.    Prepare a value analysis and a determination and distribution of excess schedule for the investment in Sardine Company. As a part of the schedule, indicate annual amortization of excess adjustments.

2.    For 20X1 and 20X2, prepare the entries that Peter would make concerning its investment in Sardine under the simple equity, sophisticated equity, and cost methods You may want to set up a worksheet with side-by-side columns for each method so that you can easily compare the entries.

3.    For 20X1 and 20X2, prepare the worksheet elimination that would be made on a consoli- dated worksheet under the simple equity, sophisticated equity, and cost methods. You may want to set up a worksheet with side-by-side columns for each method so that you can easily compare the entries.