Problem 5A-1 (LO 7) 80%, equity, financing leases with unguaranteed residual, fixed asset profit. Steven Truck Company has been an 80%-owned subsidiary of Paulz Heavy Equipment since January 1, 20X3, when Paulz acquired 128,000 shares of Steven com- mon stock for $832,000, an amount equal to the book value of Steven’s net assets at that date. Steven’s net income and dividends paid since acquisition are as follows:

 

Year	Net Income	Dividends
20X3	$70,000	$25,000
20X4	75,600	25,000
20X5	81,650	30,000

On January 1, 20X5, Paulz leased a truck from Steven. The 3-year financing-type lease pro- vides for payments of $10,000 each January 1. On January 1, 20X5, the present value of the truck at Steven’s 8% implicit rate, including the unguaranteed residual value of $6,000 at the end of the third year, was $32,596. Paulz has used the 8% implicit rate to record the lease. The truck is being depreciated on a straight-line basis.

On January 1, 20X6, Steven signed a 4-year financing-type lease with Paulz for the rental of specialized production machinery with an 8-year life. There is a $7,000 purchase option at the end of the fourth year. The lease agreement requires lease payments of $30,000 each January 1 plus $1,500 for maintenance of the equipment. It also calls for contingent payments equal to 10% of Steven’s cost savings through the use of this equipment, as reflected in any increase in net income (excluding gains or losses on sale of assets) above the previous growth rate of Steven’s net income. The present value of the equipment on January 1, 20X6, at Paulz’s 10% implicit rate was $109,388.

On October 1, 20X6, Steven sold Paulz a warehouse having a 20-year remaining life, a book value of $135,000, and an estimated salvage value of $20,000. Paulz paid $195,000 for the building, which is being depreciated on a straight-line basis.

The trial balances were prepared by the separate companies on December 31, 20X6, as follows:

 

 

Paulz Heavy Equipment

 

Steven Truck Company

 

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	90,485	123,307
Accounts Receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	228,000	120,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	200,000	140,000
Minimum Lease Payments Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . .	97,000	10,000
Unguaranteed Residual Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		6,000
Unearned Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	(9,673)	(444)
Assets Under Capital Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	27,833	109,388
Accumulated Depreciation—Assets Under Capital Lease . . . . . . . . . . . .	(18,556)	(13,674)
Property, Plant, and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2,075,000	1,145,000
Accumulated Depreciation—Property, Plant, and Equipment . . . . . . . . .	(713,000)	(160,000)
Investment in Steven Truck Company. . . . . . . . . . . . . . . . . . . . . . . . . . . .	1,045,800
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	(100,000)	(85,000)
Interest Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	(740)	(7,939)
Obligations Under Capital Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	(9,260)	(79,388)
Common Stock ($5 par) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	(1,800,000)	(800,000)
Retained Earnings, January 1, 20X6. . . . . . . . . . . . . . . . . . . . . . . . . . . .	(864,834)	(387,250)
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	(3,200,000)	(1,400,000)
Gain on Sale of Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		(60,000)
Interest Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	(7,939)	(1,152)
Rent Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	(2,182)

 

 

 

 

Paulz Heavy Equipment

 

Steven Truck Company

 

Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                 1,882,000                   770,000

Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                         740                           7,939

Depreciation Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                   135,000                       45,000

Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                      924,326                   483,213

Subsidiary Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                   (124,000)

Dividends Declared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                     144,000                       35,000

                  

Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                                              0                         0

                  

Prepare the worksheet necessary to produce the consolidated financial statements of Paulz Heavy Equipment and its subsidiary for the year ended December 31, 20X6. Include income distribution schedules.