On january1, 2005, A Company acquired 90% of the stock of B Company in exchange for 5,400 shares of $10 par value stock having a total market value of $120,600. The purchase method of accounting must be used for the combination.
On january1, 2005, B Company’s assets and liabilities were equal to FMV except for followings.
Accumulated depreciation 10,000(12,000)
Patents 10,000 (13,000)
During 2005, A Company sold merchandise to B Company that originally cost A Company $15,000 and the sale was made for $20,000. On December 31, 2005, B Company’s inventory included merchandise purchased from A Company at a cost to B Company of $12,000.
Also during 2005, A Company acquired $18,000 of merchandise from B Company. B Company uses a normal markup of 25% above its cost. A Company’s ending inventory includes $10,000 of the merchandise acquired from B Company.
B Company reduced its intercompany account payable to A Company to a balance of $4,000 as of december31, 2005, by making a payment of $1,000 on December 30. this $1,000 payment was still in transit on decemver31, 2005.
On january2, 2005, B Company acquired equipment from A Company for $7,000. the equipment was originally purchased by A Company for $5,000 and had a book value of $4,000 at the date of sale to B Company. The equipment had an estimated remaining life of four years as of January2, 2005.
On December31, 2005, B Company purchased for $44,000, 50% of the $100,000 of outstanding bonds issued by A Company to third parties. The bonds mature on december31 of each year and the interest was paid to the prior investor immediately before B Company’s purchase of the bonds.
On December 31, 2005, B Company declared $4,000 cash dividends.