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Wallton Corporation owns 70 percent of the outstanding stock of Hastings Incorporated. On January 1 2009 Wallton acquired a building with a 10-year life for $300000 Wallton anticipated no salvage

Wallton Corporation owns 70 percent of the outstanding stock of Hastings, Incorporated. On January 1, 2009, Wallton acquired a building with a 10-year life for $300,000. Wallton anticipated no salvage value, and the building was to be depreciated on the straight-line basis. On January 1, 2011, Wallton sold this building to Hastings for $280,000. At that time, the building had a remaining life of eight years but still no expected salvage value. In preparing financial statements for 2011, how does this transfer affect the computation of consolidated net income?

a. Income must be reduced by $32,000.

b. Income must be reduced by $35,000.

c. Income must be reduced by $36,000.

d. Income must be reduced by $40,000.

On January 1, Jarel acquired 80 percent of the outstanding voting stock of Suarez for $260,000 cash consideration. The remaining 20 percent of Suarez had an acquisition-date fair value of $65,000. On January 1, Suarez possessed equipment (5-year life) that was undervalued on its books by $25,000. Suarez also had developed several secret formulas that Jarel assessed at $50,000. These formulas, although not recorded on Suarez’s financial records, were estimated to have a 20-year future life. As of December 31, the financial statements appeared as follows:

Jarel

Suarez

Revenues

$ (300,000)

$(200,000)

Cost of goods sold

140,000

80,000

Expenses

20,000

10,000

Net income

$ (140,000)

$(110,000)

Retained earnings, 1/1

$ (300,000)

$(150,000)

Net income

(140,000)

(110,000)

Dividends paid

–0–

–0–

Retained earnings, 12/31

$ (440,000)

$(260,000)

Cash and receivables

$ 210,000

$ 90,000

Inventory

150,000

110,000

Investment in Suarez

260,000

–0–

Equipment (net)

440,000

300,000

Total assets

$ 1,060,000

$ 500,000

Liabilities

$ (420,000)

$(140,000)

Common stock

(200,000)

(100,000)

Retained earnings, 12/31

(440,000)

(260,000)

Total liabilities and equities

$(1,060,000)

$(500,000)

During the year, Jarel bought inventory for $80,000 and sold it to Suarez for $100,000. Of these goods, Suarez still owns 60 percent on December 31.

Jul 11 2020 View more View Less

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