Exercise 9-5 On January 2, 2014, Peoples, Inc. acquired an 80% interest in Schmi
ID: 2510932 • Letter: E
Question
Exercise 9-5 On January 2, 2014, Peoples, Inc. acquired an 80% interest in Schmidt Corporation for $900,000. Schmidt reported total stockholders' equity of $1,000,000 on this date. An examination of Schmidt's books revealed that book value was equal to fair value for all assets and liabilities except for inventory, which was undervalued by $60,400. All of the undervalued inventory was sold during 2014. Peoples also purchased 30% of the $600,000 par value outstanding bonds of Schmidt Corporation for $170,000 on January 2, 2014. The bonds mature in 10 years, carry an 12% annual interest rate payable on June 30 and December 31, and had a carrying value of $606,000 on the date of purchase. Both companies use the straightline method to amortize bond discounts and premiums. Peoples reported net income of $306,000 for 2014 and paid dividends of $131,000 during 2014. Schmidt Corporation reported net income of $336,000 for 2011 and paid dividends of $82,000 during the year Compute the following items at December 31, 2014:Explanation / Answer
Requirement 1
Carrying value of bond as on the date of purchase
606000
Less: Par value of bond
600000
Discount on issue of bond
6000
Number of years of bond
10 years
Annual amortization expenses (6000 /10)
600
Carrying value of bond as on the date of purchase
606000
Less: Amortization expenses
600
Carrying value of bond as on 31.12.2014
605400
Requirement 2
Par value of bonds of Schmidt Corporation
600000
Peoples Inc. acquired 30%
Thus, investment of Peoples Inc. (600000 x 30%)
180000
Rate of annual interest on the bond
12%
Interest reported as revenue by Peoples Inc. (180000 x 12%)
21600
Requirement 3
Par value of bonds of Schmidt Corporation
600000
Rate of annual interest on the bond
12%
Interest expenses reported by Schmidt Corporation (180000 x 12%)
72000
Requirement 4
Cost of investment
170000
Share of par value of bond (600000 x 30%)
180000
Premium on bond acquisition (180000 -170000)
10000
Number of years
10
Annual amortization (10000/10)
1000
Carrying value of investment as on the date of investment
180000
Less: Amortization expenses written off
1000
Carrying value of investment as on 31.12.2014
179000
Requirement 5
Net income of Schmidt Corporation
336000
Less: Dividend paid
82000
Net income after payment of dividend
254000
Share of controlling interests
80%
Controlling interests in consolidated income for 2014 (254000 x 80%)
203200
Add: People's net income
306000
509200
Add: Share of dividend (82000 x30%)
24600
Controlling interests in consolidated net income
533800
Requirement 6
Net income of Schmidt Corporation
336000
Less: Dividend paid
82000
Net income after payment of dividend
254000
Share of non-controlling interests
20%
Non-controlling interests in consolidated income for 2014 (254000 x 20%)
50800
Requirement 1
Carrying value of bond as on the date of purchase
606000
Less: Par value of bond
600000
Discount on issue of bond
6000
Number of years of bond
10 years
Annual amortization expenses (6000 /10)
600
Carrying value of bond as on the date of purchase
606000
Less: Amortization expenses
600
Carrying value of bond as on 31.12.2014
605400
Requirement 2
Par value of bonds of Schmidt Corporation
600000
Peoples Inc. acquired 30%
Thus, investment of Peoples Inc. (600000 x 30%)
180000
Rate of annual interest on the bond
12%
Interest reported as revenue by Peoples Inc. (180000 x 12%)
21600
Requirement 3
Par value of bonds of Schmidt Corporation
600000
Rate of annual interest on the bond
12%
Interest expenses reported by Schmidt Corporation (180000 x 12%)
72000
Requirement 4
Cost of investment
170000
Share of par value of bond (600000 x 30%)
180000
Premium on bond acquisition (180000 -170000)
10000
Number of years
10
Annual amortization (10000/10)
1000
Carrying value of investment as on the date of investment
180000
Less: Amortization expenses written off
1000
Carrying value of investment as on 31.12.2014
179000
Requirement 5
Net income of Schmidt Corporation
336000
Less: Dividend paid
82000
Net income after payment of dividend
254000
Share of controlling interests
80%
Controlling interests in consolidated income for 2014 (254000 x 80%)
203200
Add: People's net income
306000
509200
Add: Share of dividend (82000 x30%)
24600
Controlling interests in consolidated net income
533800
Requirement 6
Net income of Schmidt Corporation
336000
Less: Dividend paid
82000
Net income after payment of dividend
254000
Share of non-controlling interests
20%
Non-controlling interests in consolidated income for 2014 (254000 x 20%)
50800
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