Pearl Corporation paid $150,000 on January 1, 2013 for a 25% interest in Sandlin

Question

Pearl Corporation paid $150,000 on January 1, 2013 for a 25% interest in Sandlin Inc. On January 1, 2013, the book value of Sandlin's stockholders' equity consisted of $200,000 of common stock and $200,000 of retained earnings. All the excess purchase cost over book value acquired was attributable to undervaluation of equipment with an estimated life of 5 years. During 2013, Sandlin paid $3,000 of dividends each quarter and reported net income of $60,000 for 2013. Pearl used the equity method.

1. Calculate the amount of excess to be allocated to identifiable assets and liabilities

2. Prepare the journal entry to recode divided received from Sandlin

3. Calculate Pearl's income from Sandlin for 2013.

4. Prepare the journal entry to record the Adjusted NI

5.   Determine the balance of Pearl's Investment in Sandlin account on December 31, 2013.

Explanation / Answer

a)

Net assets 400,000

25% share=100,000 but amout paid =150,000 hence the excess is 50,000

b)

Bank DR.750 (3000*.25)

Investmne in Sandlin CR.750

C)

Pearl income =60,000*.25=15000

d) Investment in sandlin DR 25000

Retained Earning CR. 25000

E) Balance of Pearl Investment in Sandlin=150000+25000-750=174250

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