Problem 1 (Recommended: review slides 3-10)

On January 1, Puckett Company paid $1.6 million for 50,000 shares of Harrison's voting
common stock, which represents a 40 percent investment. No allocation to goodwill or other
specific account was made. Significant influence over Harrison is achieved by this
acquisition and so Puckett applies the equity method. Harrison declared a $2 per share dividend
during the year and reported net income of $560,000.
What is the balance in the Investment in Harrison account found in Puckett's financial records as
of December 31?
Problem 2 (Recommended: review slides 11-20)
Hoyle, Schaefer & Doupnik - Chapter 1 Problem 7
In January 2023, Domingo Inc. acquired 20 percent of the outstanding common stock of
Martes, Inc., for $700,000. This investment gave Domingo the ability to exercise significant
influence over Martes. Martes's assets on that date were recorded at $3,900,000 with liabilities of
$900,000. Any excess of cost over book value of the investment was attributed to a patent having
a remaining useful life of 10 years. In 2023, Martes reported net income of $170,000. In 2024,
Martes reported net income of $210,000. Dividends of $70,000 were declared in each of these
two years.

What is the equity method balance of Domingo's Investment in Martes, Inc. at December 31,
2024?
Problem 3 (Recommended: review slides 21-30)
Panner Inc. owns 30 percent of Watkins and applies the equity method. During the current year,
Panner buys inventory costing $54,000 and then sells it to Watkins for $90,000. At the end of the
year, Watkins still holds $20,000 of merchandise.
What amount of unrealized gross profit must Panner defer in reporting this investment using the
equity method?
Problem 4 (Recommended: review slides 35-37)
Anderson acquires 10 percent of the outstanding voting shares of Barringer on January 1,
2022, for $92,000. This investment gives Anderson the ability to exercise significant influence
and the company uses the equity method to account for it. An additional 20 percent of the
stock is purchased on January 1, 2023, for $210,000. Barringer has a book value of $800,000
at January 1, 2022, and records net income of $180,000 for that year. Barringer declares and
pays dividends of $80,000 during 2022. The book values of Barringer's asset and liability
accounts are considered as equal to fair values except for a copyright whose value accounted
for Anderson's excess cost in each purchase. The copyright had a remaining life of 16 years at
January 1, 2022.

Barringer reports $210,000 of net income during 2023 and $230,000 in 2024. Dividends of
$100,000 are declared and paid in each of these years.

If Anderson sells its entire investment in Barringer on January 1, 2025 for $400,000 cash, what is
the impact on Anderson's income?
Problem 5 (Recommended: review slides 39-70)
Jim Company acquired a 100% of the common stock of John Company on January 1, 2024. John
Company maintains separate incorporation. Immediately following the acquisition, Jim and John had
the following shareholders’ equity accounts:

Jim John
Common stock 300,000 200,000
Additional Paid-in Capital 200,000 250,000
Retained Earnings (1/1/2024) 300,000 150,000
Total SE 800,000 600,000

Determine the shareholder equity accounts of the consolidated company based on the consolidated
worksheet prepared on the date of acquisition? Please, explain your answer.
Problem 6 (Recommended: review slides 39-70)
Hoyle, Schaefer and Doupnik – Chapter 2 Problem 25
Following are pre-acquisition financial balances for Padre Company and Sol Company as of December
31. Also included are fair values for Sol Company accounts.

Padre Company Sol Company

Book Values Book Values Fair Values
Cash $400,000 $120,000 $120,000
Receivables $220,000 $300,000 $300,000
Inventory $410,000 $210,000 $260,000
Land $600,000 $130,000 $110,000
Building and Equipment $600,000 $270,000 $330,000
Franchise Agreement $220,000 $190,000 $220,000
Accounts Payable ($300,000) ($120,000) ($120,000)
Accrued Expenses ($90,000) ($30,000) ($30,000)
Long-term Liabilities ($900,000) ($510,000) ($510,000)
Net Assets $1,160,000 $560,000 $680,000
Common Stock - $20 par value ($660,000)
Common Stock - $5 par value ($210,000)
Additional Paid-in Capital ($70,000) ($90,000)
Retained Earnings 1/1 ($390,000) ($240,000)
Revenues ($960,000) ($330,000)
Expenses $920,000 $310,000
Owners’ equity ($1,160,000) ($560,000)

On December 31, Padre acquires Sol’s outstanding stock by paying $360,000 in cash and issuing 10,000
shares of its own common stock with a fair value of $40 per share. Padre paid legal and accounting fees
of $20,000 as well as $5,000 in stock issuance costs.

Determine the value that would be shown in Padre and Sol’s consolidated financial statements for each
of the accounts listed.

Inventory Revenues
Land Additional paid-in-capital
Building and equipment Expenses
Franchise agreements Retained Earnings, 1/1
Goodwill Retained Earnings, 12/31
 Consolidation Entries
Account
Parent Subsidiary Debits Credits Consolidated Totals
Income Statement
Revenues
Expenses
Net Income

Statement of Retained Earnings

Retained Earnings 1/1
Net Income (above)
Dividend paid
Retained earnings 12/31

Balance Sheet
Cash
Receivables
Inventory
Investment in Subsidiary

Land
Building and Equipment
Franchise Agreement

Total Assets
Accounts Payable
Accrued Expenses
Long-term Liabilities
Common Stock
Additional Paid-in Capital
Retained earnings 12/31
Total Liabilities and Equity
Problem 7 (Recommended: review slides 71-75)
On June 30, 2024, Sampras Company reported the following account balances:

Account Balance
Receivables $80,000
Inventory $70,000
Building (net) $75,000
Equipment (net) $25,000
Current Liabilities ($10,000)
Long-term Liabilities ($50,000)
Net Assets $190,000
Common Stock ($90,000)
Retained Earnings ($100,000)
Owner's Equity ($190,000)

On June 30, 2024, Pelham paid $300,000 cash for all assets and liabilities of Sampras, which will
cease to exist as a separate entity. In connection with the acquisition Pelham paid $10,000 in legal
fees. Pelham also agreed to pay $50,000 to the former owners of Sampras contingent on meeting
certain revenue goals during 2025. Pelham estimated the present value of its probability adjusted
expected payment for the contingency at $15,000.
In determining its offer, Pelham noted the following pertaining to Sampras:
 It holds a building with fair value $40,000 more than its book value.
 It has developed a customer list appraised at $22,000, although it is not recorded in its
financial records.
 It has research and development activity in process with an appraised fair value of $30,000.
However, the project has not yet reached technological feasibility and the assets used in the
activity have no alternative future use.
 Book values for the receivables, inventory, equipment, and liabilities approximate fair
values.

Prepare Pelham’s accounting entry to record the combination with Sampras.

Problem 8 (Recommended: review slides 76-77)
On January 1, 2024, the Moody Company entered in a transaction for 100% of the outstanding
common stock of Osorio Company. Osorio Company will cease to exist as a separate entity. To
acquire the shares, Moody issued $400 in long-term liabilities and 40 shares of common stock
having a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for
assistance in bringing about this acquisition. Another $15 was paid in connection with stock
issuance costs. Prior to these transactions, the Balance Sheets for the two companies were as
follows:

Moody Osario
Cash $ 180 $ 40
Receivables 810 180
Inventory 1,080 280
Land 600 360
Buildings (net) 1,260 440
Equipment (net) 480 100
Accounts Payable (450) (80)
Long-term Liabilities (1,290) (400)
Common Stock ($1 par) (330)
Common Stock ($20 par) (240)
Additional paid-in
capital (1,080) (340)
Retained earnings (1,260) (340)

Note: Parentheses indicate a credit balance.

In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the
subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60.

Prepare the accounting entry to record the combination with Osorio using the acquisition method.