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Problem 5-19

Pcost Company purchased 85% of the common stock of Scost Company on April 1, Year 1 for total consideration of $534,455 cash plus $50,600 of contingent consideration as measured according to GAAP at fair value. Both companies have a December 31 year-end. December 31, Year 1, trial balances for Pcost and Scost were:

		At December 31, Year 1
		Pcost		Scost
Cash		$30,400		$25,000
Accounts Receivables		171,100		135,800
Inventory		235,400		131,800
Treasury Stock at Cost, 500 Shares				48,200
Investment in Scost Company		585,055
Property and Equipment (net)		927,700		522,300
Cost of Goods Sold		1,513,900		558,800
Selling, General, & Administration		322,400		221,100
Other Expenses		94,500		67,900
Dividends Declared		0		49,100
Total		$3,880,455		$1,760,000
Accounts Payable		$111,720		$137,800
Contingent Consideration		60,700
Dividends Payable		0		49,100
Common Stock, $5 par value		271,500		39,300
Other Contributed Capital		908,300		254,900
Retained Earnings, 1/1		358,000		319,000
Sales		2,128,500		959,900
Dividend Income		41,735		0
Total		$3,880,455		$1,760,000

Scost Company declared a $50,600 cash dividend on December 20, Year 1, payable on January 10, Year 2, to stockholders of record on December 31, Year 1. Pcost Company recognized the dividend on its declaration date. Pcost includes dividend income receivable in the accounts receivable account. On the acquisition date, the book values and fair values of Scosts assets and liabilities were equal with the following exceptions.

		Book Value		Fair Value
Inventory		115,100		143,900
Property and Equipment		472,300		504,500

Any difference between book value and fair value for property and equipment is depreciated over seven years. Depreciation expense is reported on the income statement in Selling, General, and Administration expense. The entire amount of inventory acquired was sold in Year 1. No payments were made for the earn-out at the end of year 1, and the adjustment to contingent consideration included only interest adjustments (no change in fair value was expected since the actual and target levels for revenue were equal at the end of year 1). Both companies report depreciation expense as a component of Selling, General, and Administration expense on the income statement. For the year ending December 31, Year 1, Pcost and Scost reported depreciation expense of $96,800 and $54,600, respectively. Both companies use straight-line and use the full-year option in computing depreciation expense (i.e., they take a full years depreciation on any asset acquired during the year). The following balance sheet is available for both companies at the beginning of the year of acquisition and the acquisition date.

		Pcost		Scost			Pcost		Scost
Balance Sheet		1/1/Year 1		1/1/Year 1			4/1/Year 1		4/1/Year 1
Cash		$101,300		$15,100			28,200		11,100
Accounts Receivables		171,900		114,700			121,700		122,900
Inventory		225,700		120,400			227,100		115,100
Investment in Scost Company		0		0			585,055
Property and Equipment		833,000		449,500			833,000		472,300
Total		$1,331,900		$699,700			1,795,055		$721,400
Accounts and Notes Payable		$43,300		$85,600			181,355		156,400
Contingent Consideration							50,600
Dividends Payable				49,100
Common Stock, $5 par value		223,800		39,300			271,500		39,300
Other Contributed Capital		706,800		254,900			908,300		254,900
Retained Earnings		358,000		319,000			383,300		319,000
Treasury Stock				(48,200	)				(48,200	)
Total		$1,331,900		$699,700			$1,795,055		$721,400

(a)

Prepare a consolidated statements workpaper at the end of year 1. (List items that increase retained earnings first.)

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