On January 1, 2012. Pond Co. acquired 40% of the outstanding voting common share

Question

On January 1, 2012. Pond Co. acquired 40% of the outstanding voting common shares of Ramp Co. for $700,000. On that date. Ramp reported assets and liabilities with book values of $2.2 million and $700,000. respectively. A building owned by Ramp had an appraised value of $300,000, although it had a book value of only $120,000. This building had a 12-year remaining life and no salvage value. It was being depreciated on the straight-line basis. Ramp generated net income of $200,000 in 2012 and a loss of $120,000 in 2013. In each of these two years. Ramp paid a cash dividend of $70,000 to its stockholders. During 2012, Ramp sold inventory to Pond that had an original cost of $50,000. The merchandise was sold to Pond for $75,000. Of this balance, $72,000 was resold to outsiders during 2012 and the remainder was sold during 2013. In 2013, Ramp sold inventory to Pond for $180,000. This inventory had cost only $108,000. Pond resold $ 120,000 of the inventory during 2013 and the rest during 2014.

Explanation / Answer

for the year 2012:

pond co. paid 700000 for 40% share

net worth of Ramp is (2200000-700000-120000+300000) = 1680000

40% of $1680000 is $672000

Amount paid for Goodwill is $700000-672000 = $28000

total income of RAMP 200000

- inter sale (1000)

- excess amount charged on sale of 40% (28000)

Total net income 171000

equity income for Pond in 2012 is 171000*.4= $68400

in the year 2013

total loss (120000)

+ income on inter company sale now sold 1000

- profit on closing stock of inter sale (24000)

net loss for 2013 (143000)

equity income of 2013 for Pond is -143000*.4 = -57200 loss

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