Exercise 9 (LO 9) Push-down accounting. On January 1, 20X7, Knight Corporation purchases all the outstanding shares of Craig Company for $950,000. It has been decided that Craig Company will use push-down accounting principles to account for this transaction. The current balance sheet is stated at historical cost.
The following balance sheet is prepared for Craig Company on January 1, 20X7:
Assets Liabilities and Equity
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Current assets: Cash . . . . . . . . . . . . . . . . . . . . . . |
$ 80,000 |
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Current liabilities Long-term liabilities: |
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$ 90,000 |
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Accounts receivable. . . . . . . . . . . |
260,000 |
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Bonds payable. . . . . . . . . . . . . . . . |
$300,000 |
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|
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Deferred taxes . . . . . . . . . . . . . . . . |
50,000 |
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350,000 |
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Prepaid expenses. . . . . . . . . . . . . |
20,000 |
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$ 360,000 |
Stockholders’ equity: |
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|
|
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Property, plant, and equipment: |
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Common stock ($10 par). . . . . . . . |
$300,000 |
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Land . . . . . . . . . . . . . . . . . . . . . . . |
$200,000 |
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Retained earnings . . . . . . . . . . . . . |
420,000 |
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720,000 |
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Building (net) . . . . . . . . . . . . . . . . |
600,000 |
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800,000 |
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Total assets. . . . . . . . . . . . . . . . . . |
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$1,160,000 |
Total liabilities and equity . . . . . . . . . |
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$1,160,000 |
Knight Corporation receives the following appraisals for Craig Company’s assets and liabilities:
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Cash . . . . . . . . . . . . . . . . . . . . . . |
$ 80,000 |
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Accounts receivable . . . . . . . . . . |
260,000 |
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Prepaid expenses . . . . . . . . . . . . |
20,000 |
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Land. . . . . . . . . . . . . . . . . . . . . . . |
250,000 |
|
Building (net) . . . . . . . . . . . . . . . . |
700,000 |
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Current liabilities . . . . . . . . . . . . . |
90,000 |
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Bonds payable . . . . . . . . . . . . . . |
280,000 |
|
Deferred tax liability . . . . . . . . . . |
40,000 |
1. Record the investment.
2. Prepare the value analysis schedule and the determination and distribution of excess sched- ule.
3. Record the adjustments on the books of Craig Company.
4. Prepare the entries that would be made on the consolidated worksheet to eliminate the investment.
