Refer to the preceding facts for Parson€™s acquisition of Solar common stock. Parson uses the simple equity method to account for its investment in Solar. During 2012, Solar sells $30,000 worth of merchandise to Parson. As a result of these intercompany sales, Parson holds beginning inventory of $12,000 and ending inventory of $16,000 of merchandise acquired from Solar. At December 31, 2012, Parson owes Solar $6,000 from merchandise sales.
Solar has a gross profit rate of 30%. On January 1, 2011, Parson sells equipment having a net book value of $50,000 to Solar for $80,000. The equipment has a 5-year useful life and is depreciated using the straight-line method.
Neither company has provided for income tax. The companies qualify as an affiliated group and, thus, will file a consolidated tax return based on a 40% corporate tax rate. The original purchase is not a nontaxable exchange. On December 31, 2012, Parson and Solar have the following trial balances:
On January 1, 2011, Parson Company acquires an 80% interest in Solar Company for $500,000. Solar had the following balance sheet on the date of acquisition:

Buildings, which have a 20-year life, are undervalued by $70,000. Equipment, which has a 5-year life, is undervalued by $50,000. Any remaining excess of cost over book value is attributable to goodwill, which has a 15-year life for tax purposes only.
QUESTION CONTINUE TO NEXT PAGE

Required
1. Prepare a determination and distribution of excess schedule.
2. Prepare a consolidated worksheet for the year ended December 31, 2012. Include a provision for income tax and income distribution schedules.

Transcribed Image Text:

Solar Company Balance Sheet January 1, 2011 Assets Liabilities and Equity Accounts receivable . 60,000 Accounts payabl . 70,000 Assets Liabilities and Equity Land Buildings.. . . Accumulated depreciation.... Equipment 120,000 Common stock 250,000 Paid-in capital in excess 10,000 Accumulated depreciation .. . Goodw . (70,000) 30,000 $540,000 ailities and equity $540,000 Parson Solar Compan Compan 46,080 150,600 105,000 100,000 567,200 800,000 Cash 54,000 90,000 90,000 150,000 and.. Buildings . 250,000 (250,000) 70,000) 120,000 (115,000) (90,000) (70,000) (40,000) (100,000) 210,000 Accounts Payable Bonds Payable (2,880) (100,000)(10,000) (600,000)(190,000) (622,400)(222,000) (890,000)(350,000) 220,000 10,000 10,000 60,000 8,000 480,000 30,000 25,000 150,000 (33,600) 20,000 Subsidiary Income 10,000 0 otals..