On January 1, 2012, Pruitt Company issued 25,500 shares of its common stock in exchange for 85% of the outstanding common stock of Shah Company. Pruitt’s common stock had a fair value of $28 per share at that time (par value of $2 per share). Pruitt Company uses the cost method to account for its investment in Shah Company and files a consolidated income tax return. A schedule of the Shah Company assets acquired and liabilities assumed at book values (which are equal to their tax bases) and fair values follows.

Additional Information:

1. Pruitt’s income tax rate is 35%.

2. Shah’s beginning inventory was all sold during 2012.

3. Useful lives for depreciation and amortization purposes are:

Plant assets........10 years

Patents...........8 years

Bond premium........ 10 years

4. Pruitt uses the straight-line method for all depreciation and amortization purposes.

Required:

A. Prepare the stock acquisition entry on Pruitt Company’s books.

B. Prepare the eliminating entries for a consolidated statements workpaper on January 1, 2012, immediately after acquisition.

Transcribed Image Text:

Book Value/ Tax Basis Item Fair Value Excess $125,000 167,000 86,500 467,000 95,000 $ 125,000 195,000 120,000 567,000 200,000 $1,207,000 $ -0- 28,000 33,500 100,000 Receivables (net) Inventory Land Plant assets (net) Patents 105,000 Total $940,500 $266,500 Current liabilities $ 89,500 $ 89,500 -0- Bonds payable Common stock Other contributed capital Retained earnings 300,000 120,000 164,000 267,000 $940,500 360,000 60,000 Total