Exercise 2 (LO 1) Alternative investment models, more complex D&D. Mast Corporation purchased a 75% interest in the common stock of Shaw Company on January 1, 20X4, for $462,500 cash. Shaw had the following balance sheet on that date:

Assets Liabilities and Equity Current assets . . . . . . . . . . . . . $ 80,000 Current liabilities . . . . . . . . . . . $ 50,000 Inventory . . . . . . . . . . . . . . . . 40,000 Common stock ($5 par) . . . . . . . 50,000 Land . . . . . . . . . . . . . . . . . . . 100,000 Paid-in capital in excess of par . . 150,000 Buildings and equipment (net) . . . 200,000 Retained earnings . . . . . . . . . . . 200,000 Patent . . . . . . . . . . . . . . . . . . 30,000 Total assets . . . . . . . . . . . . . $450,000 Total liabilities and equity . . . . $450,000 Appraisals indicated that the book values for inventory and buildings and equipment, and patent are below fair values. The inventory had a fair value of $50,000 and was sold during 20X4.

The buildings and equipment have an appraised fair value of $300,000 and a remaining life of 20 years. The patent, which has a 10-year life, has an estimated fair value of $50,000. Any remaining excess is goodwill.

Shaw Company reported the following income earned and dividends paid during 20X4 and 20X5:

Retained earnings, January 1, 20X4 . . . . . . . . . . . . . . . . . . . . . . . . $200,000 Net income, 20X4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 70,000 Dividends paid in 20X4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,000) 50,000 Balance, December 31, 20X4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $250,000 Net income, 20X5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48,000 Dividends paid in 20X5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,000) 28,000 Balance, December 31, 20X5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $278,000 Prepare a determination and distribution of excess schedule for the investment in Shaw Company and determine the balance in the Investment in Shaw Company on Mast Company’s books as of December 31, 20X5, under the following methods that could be used by the parent, Mast Company: simple equity, sophisticated equity, and cost.