Assume that on 1/1/20 Big bought 100% of Little’s common stock for $500,000. Little’s book value on that date was $350,000, comprised of $50,000 of common stock and $300,000 of retained earnings. Little had the following misvalued/unrecorded assets and liabilities:

• Land, undervalued by $20,000
• In-process R & D, 2 year expected life, $30,000
• Overvalued inventory, FIFO basis, $10,000
• Equipment, 10 year life, undervalued by $50,000
• Bonds payable, 5 year life, undervalued by $10,000
• Little was the plaintiff in a lawsuit, and Big and Little both expected a favorable settlement of $15,000.

During 2020 and 2021, Little reported earnings of $50,000 and $60,000, respectively, and paid no dividends.

At the end of 2020, it was determined that the goodwill which arose in the purchase of Little had become impaired and needed to be reduced to $40,000.

In 2021 the lawsuit was favorably settled, and Little received the expected $15,000 judgment.

Required:

• Prepare the “differential analysis” to explain the purchase price of Little
• Prepare equity method entries as appropriate for 2020
• Prepare elimination entries as appropriate for 2020
• Prepare equity method entries as appropriate for 2021
• Prepare elimination entries as appropriate for 2021

Answer rating: 100% (QA)

Differential Analysis Land 20000 Inprocess RD 30000 Overvalued inventory 10000 Equi... View the full answer