Problem 5A-1 (LO 7) 80%, equity, financing leases with unguaranteed residual value, fixed asset profit.

Steven Truck Company has been an 80%-owned subsidiary of Paulz Heavy Equipment since January 1, 2013, when Paulz acquired 128,000 shares of Steven common stock for $832,000, an amount equal to the book value of Stevens net assets at that date. Stevens net income and dividends paid since acquisition are as follows:

Year Net Income Dividends

2013 $70,000 $25,000

2014 75,600 25,000

2015 81,650 30,000

Totals $227,250 $80,000

On January 1, 2015, Paulz leased a truck from Steven. The 3-year financing-type lease provides for payments of $10,000 each January 1 (including present value of unguaranteed residual value of $4,763). On January 1, 2015, the present value of the truck at Stevens 8% implicit rate, including the unguaranteed residual value of $6,000 at the end of the third year, was $32,596. Paulz has used the 8% implicit rate to record the lease. The truck is being depreciated over three years on a straight-line basis.

On January 1, 2016, Steven signed a 4-year financing-type lease with Paulz for the rental of specialized production machinery with an 8-year life. There is a $7,000 purchase option at the end of the fourth year. The lease agreement requires lease payments of $30,000 each January 1 plus $1,500 for maintenance of the equipment. It also calls for contingent payments equal to 10% of Stevens cost savings through the use of this equipment, as reflected in any increase in net income (excluding gains or losses on sale of assets) above the previous growth rate of Stevens net income. The present value of the equipment on January 1, 2016, at Paulzs 10% implicit rate was $109,388.

On October 1, 2016, Steven sold Paulz a warehouse having a 20-year remaining life, a book value of $135,000, and an estimated salvage value of $20,000. Paulz paid $195,000 for the building, which is being depreciated on a straight-line basis.

The trial balances were prepared by the separate companies on December 31, 2016, as follows:

Paulz Steven

Cash 90,485 123,307

Accounts Receivable (net) 228,000 120,000

Inventory 200,000 140,000

Minimum Lease Payments Receivable 97,000 10,000

Unguaranteed Residual Value 6,000

Unearned Interest Income (9,673) (444)

Assets Under Capital Lease 27,833 109,388

Accumulated Depreciation-Assets Under Capital Lease (18,556) (13,674)

Property, Plant, and Equipment 2,075,000 1,145,000

Accumulated Depreciation-Property, Plant, and Equipment (713,000) (160,000)

Investment in Steven Truck Company 1,045,800

Accounts Payable (100,000) (85,000)

Interest Payable (740) (7,939)

Obligations Under Capital Lease (9,260) (79,388)

Common Stock ($5 par) (1,800,000) (800,000)

Retained Earnings, January 1, 2016 (864,834) (387,250)

Sales (3,200,000) (1,400,000)

Gain on Sale of Assets (60,000)

Interest Income (7,939) (1,152)

Rent Income (2,182)

Cost of Goods Sold 1,882,000 770,000

Interest Expense 740 7,939

Depreciation Expense 135,000 45,000

Other Expenses 924,326 483,213

Subsidiary Income (124,000)

Dividends Declared 144,000 35,000

Totals 0 0

Prepare the worksheet necessary to produce the consolidated financial statements of Paulz Heavy Equipment and its subsidiary for the year ended December 31, 2016. Include income distribution schedules.