Finance
McKinney Enterprises acquired Pottsboro, Inc. as a wholly-owned subsidiary on January 1, 2019 paying $1,750,000. The $440,000 excess of cost over book value of Pottsboro’s net assets was partly attributable to a patent undervalued by $210,000. The patent has a 10-year life. The remaining excess is considered goodwill. The parent uses the cost method of pre-consolidation Equity investment bookkeeping. The separate financial statements of the two companies for 2022 are presented below. Neither company issued additional shares after the acquisition Pottsboro by McKinney.
McKinney Enterprises
Pottsboro, Inc.
Sales revenue
$3,100,000
$440,000
Cost of goods sold
-1,580,000
-252,000
Gross profit
1,520,000
188,000
Operating expenses
-485,000
-68,000
Dividend income
42,000
0
Net Income
$1,077,000
$120,000
Retained Earnings, 1/1/22
$1,700,000
$750,000
Net income
1,077,000
120,000
Dividends
-65,000
-42,000
Retained Earnings, 12/31/22
$2,712,000
$828,000
Cash and receivables
$535,000
$501,000
Inventory
758,000
840,000
Equity investment
1,750,000
Property, plant & equipment (Net)
4,596,000
1,205,480
Total Assets
$7,639,000
$2,546,480
Accounts payable
$265,000
$182,430
Accrued liabilities
458,000
272,390
Notes payable
780,000
603,500
Common stock
460,000
204,540
Additional paid-in capital
2,964,000
455,620
Retained Earnings, 12/31/22
2,712,000
828,000
Total Liabilities and Equities
$7,639,000
$2,546,480
Required:
a. What was Pottsboro, Inc.’s retained earnings balance on the acquisition date?
b. Prepare all necessary consolidation entries for 2022 consolidated financial statements.
