8On May 1 2017 Pepper Company issues 30000 shares of its 12

8)On May 1, 2017, Pepper Company issues 30,000 shares of its $12 par value ($25 fair value) common stock in exchange for all of the shares of Salt\'s common stock. Pepper paid $10,000 for costs to issue the new shares of stock. Before the acquisition, Pepper has $700,000 in its common stock account and $300,000 in its additional paid-in capital account (APIC).

What entries would Pepper use to record this acquisition?

A. Dr. Expenses and Cr. Cash.
B. Dr. Common Stock and Cr. Cash
C. Dr. Investment and Cr. Cash
D. Dr. Investment and Cr. Common Stock and Cr. APIC
E. Dr. Investment and Cr. Common Stock.

9) On January 1, 2017, Pawson, Incorporated, paid $100,000 for a 30% interest in Sacco Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six-year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2017, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2018 it reported income of $75,000 and dividends of $30,000. Assume Pawson has the ability to significantly influence the operations of Sacco.

The amount allocated to goodwill at January 1, 2017, is

A. $25,000.
B. $13,000.
C. $9,000.
D. $10,000.
E. $16,000.

10)Pace Company owns 80% of the common stock of Speed Co. and uses the equity method to account for the investment. During 2017, Speed reported income of $250,000 and paid dividends of $80,000. There is no amortization associated with the investment. During 2017, how will Pace’s investment account change related to this investment?

A. $136,000 increase.
B. $200,000 increase.
C. $0 change.
D. $136,000 decrease.
E. $200,000 decrease.

Solution

8.   ANSWER: A & D 1. Investment in Salt common stock(30000*25) 750000 Common stock(30000*12) 360000 APIC(30000*(25-12)) 390000 2.. Expenses on new stock issue 10000 Cash 10000 9.   Answer: E . $ 16000 Total Cash Paid by Pawson Inc. on Jan.1,2017 100000 Book value worth of 30% interest(550000-300000)=250000*30%= 75000 So,   Excess paid   (100000-75000) 25000 Paid towards patent(40000-10000)*30% 9000 So, the balance paid towards goodwill(25000-9000) 16000 10. ANSWER:      A. $136,000 increase. Pace\'s Investment in Speed Co. Increased by 80%*250000= 200000 Decreased by 80%*80000= 64000 Net increase =200000-64000= 136000