Class example 1:
On January 2, 2002, Playful Inc. purchased 60% of the outstanding
common shares of Serious Ltd. for $6,000,000. Serious’ condensed balance sheet at that
time was as follows:
Common shares (100,000, no par)
Preferred shares (100,000, no par,
$4 dividend, callable at $40;
cumulative and nonvoting)
The fair value of Serious’ assets was the same as their book value except for capital
assets, which had a fair value of $20,000,000. The capital assets have a remaining useful
life of fifteen years. Goodwill was impaired by $50,000 in 2002.
On October 1, 2002, Playful purchased 20,000 of Serious’ preferred shares at $32 per
share. There was no dividend in arrears. Serious declared the fourth-quarter preferred
dividend on December 15, 2002, payable on January 15, 2003, to holders of record on
December 30, 2002. Note that the $4 dividend is paid out quarterly at $1 per quarter.
Assume Serious Ltd. declared no dividends to common shareholders for 2002.
The condensed balance sheets for both Playful and Serious were as follows on
December 31, 2002: