Unfortunately, some of the accounting records were recently destroyed in a flood (not a fire). Hap Hazard, the former accountant, was fired because he lacked the necessary accounting skills demanded by this position.
You were able to ascertain that Hap used the cost method to account for this investment and the related transaction that occurred during 2011 appeared to be properly recorded. However, upon further review the entry to record the initial investment looks suspicious and may need to be adjusted.
From your review, you determine the following:
1. Inferno issued to the public 100,000 shares of $1 par stock. Inferno received $1,000,000 in this transaction.
2. The entire proceeds were then used to purchase a 90% interest in Pyrotech.
3. Hap recorded the above transactions with a debit entry to the Investment in Pyrotech for $720,000 and
credits to Common Stock for $100,000, Paid-in-Capital in Excess of Par for $350,000 and Retained
Earnings for $270,000.
4. The fair market value of Pyrotech's equipment was $100,000 higher than its net book value. This
equipment has a five-year remaining life. All other assets and liabilities were stated at their fair
value on January 1, 2011.
Inferno sold merchandise costing $40,000 to Pyrotech for $55,000 during 2011. At December 31, Pyrotech had 20% of this merchandise on hand.
Pyrotech declared $20,000 in dividends during 2011. At December 31, only $15,000 of this dividend had actually been paid.
Your boss, Jane Orderly, told you to make the necessary entries on the worksheet to straighten out the mess. She said "We might have to make entries on our books or Pyrotech's to fix this mess. If so, we will do that next year. Right now, I want you to get the consolidation worksheet completed ASAP!"
Intangibles are amortized over a ten year period. Assume no impairment in Goodwill. Inferno recognizes dividend income when the cash is received. Inferno uses the straight-line depreciation method.
Complete a consolidating worksheet for 2011 (using a spreadsheet program). Ignore income taxes. The attached worksheet is given to provide the account balances and to serve as a scratch sheet prior to generating the consolidated balances that are to be submitted.
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