Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2010. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired.
Demers earns income and pays dividends as follows:
(Assume the equity method is applied).
2010 2011 2012
Net Income $100,000 $120,000 $130,000
Dividends $40,000 $50,000 $60,000
Compute Pell's income from Demers for the year ended December 31, 2012.
Steps to solve for fair value of subsidiary and then related goodwill are shown. Then, the income after amortization of excess fair value is shown. Click in cells to see computations.