Hobson acquires 40% of the outstanding voting stock of Stokes Company on January 1, 2008,for $210,000 in cash. The book value of Stokes' net assets on the date was $400,000, although one company's buildings, with a $60,000 carrying value, was actually worth $100,000. This building had a 10-year remaining life. Stokes owned a royalty agreement with a 20-year remaining life that was undervalued by $85,000.
Stokes sold inventory with an original cost of $60,000 to Hobson during 2008 at a price of $90,000. Hobson still held $15,000(transfer price) of this amount in inventory as of December 31, 2008. These goods are to be sold to outside parties during 2009.
Stokes reported a loss of $60,000 for 2008, $40,000 from continuing operations, and $20,000 from an extraordinary loss. The company still manages to pay a $10,000 cash dividend during the year.
During 2009, Stokes reported a $40,000 net income and distributed a cash dividend of $12,000. It made additional inventory sales of $80,000 to Hobson during the period. The original cost of the merchandise as $50,000. All but 30% if this inventory had been resold to outside partied by the end of the 2009 fiscal year.
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Anna Liza Gaspar
NOTE: There is no significant influence; hence there is no consolidation of statements. Thus, there will be no adjustments for the upward sale of ...
This solution prepares the investment journal entries for Hobson.