On January 1, 2016, Ashland Company purchases a 25% interest in Cramer Company for $195,000. Ashland Company prepares the following determination and distribution of excess schedule:Price paid for investment . . . . . . . . . . . . . . . . . . . $195,000Less book value of interest acquired:Common stock ($5 par) . . . . . . . . . . . . . . . . . . . . $100,000Paid-in capital in excess of par . . . . . . . . . . . . . .. 200,000Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . .. 150,000Total stockholders’ equity. . . . . . . . . . . . . . . . . . . $450,000Interest acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . x 25% 112,500Excess of cost over book value (debit) . . . . . . . . $ 82,500Equipment [25% x $30,000 (10-year life)] . . . . . 7,500 DrGoodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,000 DrThe following additional information is available:a. Cramer Company sells a machine to Ashland Company for $30,000 on July 1, 2017. At thisdate, the machine has a book value of $25,000 and an estimated future life of five years. Straight-line depreciation (to the nearest month) is being used. For income tax purposes, the gain on the sale is taxable in the year of the sale.b. The following applies to Ashland Company sales to Cramer Company for 2017 and 2018: 2017 2018Intercompany merchandise in beginning inventory . . . . . $ 4,000Sales for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,000 $15,000Intercompany merchandise in ending inventory . . . . . . . . $ 4,000 $ 5,000Gross profit on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40% 40%c. Internally generated income (before tax) for the two companies is as follows: 2016 2017 2018Ashland Company. . . . . . . . . . . . . . . . $140,000 $150,000 $155,000Cramer Company . . . . . . . . . . . . . . . . 60,000 80,000 100,000d. Cramer pays dividends of $5,000, $10,000, and $10,000 in 2016, 2017, and 2018, respectively.e. The corporate income tax rate of 30% applies to both companies. Assume an 80% dividend exclusion.Prepare all equity method adjustments for Ashland Company’s investment in Cramer Company on December 31, 2016, 2017, and 2018. Consider income tax implications. Supporting calculations and schedules should be in good form.
On January 1, 2016, Ashland Company purchases a 25% interest in Cramer Company for $195,000. Ashland Company prepares the following determination and distribution of excess schedule:
Price paid for investment . . . . . . . . . . . . . . . . . . . $195,000
Less book value of interest acquired:
Common stock ($5 par) . . . . . . . . . . . . . . . . . . . . $100,000
Paid-in capital in excess of par . . . . . . . . . . . . . .. 200,000
Total
Interest acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . x 25% 112,500
Excess of cost over book value (debit) . . . . . . . . $ 82,500
Equipment [25% x $30,000 (10-year life)] . . . . . 7,500 Dr
The following additional information is available:
a. Cramer Company sells a machine to Ashland Company for $30,000 on July 1, 2017. At this
date, the machine has a book value of $25,000 and an estimated future life of five years. Straight-line
b. The following applies to Ashland Company sales to Cramer Company for 2017 and 2018:
2017 2018
Intercompany merchandise in beginning inventory . . . . . $ 4,000
Sales for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,000 $15,000
Intercompany merchandise in ending inventory . . . . . . . . $ 4,000 $ 5,000
Gross profit on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40% 40%
c. Internally generated income (before tax) for the two companies is as follows:
2016 2017 2018
Ashland Company. . . . . . . . . . . . . . . . $140,000 $150,000 $155,000
Cramer Company . . . . . . . . . . . . . . . . 60,000 80,000 100,000
d. Cramer pays dividends of $5,000, $10,000, and $10,000 in 2016, 2017, and 2018, respectively.
e. The corporate income tax rate of 30% applies to both companies. Assume an 80% dividend exclusion.
Prepare all equity method adjustments for Ashland Company’s investment in Cramer Company on December 31, 2016, 2017, and 2018. Consider income tax implications. Supporting calculations and schedules should be in good form.
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