35. Palm Company acquired 100 percent of Storm Company’s voting

35. Palm Company acquired 100 percent of Storm Company’s voting stock on January 1, 2011,
by issuing 10,000 shares of its $10 par value common stock (having a fair value of $14 per
share). As of that date, Storm had stockholders’ equity totaling $105,000. Land shown on
Storm’s accounting records was undervalued by $10,000. Equipment (with a 5-year remain-
ing life) was undervalued by $5,000. A secret formula developed by Storm was appraised at
$20,000 with an estimated life of 20 years.
Following are the separate financial statements for the two companies for the year end-
ing December 31, 2015. There were no intra-entity payables on that date. Credit balances are
indicated by parentheses.
Palm
Company Storm
Company
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (485,000) $(190,000)
Cost of goods sold. . . . . . . . . . . . . . . . . . . . . 160,000 70,000
Depreciation expense. . . . . . . . . . . . . . . . . . . 130,000 52,000
Subsidiary earnings . . . . . . . . . . . . . . . . . . . . (66,000 ) –0–
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ (261,000 ) $ (68,000 )
Retained earnings, 1/1/15 . . . . . . . . . . . . . . . $ (659,000) $ (98,000)
Net income (above) . . . . . . . . . . . . . . . . . . . . (261,000) (68,000)
Dividends declared. . . . . . . . . . . . . . . . . . . . . 175,500 40,000
Retained earnings, 12/31/15. . . . . . . . . . . . $ (744,500 ) $(126,000 )
Current assets . . . . . . . . . . . . . . . . . . . . . . . . $ 268,000 $ 75,000
Investment in Storm Company. . . . . . . . . . . . 216,000 –0–
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 427,500 58,000
Buildings and equipment (net) . . . . . . . . . . . . 713,000 161,000
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $ 1,624,500 $ 294,000
Current liabilities . . . . . . . . . . . . . . . . . . . . . . $ (110,000) $ (19,000)
Long-term liabilities . . . . . . . . . . . . . . . . . . . . (80,000) (84,000)
Common stock . . . . . . . . . . . . . . . . . . . . . . . (600,000) (60,000)
Additional paid-in capital. . . . . . . . . . . . . . . . (90,000) (5,000)
Retained earnings, 12/31/15 . . . . . . . . . . . . . (744,500 ) (126,000 )
Total liabilities and equity. . . . . . . . . . . . . . $(1,624,500 ) $(294,000 )
a. Explain how Palm derived the $66,000 balance in the Subsidiary Earnings account.
b. Prepare a worksheet to consolidate the financial information for these two companies.

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