P Company Purchased 80% of the Outstanding Common Stock of S

question 25

Multiple Choice

P Company purchased 80% of the outstanding common stock of S Company on May 1, 2017, for a cash payment of $1,272,000. S Company's December 31, 2016 balance sheet reported common stock of $800,000 and retained earnings of $540,000. During the calendar year 2017, S Company earned $840,000 evenly throughout the year and declared a dividend of $300,000 on November 1. What is the amount needed to establish reciprocity under the cost method in the preparation of a consolidated workpaper on December 31, 2018?

• A) $208,000
• B) $260,000
• C) $248,000
• D) $432,000

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Definitions:

Par Value

The nominal or face value of a bond, share of stock, or coupon as indicated on a bond or stock certificate.

Fair Value

The cost incurred or received during the sale of an asset or transfer of a liability in a systematic transaction among market actors on the valuation date.

Undervalued

An economic condition where the market price of an asset falls short of its intrinsic or real value as evaluated by investors.

Overvalued

A descriptor for an asset or stock whose price is believed to be higher than its intrinsic value.