Pete Purchased 100% of the Common Stock of the Sanburn $$\begin{array} { l r r } & 2016 & 2017 \\ \text { Net income } & \$ 80,000 & \$ 90,000 \\\text { Dividends paid }& 10,000 & 10,000\end{array}$$

question 31

Short Answer

Pete purchased 100% of the common stock of the Sanburn Company on January 1, 2016, for $500,000.On that date, the stockholders' equity of Sanburn Company was $380,000.On the purchase date, inventory of Sanburn Company, which was sold during 2016, was understated by $20,000.Any remaining excess of cost over book value is attributable to patent with a 20-year life.The reported income and dividends paid by Sanburn Company were as follows: ?
?
$$\begin{array} { l r r } & 2016 & 2017 \\ \text { Net income } & \$ 80,000 & \$ 90,000 \\\text { Dividends paid }& 10,000 & 10,000\end{array}$$
Using the sophisticated (full) equity method, which of the following amounts are correct?
?
$\begin{array}{cc}\text { Investment Income } & \text { Investment Account Balance } \\2016 & \text { December } 31,2016\end{array}$
A) $\begin{array}{ll}&& \$ 55,000 &&&&&&& \$ 555,000 \\\end{array}$
B) $\begin{array}{ll}&&\$ 55,000 &&&&&&& \$ 545,000 \\\end{array}$
C) $\begin{array}{ll}&&\$ 75,000 &&&&&&& \$ 565,000 \\\end{array}$
D) $\begin{array}{ll} &&\$ 80,000 &&&&&&& \$ 570,000\end{array}$

• A)\(\begin{array}{ll}&& \$ 55,000 &&&&&&& \$ 555,000 \\\end{array}\)
• B)\(\begin{array}{ll}&&\$ 55,000 &&&&&&& \$ 545,000 \\\end{array}\)
• C)\(\begin{array}{ll}&&\$ 75,000 &&&&&&& \$ 565,000 \\\end{array}\)
• D)\(\begin{array}{ll} &&\$ 80,000 &&&&&&& \$ 570,000
• \end{array}\)

---

Definitions:

Prime Costs

The combined costs of direct labor and direct materials involved in the production of goods.

Factory Overhead

includes all the indirect costs associated with manufacturing, such as utilities, maintenance, and salaries of indirect labor.

Direct Labor

The labor costs directly associated with the manufacturing of a product, including wages of workers physically involved in production.

Balance Sheet

A financial statement that summarizes a company's assets, liabilities, and shareholders' equity at a specific point in time.