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 10

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 cost 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) $\begin{array}{lr}&&\$ 10,000 &&&&&&&& \$ 500,000 \\\end{array}$
B) $\begin{array}{lr} &&\$ 10,000 &&&&&&&& \$ 570,000 \\\end{array}$
C) $\begin{array}{lr} &&\$ 0 & &&&&&&&&&\$ 570,000 \\\end{array}$
D) $\begin{array}{lr} &&\$ 80,000 &&&&&&&& \$ 500,000\end{array}$

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Definitions:

Plant Asset

Long-term tangible assets that are used in the production of goods or services and are not intended for sale.

Book Value

The value of an asset according to its balance sheet account balance, taking depreciation into account.

Fair Market Value

The estimated price at which an asset would trade in a competitive auction setting.

Gain on Disposal

The profit realized from the sale of assets, other than inventory, for more than their carrying amount on the books.