Pell Company Acquires 80% of Demers Company for $500,000 on January

question 2

Multiple Choice

Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2010. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired.
Demers earns income and pays dividends as follows: $\begin{array}{lrrr}&2010&2011&2012\\\text { Net income } & \$ 100,000 & \$ 120,000 & \$ 130,000 \\\text { Dividends } & 40,000 & 50,000 & 60,000\end{array}$ Assume the equity method is applied.
-Compute Pell's investment in Demers at December 31, 2010.

• A) $500,000.
• B) $574,400.
• C) $625,000.
• D) $542,400.
• E) $532,000.

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Definitions:

Shortage/Surplus

An economic condition where the quantity demanded is greater than (shortage) or less than (surplus) the quantity supplied at the market price.

Demand Equation

A mathematical representation of the relationship between the quantity of a good demanded and its price.

Supply Equation

A mathematical formula that represents the relationship between the quantity of a good supplied and its price.

Price Ceiling

A maximum price set by the government for particular goods and services that cannot legally be charged above to prevent prices from being too high.