Chapman Company obtains 100 percent of Abernethy Company’s stockon January 1, 2017. As of that date, Abernethy has the followingtrial balance:
| Debit | | Credit |
| Accountspayable | | | | $ | 50,000 |
| Accountsreceivable | $ | 40,000 | | | |
| Additionalpaid-in capital | | | | | 50,000 |
| Buildings (net)(4-year remaining life) | | 120,000 | | | |
| Cash andshort-term investments | | 60,000 | | | |
| Commonstock | | | | | 250,000 |
| Equipment (net)(5-year remaining life) | | 200,000 | | | |
| Inventory | | 90,000 | | | |
| Land | | 80,000 | | | |
| Long-termliabilities (mature 12/31/20) | | | | | 150,000 |
| Retainedearnings, 1/1/17 | | | | | 100,000 |
| Supplies | | 10,000 | | | |
| Totals | $ | 600,000 | | $ | 600,000 |
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During 2017, Abernethy reported net income of $80,000 whiledeclaring and paying dividends of $10,000. During 2018, Abernethyreported net income of $110,000 while declaring and payingdividends of $30,000.
Assume that Chapman Company acquired Abernethy’s common stockfor $500,000 in cash. Assume that the equipment and long-termliabilities had fair values of $220,000 and $120,000, respectively,on the acquisition date. Chapman uses the initial value method toaccount for its investment.
