Question

On January 1, 2017, Palka, Inc., acquired 70 percent of the outstanding shares of Sellinger Company for $1,479,800

in cash. The price paid was proportionate to Sellinger’s total fair value, although at the acquisition date, Sellinger had a total book value of $1,780,000. All assets acquired and liabilities assumed had fair values equal to book values except for a patent (six-year remaining life) that was undervalued on Sellinger’s accounting records by $324,000. On January 1, 2018, Palka acquired an additional 25 percent common stock equity interest in Sellinger Company for $585,625 in cash. On its internal records, Palka uses the equity method to account for its shares of Sellinger.

During the two years following the acquisition, Sellinger reported the following net income and dividends:

 20172018Net income$572,500 $701,500 Dividends declared 170,000  200,000

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