The separate condensed balance sheets and income statements of Purl Corp. and its wholly owned subsidiary, Scott Corp., are as follows: | BALANCE SHEETS | December 31, year 2 | |
| Purl | Scott | Assets | | | Current assets: | | | Cash | $ 80,000 | $ 60,000 | Accounts receivable (net) | 140,000 | 25,000 | Inventories | 90,000 | 50,000 | Total current assets | 310,000 | 135,000 | Property, plant, and equipment (net) | 625,000 | 280,000 | Investment in Scott (equity method) | 400,000 | — | Total assets | $1,335,000 | $ 415,000 | | | | Liabilities and Stockholders’ Equity | | | Current liabilities: | | | Accounts payable | $ 160,000 | $ 95,000 | Accrued liabilities | 110,000 | 30,000 | Total current liabilities | 270,000 | 125,000 | Stockholders’ equity: | | | Common stock ($10 par) | 300,000 | 50,000 | Additional paid-in capital | — | 10,000 | Retained earnings | 765,000 | 230,000 | Total stockholders’ equity | 1,065,000 | 290,000 | Total liabilities and stockholders’ equity | $1,335,000 | $ 415,000 |
| INCOME STATEMENTS | For the year ended December 31, year 2 | |
| Purl | Scott | Sales | $2,000,000 | $750,000 | Cost of goods sold | 1,540,000 | 500,000 | Gross margin | 460,000 | 250,000 | Operating expenses | 260,000 | 150,000 | Operating income | 200,000 | 100,000 | Equity in earnings of Scott | 70,000 | — | Income before income taxes | 270,000 | 100,000 | Provision for income taxes | 60,000 | 30,000 | Net income | $ 210,000 | $ 70,000 |
Additional information: | • | On January 1, year 2, Purl purchased for $360,000 all of Scott’s $10 par, voting common stock. On January 1, year 2, the fair value of Scott’s assets and liabilities equaled their carrying amount of $410,000 and $160,000, respectively, except that the fair values of certain items identifiable in Scott’s inventory were $10,000 more than their carrying amounts. These items were still on hand at December 31, year 2. Goodwill is determined to be unimpaired at December 31, year 2. | | | • | During year 2, Purl and Scott paid cash dividends of $100,000 and $30,000, respectively. For tax purposes, Purl receives the 100% exclusion for dividends received from Scott. | | | • | There were no intercompany transactions, except for Purl’s receipt of dividends from Scott and Purl’s recording of its share of Scott’s earnings. | | | • | Both Purl and Scott paid income taxes at the rate of 30%. |
In the December 31, year 2 consolidated financial statements of Purl and its subsidiary, total assets should be
A. $1,740,000 B. $1,460,000 C. $1,350,000 D. $1,325,000 |
