On January 1, 19X9, Apache Company purchased 80% of the outstanding voting shares of Navaho Company for $300,000. Navahos assets and liabilities all had fair values that were equal to their carrying values. The $100,000 excess of purchase price over the carrying values of Navaho Companys net assets was allocated to . Goodwill is tested for impairment on an annual basis. Between January 1, 19X9, and January 1, 20X5, Navaho Company earned $200,000 and paid dividends of $40,000. Both companies use the straight-line method to calculate depreciation and amortization.
Additional Information
1. On January 1, 19X5, Navaho Company purchased a machine for $100,000 that had an estimated useful life of 20 years; on January 1, 20X0, Navaho Company sold the machine to Apache Company for $60,000. The estimated useful life of the machine remains unchanged at a total of 20 years (15 years from January 1, 20X0).
2. During 20X5, Navaho Company had sales of merchandise in the amount of $400,000 to Apache Company, of which $60,000 remains in the December 31, 20X5, inventories of Apache Company. Apache Company had no sales to Navaho Company during 20X5, but had sales of $200,000 to Navaho Company in 20X4. Of these sales, $40,000 remained in the December 31, 20X4, inventories of Navaho Company. Intercompany sales are priced to provide the selling company with a 40% gross profit on sales prices.
3. On September 1, 20X5, Navaho Company sold a piece of land to Apache Company for $50,000. The land had been purchased for $35,000.
4. During 20X5, Navaho Company declared dividends of $6,000 and Apache Company declared dividends of $35,000.
5. During 20X5, Navaho Company paid Apache Company $10,000 in management fees.
6. On July 1, 20X5, Apache Company lent Navaho Company $100,000 for five years at an annual interest rate of 10%. Interest is paid on July 1 of each year for which the loan is outstanding.
7. To date, there has been no impairment in the value of . Apache Company carries its investment in Navaho Company by the cost method. On this date, the statements of comprehensive income of Apache Company and Navaho Company for the year ended December 31, 20X5, are as follows:
Required
1. Prepare the consolidated SCI for Apache Company and its subsidiary, Navaho Company, for the year ended December 31, 20X5.
2. Assume that Apache Company prepares separate-entity statements for its bank and uses the equity method of reporting its investment in Navaho. Provide a detailed calculation of Apache Companys investment income for the year ended December 31, 20X5.
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