Case .7

On July 31, 2005, Paley Corporation transferred all right, title, and interest in several of its current research and development projects to Carla Saye, sole stockholder of Saye Company, in exchange for 55 of the 100 shares of Saye Company common stock owned byCarla Saye. On the same date, Martin Morgan, who is not related to Paley Corporation, Saye Company, or Carla Saye, acquired for $45,000 cash the remaining 45 shares of SayeCompany common stock owned by Carla Saye. Carla Saye notified the directors of Paley Corporation of the sale of common stock to Morgan.Because Paley had recognized as expense the costs related to the research and development when the costs were incurred, Paley’s controller prepared the following journal entry to record the business combination with Saye Company:

Investment in Saye Company Common Stock (55 x $1,000)………55,000

Gain on Disposal of Intangible Assets …………………………………….55,000

To record transfer of research and development projects to CarlaSaye in exchange for 55 shares of Saye Company common stock.

Valuation of the investment is based on an unrelated cash issuance of Saye Company common stock on this date.

Instructions

Do you concur with the foregoing journal entry? Explain. Should the $55,000 gain be displayed in a consolidated income statement of Paley Corporation and subsidiary for the year ended July 31, 2005? Explain.