Problem 5-4</p><p>Eliminating Entries (including Goodwill Impairment) and Worksheets for Various Years LO1 LO6 On January 1, 2010,

Porter Company purchased an 80% interest in the capital stock of Salem Company for $850,000. At the time, Salem Company had capital stock of $550,000 and retained earnings of $80,000.</p><p> Differences between the fair value and the book value of the identifiable assets of Salem Company were as follows:</p><p> Fair Value in Excess of Book Value</p><p>Equipment $130,000</p><p>Land 65,000</p><p>Inventory 40,000</p><p>The book values of all other assets and liabilities of Salem Company were equal to their fair value on January 1, 2010. The equipment had a remaining life of five years on January 1, 2010. The inventory was sold in 2010. Salem Company's net income and dividends declared in 2010 and 2011 were as follows:</p><p>Year 2010 Net Income of $100,000; Dividends Declared of $25,000</p><p>Year 2011 Net Income of $110,000; Dividends Declared of $35,000</p><p>a. Prepare a computation and Allocation Schedule for the difference between book value of equity acquired and the value implied by the purchase price.</p><p>b. Present the eliminating / adjusting entries needed on the consolidated worksheet for the year ended December 31, 2010. (It is not necessary to prepare the worksheet.)</p><p>1. Assume the use of the cost method.</p><p>2. Assume the use of the partial equity method</p><p>3. Assume the use of the complete equity method.</p><p>c. Present the eliminating / adjusting entries needed on the consolidated worksheet for the year ended December 31, 2011(It is not necessary to prepare the worksheet.)</p><p>1. Assume the use of the cost method.</p><p>2. Assume the use of the partial equity method</p><p>3. Assume the use of the complete equity method.</p><p>Use the following financial data for 2012 for requirements D through G.</p><p> Porter Company Salem Company</p><p>Sales $1,100,000 $450,000</p><p>Dividend income 48,000 --</p><p> Total revenue $1,148,000 $450,000</p><p>Cost of goods sold 900,000 200,000</p><p>Depreciation expense 40,000 30,000</p><p>Other expenses 60,000 50,000</p><p> Total cost and expense 1,000,000 280,000</p><p>Net income $148,000 $170,000</p><p> </p><p>1/1 Retained earnings $500,000 $230,000</p><p>Net income 148,000 170,000</p><p>Dividends declared (90,000) (60,000) </p><p>12/31 Retained earnings $558,000 $340,000</p><p> </p><p>Cash $ 70,000 $ 65,000</p><p>Accounts receivable 260,000 190,000 </p><p>Inventory 240,000 175,000 </p><p>Investment in Salem Company 850,000</p><p>Land -0320,000</p><p>Plant and equipment 360,000 280,000</p><p> Total assets $ 1,780,000 $1,030,000</p><p> </p><p>Accounts payable $ 132,000 $ 110,000 </p><p>Notes

payable

90,000 30,000</p><p>Capital stock 1,000,000 550,000</p><p>Retained earnings 558,000 340,000</p><p> Total liabilities and equity $1,780,000 $1,030,000</p><p>d. Prepare a consolidated financial statements work paper for the year ended December 31, 2012. Although no goodwill impairment was reflected at the end of 2010 or 2011, the goodwill impairment test conducted at December 31, 2012 revealed implied goodwill from Salem to be only $150,000. The impairment has not been recorded in the books of the parent. (Hint: You can infer the method being used by the parent from the information in its trial balance.)</p><p>e. Prepare a consolidated statement of financial position and a consolidated income statement for the year ended December 31, 2012. Describe the effect on the consolidated balance if Salem Company uses the LIFO cost flow assumption in pricing its inventory and there has been no decrease in ending inventories since 2010. Prepare an analytical calculation of consolidated retained earnings for the year ended December 31, 2012 Problem 5-6 Work paper Entries for Two Years and Sale Equipment in Year Two LO6 On January 1, 2011, Perini Company purchased an 85% interest in Silvas Company for $400,000. On this date, Silvas Company had common stock of $90,000 and retained earnings of $210,000. An examination of Silvas Company's assets and liabilities revealed that there book value was equal to their fair value except for the equipment.</p><p> Book Value Fair Value</p><p>Equipment $360,000 </p><p>Accumulated depreciation <u>(120,000)</u></p><p> $240,000 $340,000</p><p> </p><p>The equipment had an expected remaining life of six years and no salvage value. Straightline depreciation is used.</p><p>During 2011 and 2012, Perini Company reported net income from its own operations of $80,000 ND Paid dividends of $50,000 in each year. Silvas Company had income of $40,000 each year and paid dividends of $30,000 on each December 31.</p><p>Accumulated depreciation is presented on a separate row in the workpaper and in the consolidated financial statements.</p><p> Prepare eliminating entries for consolidated financial statements workpaper for the year ended December 31, 2011, assuming:</p><p>1. The cost method is used to account for the investment.</p><p>2. The partial equity method is used to account for the investment.</p><p>b. On January 1, 2012, Silvas Company sold all its equipment for $220,000. Prepare the eliminating entries for the consolidated financial statements workpaper for the year ended December 31, 2012, assuming:</p><p>1. The cost method is used to account for the investment.</p><p>2. The partial equity method is used to account for the investment

P5-4) Part A Computation and Allocation of Difference Schedule Parent NonEntire

Share Purchase price and implied value Less: Book value of equity acquired Difference between implied and book value Equipment Land Inventory Balance Goodwill Balance *$850,000/.80 $850,000 504,000 346,000 (104,000) (52,000) (32,000) 158,000 (158,000) -0-

Controlling Share 212,500 126,000 86,500 (26,000) (13,000) (8,000) 39,500 (39,500) -0-

Value 1,062,500 * 630,000 432,500 (130,000) (65,000) (40,000) 197,500 (197,500) -0-

Part B and C Worksheet Entries

Cost Method Workpaper entries Year 2010 (1) Dividend Income ($25,000 .80) Dividends Declared To eliminate intercompany dividends (2) Beginning Retained Earnings - Salem Co. Common Stock - Salem Difference between Implied and Book Value Investment in Salem Company Noncontrolling Interest To eliminate investment account and create noncontrolling interest account (3) Cost of Goods Sold Land Plant and Equipment (5 year life) Goodwill Difference between Implied and Book Value To allocate the difference between implied and book value 20,000 20,000 80,000 550,000 432,500 850,000 212,500 40,000 65,000 130,000 197,500 432,500

(4) Depreciation Expense ($130,000/5) Plant and Equipment Cost Method Worksheet Entries Year 2011 (1) Investment in Salem Company (.80 ($100,000 - $25,000)) Beginning Retained Earnings - Porter Co. To establish reciprocity/convert to equity as of 1/1/2011 (2) Dividend Income ($35,000 .80) Dividends Declared To eliminate intercompany dividends (3) Beginning Retained Earnings - Salem Co.($80,000 + $100,000 $25,000) Common Stock - Salem Difference between Implied and Book Value Investment in Salem Company ($850,000 + $60,000) Noncontrolling Interest ($212,500 + ($155,000 $80,000) .2) To eliminate investment account and create noncontrolling interest account (4) 1/1 Retained Earnings Porter Company Noncontrolling Interest Land Plant and Equipment (5 year life) Goodwill Difference between Implied and Book Value To allocate the difference between implied and book value (5) 1/1 Retained Earnings Porter Company (previous years amount) Noncontrolling Interest Depreciation Expense ($130,000/5) Plant and Equipment Partial Equity Method Workpaper entries Year 2010 (1) Equity in Subsidiary Income ($100,000)(.80)

26,000 26,000

60,000 60,000 28,000 28,000

155,000 550,000 432,500 910,000 227,500 32,000 8,000 65,000 130,000 197,500 432,500 20,800 5,200 26,000 52,000 80,000

Dividends Declared ($25,000 .80) Investment in Salem Company To eliminate intercompany dividends (2) Beginning Retained Earnings - Salem Co. Common Stock - Salem Difference between Implied and Book Value Investment in Salem Company Noncontrolling Interest To eliminate investment account and create noncontrolling interest account (3) Cost of Goods Sold Land Plant and Equipment (5 year life) Goodwill Difference between Implied and Book Value To allocate the difference between implied and book value (4) Depreciation Expense ($130,000/5) Plant and Equipment Partial Equity Method Worksheet Entries Year 2011 (1) Equity in Subsidiary Income ($110,000)(.80) Dividends Declared ($35,000 .80) Investment in Salem Company To eliminate intercompany dividends and income (2) Beginning Retained Earnings - Salem Co. Common Stock - Salem Difference between Implied and Book Value Investment in Salem Company ($850,000 + $80,000 $20,000) Noncontrolling Interest ($212,500 + ($155,000 $80,000) .2) 88,000 80,000 550,000 432,500

20,000 60,000

850,000 212,500

40,000 65,000 130,000 197,500 432,500 26,000 26,000

28,000 60,000 155,000 550,000 432,500 910,000 227,500

To eliminate investment account and create noncontrolling interest account (3) 1/1 Retained Earnings Porter Company Noncontrolling Interest Land Plant and Equipment (5 year life) Goodwill Difference between Implied and Book Value To allocate the difference between implied and book value (4) 1/1 Retained Earnings Porter Company (previous years amount) Noncontrolling Interest Depreciation Expense ($130,000/5) Plant and Equipment Complete Equity Method Workpaper entries Year 2010 (1) Equity in Subsidiary Income ($100,000)(.80) $32,000 $20,800 Dividends Declared ($25,000 .80) Investment in Salem Company To eliminate intercompany dividends (2) Beginning Retained Earnings - Salem Co. Common Stock - Salem Difference between Implied and Book Value Investment in Salem Company Noncontrolling Interest To eliminate investment account and create noncontrolling interest account (3) Cost of Goods Sold Land Plant and Equipment (5 year life) Goodwill Difference between Implied and Book Value To allocate the difference between implied and book value 32,000 8,000 65,000 130,000 197,500 432,500 20,800 5,200 26,000 52,000

27,200 20,000 7,200 80,000 550,000 432,500 850,000 212,500 40,000 65,000 130,000 197,500 432,500

(4) Depreciation Expense ($130,000/5) Plant and Equipment Complete Equity Method Worksheet Entries Year 2011 (1) Equity in Subsidiary Income ($110,000)(.80) - $20,800 Dividends Declared ($35,000 .80) Investment in Salem Company To eliminate intercompany dividends and income (2) Beginning Retained Earnings - Salem Co. ($80,000 + $75,000) Common Stock - Salem Difference between Implied and Book Value Investment in Salem Company ($850,000 + $80,000 $20,000) Noncontrolling Interest ($212,500 + ($155,000 $80,000) .2) To eliminate investment account and create noncontrolling interest account (3) Investment in Salem Company Noncontrolling Interest Land Plant and Equipment (5 year life) Goodwill Difference between Implied and Book Value To allocate the difference between implied and book value (4) Investment in Salem Company Noncontrolling Interest Depreciation Expense ($130,000/5) Plant and Equipment Part D Porter Salem

26,000 26,000

67,200 28,000 39,200 155,000 550,000 432,500 910,000 227,500 32,000 8,000 65,000 130,000 197,500 432,500 20,800 5,200 26,000 52,000 Eliminations Noncontrolling Consolidated

Income Statement Sales Dividend Income Total Revenue Cost of Goods Sold Depreciation Expense Impairment loss Other Expenses Total Cost and Expense Net/Consolidated Income Noncontrolling Interest in Consolid. Income* Net Income to Retained Earnings

Company

Company

Debit 48,000 26,000 47,500

Credit

Interest

Balances $1,550,000 1,550,000 1,100,000 96,000 47,500 110,000 1,353,500 196,500

$1,100,000 $450,000 48,000 (2) 1,148,000 450,000 900,000 200,000 40,000 30,000 (4b) (5) 60,000 50,000 1,000,000 280,000 148,000 170,000 $148,000 $170,000

$121,50 0

19,300 $19,300

(19,300) $177,200

Retained Earnings Statement 1/1 Retained Earnings: Porter Company Salem Company Net Income from Above Dividends Declared: Porter Company Salem Company 12/31 Retained Earnings to Balance Sheet

$500,000

(4a) (4b)

32,000 41,600

(1) $120,000

$546,400

148,000 (90,000)

230,000 (3) 230,000 170,000 121,500 (2) $425,10 0 48,000 $168,000

19,300 (12,000) $7,300

177,200 (90,000) $633,600

(60,000) $558,000 $340,000

Balance Sheet Cash Accounts Receivable Inventory Investment in Salem Company

Porter Salem Company Company $70,000 $65,000 260,000 190,000 240,000 175,000 850,000

Eliminations Debit Credit

Noncontrolling Consolidated Interest Balances $135,000 $450,000 $415,000

(1)

120,000 (3)

970,000

Difference between Implied and Book Value (3) Land 320,000 (4a) Plant and Equipment 360,000 280,000 (4a) Goodwill (4a) Total Assets $1,780,000 $1,030,000 Accounts Payable Notes Payable Common Stock: Porter Company Salem Company Retained Earnings from above 1/1 Noncontrolling Interest in Net Assets 12/31 Noncontrolling Interest in Net Assets Total Liabilities and Equity $132,000 90,000 1,000,000 558,000 550,000 340,000 (3) (4a) (4b) $110,000 30,000

432,500 (4a) 65,000 130,000 (4b) 197,500 (5)

432,500 78,000 47,500 385,000 692,000 150,000 $2,227,000 $242,000 120,000 1,000,000

550,000 425,100 8,000 (3) 10,400

168,000 242,500 **

7,300 224,100 $231,400

633,600 231,400 $2,227,000

$1,938,50 $1,938,500 0 * Noncontrolling Interest in Income =.2 $170,000 (.2 x $26,000) (.2 x $47,500) = $19,300 ** $212,500 + ($230,000 $80,000) x .20 = $242,500 Explanations of workpaper entries are on the following page.

$1,780,000 $1,030,000

Computation and Allocation of Difference Schedule Parent Share Purchase price and implied value Less: Book value of equity acquired Difference between implied and book value Equipment Land Inventory Balance Goodwill Balance Explanations of Workpaper entries: (1) Investment in Salem Company [.80 ($230,000 - $80,000)] Beginning Retained Earnings - Porter Co. To establish reciprocity/convert to equity method as of 1/1/12 (2) Dividend Income ($60,000 .80) Dividends Declared To eliminate intercompany dividends (3) Beginning Retained Earnings - Salem Co. Common Stock - Salem Difference between Implied and Book Value Investment in Salem Company ($850,000 + $120,000) Noncontrolling Interest To eliminate the investment account and create noncontrolling interest account 120,000 120,000 48,000 48,000 230,000 550,000 432,500 970,000 242,500 $850,000 504,000 346,000 (104,000) (52,000) (32,000) 158,000 (158,000) -0NonControlling Share 212,500 126,000 86,500 (26,000) (13,000) (8,000) 39,500 (39,500) -0Entire Value 1,062,500 630,000 432,500 (130,000) (65,000) (40,000) 197,500 (197,500) -0-

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(4a) Beginning Retained Earnings- Porter Company Noncontrolling Interest Land Plant and Equipment Goodwill Difference between Implied and Book Value (4b) Beginning Retained Earnings - Porter Company (two years) Noncontrolling Interest (two years) Depreciation Expense Plant and Equipment Alternative to entries (4a) and (4b) (4) Beginning Retained Earnings - Porter Company a Noncontrolling Interest b Depreciation Expense Land Plant and Equipment c Goodwill Difference between Implied and Book Value To allocate and depreciate the difference between implied and book value a ($32,000 + $20,800) + ($20,800) = $73,600 b ($8,000 + $5,200) + ($5,200) = $18,400 c ($130,000 - [3 $26,000]) = $52,000 (5) Impairment Loss ($197,500 - $150,000) Goodwill To record goodwill impairment

32,000 8,000 65,000 130,000 197,500 432,500 41,600 10,400 26,000 78,000 73,600 18,400 26,000 65,000 52,000 197,500 432,500

47,500 47,500

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Part E

PORTER COMPANY AND SUBSIDIARY Consolidated Financial Statements For the Year Ended December 31, 2012 Consolidated Income Statement Sales Cost of Goods Sold Gross Profit Expenses: Depreciation Expense Impairment Loss Other Expenses Consolidated Income Noncontrolling Interest in Consolidated Income Net Income Consolidated Statement of Retained Earnings Retained Earnings - Beginning of Year Add: Net Income Less Dividends Retained Earnings - End of Year PORTER COMPANY AND SUBSIDIARY Consolidated Statement of Financial Position December 31, 2012 Assets Current Assets: Cash Accounts Receivable Inventory Noncurrent Assets: Plant and Equipment (net) $135,000 450,000 415,000 692,000 $1,550,000 1,100,000 450,000 $96,000 47,500 110,000

253,500 196,500 19,300 $177,200 $546,400 177,200 90,000 $633,600

723,600

$1,000,000

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Land Goodwill Total Assets Liabilities And Stockholders' Equity Liabilities: Accounts Payable Notes Payable Total Liabilities Stockholders' Equity Noncontrolling Interest in Net Assets Capital Stock Retained Earnings Total Liabilities and Stockholders' Equity

385,000 150,000

1,227,000 $2,227,000

$242,000 120,000 362,000 231,400 1,000,000 633,600

1,865,000 $2,227,000

Part F Ending inventory would be higher by $40,000 if LIFO is assumed because it would not have been sold. Beginning controlling retained earnings and noncontrolling interest would also be $32,000 and $8,000 higher, because cost of goods sold in the year of acquisition was lower. Part G Porter Company's Retained Earnings on 12/31/12 Porter Company's Share of the Increase in Salem Company's Retained Earnings from January 1, 2010 to December 31, 2012 ($340,000 $80,000) .8 Cumulative Effect to December 31, 2012 of the Allocation and Depreciation of the Difference between Implied and Book value (Parents share) Allocated to: 2010 2011 2012 Inventory $32,000 $0 $0 Equipment 20,800 20,800 20,800 $52,800 $20,800 $20,800 Goodwill Impairment (2012) $558,000 208,000

(94,400) (38,000)

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Controlling Interest in Consolidated Retained Earnings on 12/31/12

$633,600

P5-6) Computation and Allocation of Difference Schedule Parent Share Purchase price and implied value Less: Book value of equity acquired Difference between implied and book value Equipment* Less:Accumulated Depreciation* Balance Goodwill Balance *$400,000/.85 *Schedule of Book Value and Fair Value on Date of Acquisition Fair Value $450,000 1 150,000 2 $300,000 Book Value $360,000 120,000 $240,000 Fair Value Minus Book Value $90,000 3 30,000 4 $60,000 $400,000 255,000 145,000 (76,500) 25,500 94,000 (94,000) -0NonControlling Share 70,588 45,000 25,588 (13,500) 4,500 16,588 (16,588) -0Entire Value 470,588 * 300,000 170,588 (90,000) 30,000 110,588 (110,588) -0-

Equipment Accumulated Depreciation Equipment (net)

1 2

$300,000/($240/$360) = $450,000 $450,000 ($120/$360) = $150,000 3 $60,000/($240/$360) = $90,000

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$90,000 ($120/$360) = $30,000 Annual Amount Amortization $60,000/6 yr $10,000 110,588 0 $170,588 $10,000

Allocation of Difference between Implied and Book Value Equipment (net) Goodwill Difference between Implied and Book Value Part A Part 1 Cost Method (1) Dividend Income ($30,000 0.85) Dividends Declared (2) Beginning Retained Earnings - Silvas Company Common Stock - Silvas Company Difference between Implied and Book Value Investment in Silvas Company Noncontrolling Interest

25,500 25,500 210,000 90,000 170,588 400,000 70,588 10,000 90,000 110,588 40,000 170,588 90,000 110,588 30,000 170,588

(3) Depreciation Expense Equipment Goodwill Accumulated Depreciation - Equipment ($30,000 + $10,000) Difference between Implied and Book Value Alternative to entry (3) (3a) Equipment Goodwill Accumulated Depreciation - Equipment Difference between Implied and Book Value

5 15

Depreciation Expense Accumulated Depreciation - Equipment Part 2 Partial Equity Method (1) Equity in Subsidiary Income ($40,000 0.85) Dividends Declared ($30,000 0.85) Investment in Silvas Company To eliminate intercompany dividends and income (2) Beginning Retained Earnings - Silvas Company Common Stock - Silvas Company Difference between Implied and Book Value Investment in Silvas Company Noncontrolling Interest (3) Depreciation Expense Equipment Goodwill Accumulated Depreciation - Equipment ($30,000 + $10,000) Difference between Implied and Book Value Alternative to entry (3) (3a) Equipment Goodwill Accumulated Depreciation - Equipment Difference between Implied and Book Value (3b) Depreciation Expense

10,000 10,000 34,000 25,500 8,500 210,000 90,000 170,588 400,000 70,588 10,000 90,000 110,588 40,000 170,588 90,000 110,588 30,000 170,588 10,000

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Accumulated Depreciation - Equipment Part B Part 1 Cost Method Cost Accumulated Depreciation Undepreciated Basis Sales Proceeds Gain (Loss) Silvas Company $360,000 160,000 200,000 220,000 $ 20,000 Difference $90,000 40,000 50,000 $50,000

10,000

Consolidated $450,000 200,000 250,000 220,000 $(30,000) 8,500 8,500 25,500 25,500

(1) Investment in Silvas Company ($10,000 0.85) Beginning Retained Earnings - Perini Company To establish reciprocity/convert to equity as of 1/1/2012 (2) Dividend Income ($30,000 0.85) Dividends Declared-Silvas Company To eliminate intercompany dividends

(3) Beginning Retained Earnings-Silvas Co. 220,000 Common Stock -Silvas Company 90,000 Difference between Implied and Book Value 170,588 Investment in Silvas Company ($400,000 + $8,500) 408,500 Noncontrolling Interest ($70,588 + ($220,000 $210,000) x .15) 72,088 To eliminate investment account and create noncontrolling interest account (4) Beginning Retained Earnings-Perini Company Noncontrolling Interest 8,500 1,500

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Gain on Disposal of Equipment Loss on Disposal of Equipment Goodwill Difference between Implied and Book Value To allocate and depreciate difference between Implied and book value Note: $20,000 Dr. to Gain + $30,000 Dr. to Loss = Unamortized difference associated with equipment on date sold to outsiders equals $60,000 - $10,000 = Part B Part 2 Partial Equity Method Cost Accumulated Depreciation Undepreciated Basis Sales Proceeds Gain (Loss) Silvas Company $360,000 160,000 200,000 220,000 $20,000 Difference $90,000 40,000 50,000 $50,000

20,000 30,000 110,588 170,588 $50,000 $50,000

Consolidated $450,000 200,000 250,000 220,000 $(30,000) 34,000 34,000 25,500 25,500 220,000 90,000 170,588

(1) Equity in Subsidiary Income ($40,000 0.85) Investment in Silvas Company To eliminate intercompany dividends and income (2) Investment in Silvas Company Dividends Declared-Silvas Company ($30,000 0.85) To eliminate intercompany dividends (3) Beginning Retained Earnings-Silvas Co. Common Stock -Silvas Company Difference between Implied and Book Value

5 18

Investment in Silvas Company ($400,000 + $8,500) Noncontrolling Interest ($70,588 + ($220,000 $210,000) x .15) To eliminate investment account and create noncontrolling interest account (4) Beginning Retained Earnings-Perini Company Noncontrolling Interest Gain on Disposal of Equipment Loss on Disposal of Equipment Goodwill Difference between Implied and Book Value To allocate and depreciate difference between implied and book value 8,500 1,500 20,000 30,000 110,588

408,500 72,088

170,588 $50,000 $50,000

Note: $20,000 Dr. to Gain + $30,000 Dr. to Loss = Unamortized difference associated with equipment on date sold to outsiders equals $60,000 - $10,000 =

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