Question

Workpaper Entries and Consolidated Net Income for Two Years, Cost Method LO 6 LO 3 LO 5 On January 1, 2014, Palmero Company purchased an 80% interest in Santos Company for $2,800,000, at which time Santos Company had retained earnings of $1,000,000 and capital stock of $500,000. On the date of acquisition, the fair value of the assets and liabilities of Santos Company was equal to their book value, except for property and equipment (net), which had a fair value of $1,500,000 and a book value of $600,000. The property and equipment had an estimated remaining life of 10 years. Palmero Company reported net income from independent operations of $400,000 in 2014 and $425,000 in 2015. Santos Company reported net income of $300,000 in 2014 and $400,000 in 2015. Neither company declared dividends in 2014 or 2015. Palmero uses the cost method to account for its investment in Santos. Required: A. Prepare in general journal form the entries necessary in the consolidated statements work papers for the years ended December 31, 2014 and 2015. B. Prepare a schedule or t-account showing the calculation of the controlling and non controlling interest in consolidated net income for the years ended December 31, 2014 and December 31, 2015.

Answer 1

Part A

No.	date	General journal	Debit	Credit
	2014
1		Beginning Retained Earnings-Santos Co.	1000000
		Capital Stock- Santos Co.	500000
		Difference between Implied and Book Value	2000000
		Investment in Santos Co.		2800000
		Noncontrolling Interest		700000
		(To eliminate investment account and create noncontrolling interest account)
2		Depreciation Expense	90000
		Property and Equipment (net) ($900,000 - $90,000)	810000
		Goodwill	1100000
		Difference between Implied and Book Value		2000000
		(To allocate and depreciate the difference between implied and book value)
	2015
3		Investment in Santos Company ($300,000 × 0.80)	240000
		Beginning Retained Earnings-Palmero Co.		240000
		(To establish reciprocity/convert to equity as of 1/1/2015)
4		Beginning Retained Earnings-Santos Company	1300000
		Capital Stock-Santos Company	500000
		Difference between Implied and Book Value	2000000
		Investment in Santos Company ($2,800,000 + $240,000)		3040000
		Noncontrolling Interest $700,000 + [($1,300,000 – $1,000,000) x 0.20]		760000
		(To eliminate investment account.)
5		Beginning Retained Earnings-Palmero Co.	72000
		Noncontrolling Interest	18000
		Depreciation Expense	90000
		Property and Equipment (net) ($900,000 - $90,000 - $90,000)	720000
		Goodwill	1100000
		Difference between Implied and Book Value		2000000
		(To allocate and depreciate the difference between implied and book value)

Part B

Controlling Interest in Consolidated Net Income

	2014	2015
Palmero Company's Net Income from Independent Operations	400000	425000
Palmero Company's Share of Reported Income of Santos Company	240000	320000
Less: Depreciation of Difference between Implied and Book Value Allocated to: Property and Equipment	(72000)	(72000)
Controlling Interest in Consolidated Net Income	568000	673000

T-accounts

Noncontrolling Interest in Consolidated Income (2014)

Amortization of the difference between implied and book value related to equipment ($900,000/10)	90000	Net income reported by Santos	300000
		Adjusted net income of Santos	210000
		Noncontrolling Ownership percentage interest	20%
		Noncontrolling Interest in Consolidated Net Income	42000

Controlling Interest in Consolidated Income (2014)

		Palmero Company's net income from its independent operations	400000
		Palmero Company's share of the adjusted income of Santos Company (0.80 X $210,000)	168000
		Controlling Interest in Consolidated Net Income	568000

Noncontrolling Interest in Consolidated Income (2015)

Amortization of the difference between implied and book value related to equipment ($900,000/10)	90000	Net income reported by Santos	400000
		Adjusted net income of Santos	310000
		Noncontrolling Ownership percentage interest	20%
		Noncontrolling Interest in Consolidated Net Income	62000

Controlling Interest in Consolidated Income (2015)

		Palmero Company's net income from its independent operations	425000
		Palmero Company's share of the adjusted income of Santos Company (0.80 X $310,000)	248000
		Controlling Interest in Consolidated Net Income	673000