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On January 1, 2010, Porter Company purchased an 80% interest in the capital stock of Salem...

On January 1, 2010, Porter Company purchased an 80% interest in the capital stock of Salem Company for $850,000. At that time, Salem Company had capital stock of $550,000 an retained earnings of $80,000. Differences between the fair value and the book value of the identifiable assets of Salem Company were as follows: Fair Value in Excess of Book Value Equipment............. $130,000 Land............. 65,000 Inventory............. 40,000 The book values of all other assets and liabilities of Salem Company were equal to their fair values 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: Year 2010 Net Income of $100,000; Dividends Declared of $25,000 Year 2011 Net Income of $110,000; Dividends Declared of $35,000

Required:

A. Prepare a Computation and Allocation Schedule for the difference between book value of equity acquired and the value implied by the purchase price.

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.) 1. Assume the use of the cost method. 2. Assume the use of the partial equity method. 3. Assume the use of the complete equity method.

C. Present the eliminating/adjusting entries needed on the consolidated worksheet for the year ended December 31, 2011.

Solutions

Expert Solution

Answer:

Part A

Computation and Allocation of Difference Schedule

Part B and C – Worksheet Entries

Cost Method Workpaper entries – Year 2010

(1)  Dividend Income ($25,000 x .80)   20,000

                Dividends Declared   20,000

To eliminate intercompany dividends

(2)  Beginning Retained Earnings ‑ Salem Co. 80,000

Common Stock ‑ Salem   550,000

Difference between Implied and Book Value   432,500

                Investment in Salem Company                                                                                       850,000

                Non controlling Interest 212,500

To eliminate investment account and create non controlling interest account

(3)  Cost of Goods Sold 40,000

       Land   65,000

Plant and Equipment (5 year life)   130,000

       Goodwill 197,500

                Difference between Implied and Book Value                                                                432,500

       To allocate the difference between implied and book value

(4)  Depreciation Expense ($130,000/5)   26,000

                Plant and Equipment 26,000

Cost Method – Worksheet Entries – Year 2011

(1)  Investment in Salem Company (.80 x ($100,000 ‑ $25,000))   60,000

                Beginning Retained Earnings ‑ Porter Co.                                                                        60,000

To establish reciprocity/convert to equity as of 1/1/2011

(2)  Dividend Income ($35,000 x .80)   28,000

                 Dividends Declared 28,000

To eliminate intercompany dividends

(3) Beginning Retained Earnings ‑ Salem Co. ($80,000 + $100,000 – $25,000) 155,000

Common Stock ‑ Salem   550,000

Difference between Implied and Book Value 432,500

  Investment in Salem Company ($850,000 + $60,000)   910,000

  Non controlling Interest ($212,500 + ($155,000 – $80,000) x .2) 227,500

To eliminate investment account and create non controlling interest account

(4)  1/1 Retained Earnings – Porter Company                                                                 32,000

       Non controlling Interest   8,000

       Land   65,000

       Plant and Equipment (5 year life)                                                                            130,000

       Goodwill   197,500

                Difference between Implied and Book Value   432,500

       To allocate the difference between implied and book value

(5)  1/1 Retained Earnings – Porter Company (previous year’s amount) 20,800

       Non controlling Interest                                                                                               5,200

Depreciation Expense ($130,000/5) 26,000

                Plant and Equipment   52,000

Partial Equity Method Workpaper entries – Year 2010

(1)  Equity in Subsidiary Income ($100,000) (.80)                                                          80,000

                Dividends Declared ($25,000 x .80) 20,000

                Investment in Salem Company 60,000

       To eliminate intercompany dividends

(2)  Beginning Retained Earnings ‑ Salem Co.   80,000

Common Stock ‑ Salem   550,000

Difference between Implied and Book Value   432,500

                Investment in Salem Company   850,000

                Non controlling Interest   212,500

       To eliminate investment account and create non controlling interest account

(3)  Cost of Goods Sold 40,000

Land   65,000

Plant and Equipment (5 year life) 130,000

       Goodwill                                                                                                                  197,500

                Difference between Implied and Book Value                                                                432,500

       To allocate the difference between implied and book value

(4)  Depreciation Expense ($130,000/5) 26,000

                Plant and Equipment   26,000

Partial Equity Method – Worksheet Entries – Year 2011

(1) Equity in Subsidiary Income ($110,000) (.80)   88,000

                Dividends Declared ($35,000 x.80) 28,000

                Investment in Salem Company                                                                                         60,000

       To eliminate intercompany dividends and income

(2) Beginning Retained Earnings ‑ Salem Co. 155,000

       Common Stock ‑ Salem 550,000

       Difference between Implied and Book Value                                                         432,500

                Investment in Salem Company ($850,000 + $80,000 – $20,000)                                   910,000

                Non controlling Interest ($212,500 + ($155,000 – $80,000) x.2)                                   227,500

       To eliminate investment account and create non controlling interest account

(3)  1/1 Retained Earnings – Porter Company                                                                 32,000

       Non controlling Interest   8,000

       Land   65,000

Plant and Equipment (5 year life)   130,000

       Goodwill     197,500

                Difference between Implied and Book Value                                                                432,500

       To allocate the difference between implied and book value

(4)  1/1 Retained Earnings – Porter Company (previous year’s amount)   20,800

       Non controlling Interest                                                                                               5,200

Depreciation Expense ($130,000/5)   26,000

                Plant and Equipment   52,000

Complete Equity Method Workpaper entries – Year 2010

(1)  Equity in Subsidiary Income ($100,000) (.80) – $32,000 – $20,800 27,200

                Dividends Declared ($25,000 x.80) 20,000

                Investment in Salem Company                                                                                           7,200

       To eliminate intercompany dividends

(2)  Beginning Retained Earnings ‑ Salem Co. 80,000

Common Stock ‑ Salem   550,000

Difference between Implied and Book Value 432,500

                Investment in Salem Company                                                                                       850,000

                Non controlling Interest                                                                                                  212,500

       To eliminate investment account and create non controlling interest account

(3)  Cost of Goods Sold                                                                                                   40,000

       Land                                                                                                                           65,000

Plant and Equipment (5 year life) 130,000

       Goodwill                                                                                                                  197,500

                Difference between Implied and Book Value                                                                432,500

       To allocate the difference between implied and book value

(4) Depreciation Expense ($130,000/5) 26,000

                Plant and Equipment   26,000

Complete Equity Method – Worksheet Entries – Year 2011

(1) Equity in Subsidiary Income ($110,000) (.80) - $20,800 67,200

                Dividends Declared ($35,000 x 80) 28,000

                Investment in Salem Company                                                                                         39,200

       To eliminate intercompany dividends and income

(2) Beginning Retained Earnings ‑ Salem Co. ($80,000 + $75,000)   155,000

Common Stock ‑ Salem 550,000

Difference between Implied and Book Value 432,500

  Investment in Salem Company ($850,000 + $80,000 – $20,000) 910,000

                Non controlling Interest ($212,500 + ($155,000 – $80,000) x .2)                                  227,500

       To eliminate investment account and create non controlling interest account

(3)  Investment in Salem Company 32,000

Non controlling Interest   8,000

Land 65,000

Plant and Equipment (5 year life) 130,000

       Goodwill                                                                                                                  197,500

                Difference between Implied and Book Value                                                                432,500

       To allocate the difference between implied and book value

(4)  Investment in Salem Company 20,800

Non controlling Interest 5,200

Depreciation Expense ($130,000/5) 26,000

                Plant and Equipment                                                                                                         52,000

ekkarill92 answered 2 years ago
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