Question

EXERCISE 5-4

Allocation of Cost and Workpaper Entries at Date of Acquisition LO 2

On January 1, 2020, Porter Company purchased an 80% interest in Salem Company for $260,000. On this date, Salem Company had common stock of $207,000 and retained earnings of $130,500.

An examination of Salem Company’s balance sheet revealed the following comparisons between book and fair values:

	Book Value	Fair Value
Inventory	$ 30,000	$ 35,000
Other current assets	50,000	55,000
Equipment	300,000	350,000
Land	200,000	200,000

Required:

1. Determine the amounts that should be allocated to Salem Company’s assets on the consolidated financial statements workpaper on January 1, 2020.
2. Prepare the January 1, 2020, consolidated financial statements workpaper entries to eliminate the investment account and to allocate the difference between book value and the value implied by the purchase price.

Answer 1

Answer :

Particulars	Book value ($)	Fair value ($)	Difference ($)
Inventory	30,000.00	35,000.00	5,000.00
Other current assets	50,000.00	55,000.00	5,000.00
Equipments	3,00,000.00	3,50,000.00	50,000.00
Land	2,00,000.00	2,00,000.00	-
Total	5,80,000.00	6,40,000.00	60,000.00

Particulars	Parent share 80%	Non- controlling interest 20%	Entire value
Purchase price and implied value	2,60,000.00	65,000.00	3,25,000.00
Less : Book value of equity acquired	-	-	-
Common stock	1,65,600.00	41,400.00	2,07,000.00
Retained earnings	1,04,400.00	26,100.00	1,30,500.00
Total book value	2,70,000.00	67,500.00	3,37,500.00
Difference between implied and book value	-10,000.00	-2,500.00	-12,500.00
Increase inventory	4,000.00	1,000.00	5,000.00
Increase marketable securities	4,000.00	1,000.00	5,000.00
Increase plant and equipments	40,000.00	10,000.00	50,000.00
Total	48,000.00	12,000.00	60,000.00
Balance	-58,000.00	-14,500.00	-72,500.00
Record capital reserve	58,000.00	14,500.00	72,500.00
Balance	-	-	-

(b) Journal Enrties for Elimination of investement

Date	Account Title	Debit ($)	Credit ($)
01.01.2020	Common stock	2,07,000.00	-
	Retained earnings	1,30,500.00	-
	Defference Implied and book	-	12,500.00
	Inventory in salem company	-	2,60,000.00
	Non - Controlling interest in Equity	-	$65,000.00
	(Being Elimination of investment)	-	-
01.01.2020	Defference between Implied and book	12,500.00	-
	Increase inventory	5,000.00	-
	Increase marketable securities	5,000.00	-
	Increase plant and equipments	50,000.00	-
	Capital Reserve / Ordinary gain	-	72,500.00
	(Being ordinary gain recorded)	-	-