In: Accounting
Comprehensive Problem: Consolidation Working Paper and Financial Statements Pierre
Corporation acquired 75 percent of Selene Corporation’s common stock for $20,100,000 on January 2,
2017. The estimated fair value of the noncontrolling interest was $5,900,000. Selene’s book value at date
of acquisition was $10,000,000, and its identifiable net assets were fairly stated except for previously
unreported completed technology, valued at $4,000,000, with a remaining life of 5 years, straight‑line. It
is now December 31, 2020, and you are preparing consolidated financial statements for Pierre and Selene.
Following is information on intercompany transactions
1. On January 2, 2018, Pierre sold equipment to Selene for $6 million and recorded a gain of $2 million.
The equipment had a remaining life of 10 years at that time.
2. Selene supplies Pierre with component parts for its products, at a markup of 20 percent on cost.
During 2020, Selene made sales totaling $20 million to Pierre. Pierre had parts purchased for $1.8
million and $2.4 million in its 2020 beginning and ending inventory balances, respectively.
3. Pierre sells materials to Selene for use in its manufacturing processes, at a markup of 20 percent on sell‑
ing price. During 2020, Pierre made sales totaling $15 million to Selene. Selene had materials purchased
for $3 million and $2.8 million in its 2020 beginning and ending inventory balances, respectively
Goodwill arising from this acquisition was impaired by $3 million during the years 2017–2019, and no
further goodwill impairment occurred in 2020. Pierre uses the complete equity method to report the in‑
vestment in Selene on its own books. The separate December 31, 2020, trial balances of Pierre and Selene
appear below, before Pierre’s end‑of‑year adjustment to record its equity in Selene’s net income and other
comprehensive income for 2020.
in thousands) Pierre Selene
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,000 $ 2,500
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,600 10,000
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000 30,000
Investment in AFS debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000 6,000
Plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 452,000 144,000
Investment in Selene . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,225 —
Current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,000) (2,800)
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (489,825) (163,700)
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,000) (2,000)
Retained earnings, January 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (88,500) (19,600)
Accumulated other comprehensive income, January 1. . . . . . . . . . . . . . . . . . (1,500) (400)
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 3,000
Sales revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (150,000) (50,000)
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 35,000
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,500 7,900
Unrealized losses on AFS investments (other comprehensive income). . . . . . 500
100
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0 $ 0
Required
a. Calculate the total goodwill arising from this acquisition and its percentage allocation to the control‑
ling and noncontrolling interests.
b. Prepare a schedule calculating Pierre’s equity in the net income of Selene for 2020, and the noncon‑
trolling interest in Selene’s net income for 2020.
c. Update Pierre’s trial balance for its 2020 equity method entries and prepare a working paper consoli‑
dating the 2020 trial balances of Pierre and Selene.
d. Present the consolidated financial statements of Pierre and Selene, in proper format