Question

In: Accounting

On January 1, 2017, Portland Company acquired all of Salem Company’s voting stock for $16,000,000 in...

On January 1, 2017, Portland Company acquired all of Salem Company’s voting stock for $16,000,000 in cash. Some of Salem’s assets and liabilities at the date of purchase had fair values that differed from reported values, as follows:

  

Book value Fair value
Buildings and equipment, net (20 years, straight-line) $11,000,000 $ 3,000,000
Identifiable intangibles (5 years, straight-line) 0 10,000,000

Salem’s total shareholders’ equity at January 1, 2017, was $4,000,000. It is now December 31, 2020 (four years later). Salem’s retained earnings reflect the accumulation of net income less dividends; there have been no other changes in its retained earnings. Salem does not report any other comprehensive income. Cumulative goodwill impairment to the beginning of 2020 is $2,000,000. Goodwill impairment for 2020 is $500,000. Portland uses the complete equity method to account for its investment. The December 31, 2020, trial balance for Salem appears below.

Salem
Dr (Cr)
Current assets $2,500,000
Plant assets, net 28,000,000
Liabilities (10,000,000)
Capital stock (2,000,000)
Retained earnings, January 1 (16,000,000)
Sales revenue (14,000,000)
Cost of goods sold 8,000,000
Operating expense 3,500,000
$ 0

On the 2020 consolidation working paper, eliminating entry (R) reduces Investment in Salem by

$3,100,000

$5,200,000

$6,400,000

$8,000,000

Solutions

Expert Solution

Answer:

Entry R is to record the revaluation of the Acquired assets on the date of acquisition at the beginning of year.

Acquisition price paid by portland $16,000,000
Less: Book Value of Salem $(4,000,000)
Excess of Fair over Book Value $12,000,000
Allocation of excess value Value (A) Life (B) Amortization per year (A/B)
Buildings and equipment (3,000,000 - 11,000,000) $(8,000,000) 20 $(400,000)
Identifiables Intangibles $10,000,000 5 2,000,000
Goodwill (12,000,000 + 8,000,000 - 10,000,000) $10,000,000

Unamortized value of excess value at the beginning of year 2020

Goodwill $10,000,000
Less: Cummulative Impairment $(2,000,000)
Goodwill as on 01/01/2020 $8,000,000
Buildings and Equipment $(8,000,000)
Less: Cumulative Amortization from 2017 - 2019 (400,000 x 3) 1,200,000
Value as on 01/01/2020 $(6,800,000)
Identifiable Intangibles $10,000,000
Less: Cumulative Amortization from 2017-2019 (2,000,000 * 3) $(6,000,000)
Value as on 01/01/2019

Entry R

Account Titles and Explanation Debit ($) Credit ($)
Goodwill $8,000,000
Identifiable Intangibiles $4,000,000
Building and Equipment $6,800,000
Investment in Salem (8000000+4000000-6800000) $5,200,000

Option (b) is correct $5,200,000


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