In: Accounting
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
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