Name: Advanced Accounting 4th Edition Solution by Jeter - Test Bank
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Complete Test Bank With Answers

Sample Questions Posted Below

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CHAPTER 5

ANSWERS TO QUESTIONS

a. The ―difference between implied and book value‖ is the total difference between the value of the subsidiary in total, as implied by the acquisition cost of an investment in that subsidiary, and the book value of the subsidiary’s equity on the date of the acquisition (note that equity is the same as net assets).

The excess of implied value over fair value, or ―Goodwill,‖ is the excess of the value of the subsidiary, as implied by the amount paid by the parent, over the fair value of the identifiable net assets of that subsidiary on the date of acquisition.

The ―excess of fair value over implied value‖ is the excess of the fair value of the identifiable net assets of a subsidiary (all assets other than goodwill minus liabilities) on the acquisition date over the value of the subsidiary as implied by the amount paid by the parent. This may be referred to as a bargain acquisition.

An excess of book value over fair value describes a situation where some (or all) of the subsidiary’s assets need to be written down rather than up (or liabilities need to be increased, or both). It does not, however, tell us whether the acquisition results in the recording of goodwill or an ordinary gain (in a bargain acquisition). That determination depends on the comparison of fair value of identifiable net assets and the implied value (purchase price divided by percentage acquired), referred to in parts (b) and (c) above.

The ―difference between implied and book value‖ and the ―Goodwill‖ are a part of the cost of an investment and are included in the amount recorded in the investment account. Although not recorded separately in the records of the parent company, these amounts must be known in order to prepare the consolidated financial statements.

In allocating the difference between implied and book value to specific assets of a less than wholly owned subsidiary, the difference between the fair value and book value of each asset on the date of acquisition is reflected by adjusting each asset upward or downward to fair value (marked to market) in its entirety, regardless of the percentage acquired by the parent company.

If the parent’s share of the fair value exceeds the cost, then the entire fair value similarly exceeds the implied value of the subsidiary. This constitutes a bargain acquisition, and under proposed GAAP (ED No. 1204-001), the excess is recorded as an ordinary gain in the period of the acquisition. Past GAAP (APB Opinion No. 16) differed in that it provided that the excess of fair value over cost should be allocated to reduce proportionally the values assigned to noncurrent assets with certain exceptions. If such noncurrent assets were reduced to zero (or to the noncontrolling percentage, if there was one) by this allocation, any remaining excess was recorded as an extraordinary gain.

The recording of an ordinary (or extraordinary gain) on an acquisition flies in the face of the rules of revenue recognition because no earnings process has been completed. On the other hand, a decision to record certain assets below their fair values is arbitrary, and also rather confusing (how far should they be reduced?) The reason that bargain acquisitions are unlikely to occur very often is because they suggest that the usual assumptions of an arm’s length transaction have been

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violated. In most accounting scenarios, we assume that both parties are negotiating for a reasonable exchange price and that price, once established, represents fair value both for the item given up and the item received. In the case of a business combination, there is not a single item being exchanged but rather a number of assets and liabilities. Nonetheless, the assumption is still that both parties are negotiating for a fair valuation. If one party is able to obtain a bargain, it most likely indicates that the other party was being influenced by non-quantitative considerations, such as a wish to retire quickly, health concerns, etc.

If P Company acquires a 100 percent interest in S Company the land will be included in the consolidated financial statements at its fair value on the date of acquisition of $1,500,000. If P Company acquires an 80 percent interest in S Company, the land will still be included in the consolidated financial statements at $1,500,000, and the noncontrolling interest would be charged with its share of the fair value adjustment.

(d). Once the determination is made that none of the assets are over-valued (and none of the liabilities under-valued), the bargain is reflected as an ordinary gain of $10,000 in the year of acquisition.

(b). The ―excess of fair value over implied value‖ is reported as an ordinary gain under the FASB exposure draft on business combinations (ED 1204-001).

Under the entity theory, the noncontrolling interest shares in the adjustment of consolidated net assets for the difference between implied and book value. The noncontrolling interest is also affected by the amortization or depreciation in the consolidated workpapers of the difference between implied and book value. Assuming that implied value exceeds book value, the effect will generally be to lower the noncontrolling interest in reported earnings because of its (the noncontrolling interest’s) share of the excess depreciation and amortization charges, additional cost of goods sold, impairment of goodwill, etc.

ANSWERS TO BUSINESS ETHICS CASE

This case brings an interesting question to the table for discussion. As the article by Mano points out, each individual must decide for himself or herself how to respond to the gray issues that are bound to arise in life. Ultimately life is more about being at peace with ourselves and leaving a legacy of a life well-lived and values taught through our example to the generations that we leave behind us than it is about accumulating wealth (that we cannot take to the grave). The individual, had he acted on the advice, may have been guilty of insider trading as the information available to him was, apparently, not available publicly. Although there is no clear-cut definition of what constitutes insider trading, the gray area implies uncertainty; and this uncertainty can in many cases result in decisions that have severe implications both professionally and personally.

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ANSWERS TO EXERCISESExercise 5-1Part AComputation and Allocation of Difference Schedule

				Parent		Non-	Entire
				Share	Controlling	Value

SharePurchase price and implied value

$540,000

95,294

635,294 *

Less: Book value of equity acquired:Common stock340,00060,000400,000Retained earnings119,00021,000140,000Total book value459,00081,000540,000Difference between implied and book value 81,000

	14,294			95,294
Marketable Securities ($45,000 – $20,000)	(21,250)	(3,750)		(25,000)
Equipment ($140,000 – $120,000)		(17,000)	(3,000)		(20,000)

Balance42,7507,54450,294Goodwill

	(42,750)	(7,544)		(50,294)
Balance	-0-	-0-		-0-

*$540,000/.85Part BMarketable securities

	$ 45,000
Equipment (net)	140,000
Goodwill	50,294

Exercise 5-2Computation and Allocation of Difference ScheduleParentNon-Entire

Controlling

Value

SharePurchase price and implied value

	$585,000		195,000			780,000 *
Less: Book value of equity acquired	450,000		150,000			600,000

Difference between implied and book value135,00045,000180,000Equipment ($705,000 – $525,000)

(135,000)

(45,000)

(180,000)

Balance- 0 — 0 — 0 -*$585,000/.75Part A Equipment180,000

Difference between Implied and Book Value

180,000

Depreciation Expense ($180,000/10)18,000Accumulated Depreciation18,000

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Exercise 5-2 (continued)

Part B

The asset has a value of $180,000 with 10 years of a 15 year life (i.e. 2/3). Therefore, the implied gross value of the asset is $270,000 (or $180,000 2/3).

Equipment ($180,000 2/3)270,000Accumulated Depreciation (1/3$270,000)90,000Difference between Implied and Book Value180,000Depreciation Expense ($180,000/10)18,000Accumulated Depreciation18,000Exercise 5-3Part A Investment in Saddler Corporation525,000Cash525,000Part B Computation and Allocation of Difference ScheduleParentNon-EntireShareControllingValueSharePurchase price and implied value

	$525,000	131,250			656,250 *
Less: Book value of equity acquired	480,000	120,000			600,000

Difference between implied and book value45,00011,25056,250Inventory

	(16,000)	(4,000)	(20,000)
Marketable Securities	(20,000)	(5,000)	(25,000)
Plant and Equipment	(24,000)	(6,000)	(30,000)

Balance (excess of FV over implied value)

(15,000)

(3,750)

(18,750)

Gain15,000Increase Noncontrolling interest to fair value of assets3,750Total allocated bargain18,750Balance-0–0–0-*$525,000/.80

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Exercise 5-4

Part AComputation and Allocation of Difference ScheduleParentNon-Entire

Controlling

Value

SharePurchase price and implied value

$260,000

65,000

325,000 *

Less: Book value of equity acquired270,00067,500337,500Difference between implied and book value

		(10,000)	(2,500)		(12,500)
Inventory	(4,000)	(1,000)		(5,000)
Current Assets	(4,000)	(1,000)		(5,000)
Equipment (net)	(40,000)	(10,000)		(50,000)

Balance (excess of FV over implied value)

(58,000)

(14,500)

(72,500)

Gain58,000Increase Noncontrolling interest to fair value of assets14,500Total allocated bargain72,500Balance-0–0–0-

*$260,000/.80
Part B (1)	Capital Stock- Salem Company	207,000
	Beginning Retained Earnings-Salem Company	130,500
	Difference between Implied and Book Value	12,500
	Investment in Salem Company	260,000
	Noncontrolling Interest	65,000
(2)	Difference between Implied and Book Value	12,500
	Inventory	5,000
	Current Assets	5,000
	Equipment (net)	50,000
	Gain on Acquisition	58,000
	Noncontrolling interest	14,500

Exercise 5-5

Noncontrolling Interest in Consolidated Income

	Amortization of the difference between	Net income reported by S	$	100,000
implied and book value related to
patent amortization ($100,000*/10)	10,000
		Adjusted net income of S		90,000
		Noncontrolling Ownership percentage interest		20%

		Noncontrolling Interest in Consolidated Net Income	$	18,000

* (600,000/.80) – ($300,000 + $350,000)

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Exercise 5-5 (continued)

Controlling Interest in Consolidated Income

P Company’s net income from its independent

operations$200,000

P Company’s share of the adjusted income of S

Company (.8 X $90,000)72,000

Controlling Interest in Consolidated Net Income

272,000

ParentNon-EntireShareControllingValueSharePurchase price and implied value$600,000150,000750,000Less: Book value of equity acquired520,000130,000650,000Difference between implied and book value (patent)80,00020,000100,000Patent(80,000)(20,000)(100,000)Balance-0–0–0-*$600,000/.80Exercise 5-6201220131/1 Retained Earnings-Park Co.* (12,000 x .85)10,200Noncontrolling Interest1,800Depreciation Expense ($120,000/10)12,00012,000Equipment [$120,000/(10/15)]180,000180,000Accumulated Depreciation72,000^a84,000^b

Difference between Implied and Book Value

120,000

If the complete equity method is used, the debit to 1/1 Retained Earnings – Park Co. would be replaced with a debit to Investment in Sunland Company

a ($180,000)(6/15)= $72,000 b ($180,000)(7/15)= $84,000

Alternative entries
		2012			2013
Equipment [$120,000/(10/15)]	180,000			180,000
Accumulated Depreciation ($180,000	5/15)		60,000	60,000
Difference between Implied and Book Value	120,000	120,000
1/1 Retained Earnings-Park Co*.					10,200
Noncontrolling Interest					1,800
Depreciation Expense ($120,000/10)	12,000			12,000
Accumulated Depreciation			12,000	24,000^b

If the complete equity method is used, the debit to 1/1 Retained Earnings – Park Co. would be replaced with a debit to Investment in Sunland Company

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Exercise 5-7		2011		2012
1/1 Retained Earnings – Packard Co.*			32,000
1/1 Noncontrolling Interest			8,000
Depreciation Expense ($200,000/5)	40,000		40,000
Equipment [$200,000/(5/10)]	400,000		400,000
Accumulated Depreciation	240,000^a	280,000
Difference between Implied and Book Value	200,000	200,000

If the complete equity method is used, the debit to 1/1 Retained Earnings – Packard Co. would be replaced with a debit to Investment in Sage Company

^a $400,000(6/10) = $240,000^b $400,000(7/10) = $280,000Computation and Allocation of Difference ScheduleParentNon-EntireShareControllingValueSharePurchase price and implied value$600,000150,000750,000 *Less: Book value of equity acquired440,000110,000550,000Difference between implied and book value160,00040,000200,000Equipment ($705,000 – $525,000)(160,000)(40,000)(200,000)Balance- 0 — 0 — 0 -*$600,000/.80Alternative entries20112012Equipment [$200,000/(5/10)]400,000400,000Accumulated Depreciation200,000200,000Difference between Implied and Book Value

200,000

1/1 Retained Earnings – Packard Co.32,0001/1 Noncontrolling interest8,000Depreciation Expense ($400,000/10)40,00040,000Accumulated Depreciation40,00080,000

If the complete equity method is used, the debit to 1/1 Retained Earnings – Packard Co. would be replaced with a debit to Investment in Sage Company

5 – 7

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Exercise 5-8Part A Land ($31,000/0.8)38,750Difference between Implied and Book Value38,750Part B Gain on subsidiary books$50,000Reduction for consolidated adjustment to fair market value

(38,750)

Consolidated gain$11,250Part C 1/1 Retained Earnings – Padilla Co.38,750Difference between Implied and Book Value38,750Exercise 5-9Part AComputation and Allocation of Difference ScheduleParentNon-EntireShareControllingValueSharePurchase price and implied value$2,000,000500,0002,500,000 *Less: Book value of equity acquired1,760,000440,0002,200,000Difference between implied and book value240,00060,000300,000Land ($100,000 – $ 80,000)(16,000)(4,000)(20,000)Premium on Bonds Payable^a31,9417,98539,926Balance255,94163,985319,926Goodwill(255,941)(63,985)(319,926)Balance-0–0–0-*$2,000,000/.80^aPresent Value on 1/1/2010 of 10% Bonds PayableDiscounted at 8% over 5 periodsPrincipal ($500,000 0.68058)$340,290Interest ($50,000 3.99271)199,636Fair value of bond$539,926Face value of bond500,000Bond premium39,926

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Exercise 5-9 (continued)Part BLand20,000Goodwill319,926Interest Expense ($50,000 – ($539,9260.08))6,806

Unamortized Premium on Bonds Payable ($39,926 – $6,806)

33,120

Difference between Implied and Book Value300,000Alternative entriesLand20,000Goodwill319,926Unamortized Premium on Bonds Payable39,926Difference between Implied and Book Value300,000Unamortized Premium on Bonds Payable6,806Interest Expense ($50,000 – ($539,9260.08))6,806Exercise 5-10Part AComputation and Allocation of Difference ScheduleParentNon-EntireShareControllingValueSharePurchase price and implied value$3,500,000388,8893,888,889*Less: Book value of equity acquired3,150,000350,0003,500,000Difference between implied and book value350,00038,889388,889Land ($200,000 – $ 120,000)

(72,000)

(8,000)

(80,000)

Premium on Bonds Payable^a56,8676,31963,186Balance334,86737,208372,075Goodwill

(334,867)

(37,208)

(372,075)

Balance-0–0–0-*$3,500,000/.90

Present Value on 1/2/2010 of 9% Bonds Payable Discounted at 6% for 5 periods

Principal ($500,000 0.74726)	$373,630
Interest ($45,000 4.21236)	189,556
Fair value of bond	$563,186
Face value of bond		500,000
Premium on bond payable	63,186

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Exercise 5-10 (continued)Part B Land80,000Goodwill372,075Interest Expense11,209^a

Unamortized Premium on Bonds Payable ($63,186 – $11,209)

51,977

Difference between Implied and Book Value388,889^a Effective Interest (0.06Year 2010$563,186)$(33,791)Nominal Interest (0.09$500,000)45,000Difference11,209Alternative entriesLand80,000Goodwill372,075Unamortized Premium on Bonds Payable63,186Difference between Implied and Book Value388,889Unamortized Premium on Bonds Payable11,209Interest Expense11,209^aExercise 5-11Part 1 – CostMethodComputation and Allocation of Difference ScheduleParentNon-EntireShareControllingValueSharePurchase price and implied value$2,276,000569,0002,845,000 *Less: Book value of equity acquired2,000,000500,0002,500,000Difference between implied and book value276,00069,000345,000Inventory(36,000)(9,000)(45,000)Equipment(40,000)(10,000)(50,000)Balance200,00050,000250,000Goodwill(200,000)(50,000)(250,000)Balance-0–0–0-*$2,276,000/.802010(1) Dividend Income16,000Dividends Declared (0.80$20,000)16,000

To eliminate intercompany dividends

5 – 10

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Exercise 5-11 (continued)
(2)	Beginning Retained Earnings-Sand	700,000
	Capital Stock-Sand	1,800,000
	Difference between Implied and Book Value	345,000
		Investment in Sand Company	2,276,000
		Noncontrolling Interest	569,000
(3) Cost of Goods Sold (Beginning Inventory)	45,000
	Depreciation Expense ($50,000/8)	6,250
	Equipment (net) ($50,000 – $6,250)	43,750
	Goodwill	250,000
		Difference between Implied and Book Value	345,000
	To allocate and depreciate the difference between implied and book value
Alternative to entry (3)
(3a) Cost of Goods Sold (Beginning Inventory)	45,000
	Equipment (net)	50,000
	Goodwill	250,000
		Difference between Implied and Book Value	345,000
(3b) Depreciation Expense ($50,000/8)	6,250
		Equipment (net)	6,250
2011
(1)	Investment in Sand Company ($80,000 0.80)	64,000
		Beginning Retained Earnings – Piper Company	64,000
	To establish reciprocity/convert to equity method as of 1/1/2011
(2)	Dividend Income ($30,000 0.80)	24,000
		Dividends Declared	24,000
	To eliminate intercompany dividends
(3)	Beginning Retained Earnings-Sand Company ($700,000 + $100,000 – $20,000) 780,000
	Capital Stock-Sand Company	1,800,000
	Difference between Implied and Book Value	345,000
		Investment in Sand Company ($2,276,000 + $64,000)	2,340,000
		Noncontrolling Interest ($569,000 + ($780,000 – $700,000) x 0.20)	585,000
	To eliminate investment account and create noncontrolling interest account
(4) Beginning Retained Earnings-Piper Company ($36,000 + $5,000)	41,000
	Noncontrolling Interest ($9,000 + $1,250)	10,250
	Depreciation Expense	6,250
	Equipment (net) ($50,000 – $6,250 – $6,250)	37,500
	Goodwill	250,000
		Difference between Implied and Book Value	345,000
	To allocate and depreciate the difference between implied and book value

5 – 11

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Exercise 5-11 (continued)
Alternative to entry (4)
(4a) Beginning Retained Earnings-Piper Company	36,000
	Noncontrolling Interest	9,000
	Equipment (net)	50,000
	Goodwill	250,000
		Difference between Implied and Book Value	345,000
(4b) Beginning Retained Earnings-Piper Company	5,000
	Noncontrolling Interest	1,250
	Depreciation Expense ($50,000/8)	6,250
		Equipment (net)	12,500
2012
(1)	Investment in Sand Company ($200,000 0.80)	160,000
		Beginning Retained Earnings-Piper Company	160,000
	To establish reciprocity/convert to equity method as of 1/1/2012
(2)	Dividend Income ($15,000 0.80)	12,000
		Dividends Declared	12,000
	To eliminate intercompany dividends
(3) Beginning Retained Earnings-Sand ($780,000 + $150,000 – $30,000)	900,000
	Common Stock- Sand Company	1,800,000
	Difference between Implied and Book Value	345,000
		Investment in Sand Company ($2,276,000 + $160,000)	2,436,000
		Noncontrolling Interest ($569,000 + ($900,000 – $700,000) x 0.20)	609,000
	To eliminate investment account and create noncontrolling interest account
(4) Beginning Retained Earnings-Piper Company ($41,000 + $5,000)	46,000
	Noncontrolling Interest ($10,250 +$1,250)	11,500
	Depreciation Expense	6,250
	Equipment (net)	31,250
	Goodwill	250,000
		Difference between Implied and Book Value	345,000
	To allocate and depreciate the difference between implied and book value
Alternative to entry (4)
(4a) Beginning Retained Earnings-Piper Company	36,000
	Noncontrolling Interest	9,000
	Equipment (net)	50,000
	Goodwill	250,000
		Difference between Implied and Book Value	345,000
(4b) Beginning Retained Earnings-Piper Company	10,000
	Noncontrolling Interest	2,500
	Depreciation Expense ($50,000/8)	6,250
		Equipment (net)	18,750
				5 – 12

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Exercise 5-11 (continued)

Part 2 – Partial Equity Method

Computation and Allocation of Difference ScheduleParentNon-EntireShareControllingValueSharePurchase price and implied value$2,276,000569,0002,845,000Less: Book value of equity acquired2,000,000500,0002,500,000Difference between implied and book value276,00069,000345,000Inventory(36,000)(9,000)(45,000)Equipment(40,000)(10,000)(50,000)Balance200,00050,000250,000Goodwill(200,000)(50,000)(250,000)Balance-0–0–0-Investment in Sand Corporation (Partial Equity)Cost of investment2,276,000P

2010 equity income (.8)($100,000)

80,000

2010 Dividends (.8)($20,000)

16,000

Balance 20102,340,000

2011 equity income (.8)($150,000)

120,000

2011 Dividends (.8)($30,000)

24,000

Balance 20112,436,000

2012 equity income (.8)($80,000)

64,000

2012 Dividends (.8)($15,000)

12,000

Balance 20122,488,0002010(1) Equity in Subsidiary Income (0.80$100,000)80,000Dividends Declared (0.80$20,000)16,000Investment in Sand Company64,000To eliminate intercompany dividends and income(2) Beginning Retained Earnings-Sand700,000Capital Stock-Sand1,800,000Difference between Implied and Book Value345,000Investment in Sand Company2,276,000Noncontrolling Interest569,000(3) Cost of Goods Sold (Beginning Inventory)45,000Depreciation Expense ($50,000/8)6,250Equipment (net) ($50,000 – $6,250)43,750Goodwill250,000Difference between Implied and Book Value345,000

To allocate and depreciate the difference between implied and book value

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Exercise 5-11 (continued)
Alternative to entry (3)
(3a) Cost of Goods Sold (Beginning Inventory)	45,000
Equipment (net)		50,000
Goodwill		250,000
	Difference between Implied and Book Value	345,000
(3b) Depreciation Expense ($50,000/8)		6,250
	Equipment (net)		6,250
Part 2 – Partial Equity Method
2011
(1) Equity in Subsidiary Income (0.80	$150,000)	120,000
	Dividends Declared (0.80	$30,000)	24,000
	Investment in Sand Company	96,000
To eliminate intercompany dividends and income
(2) Beginning Retained Earnings-Sand Company	780,000
Capital Stock- Sand Company		1,800,000
Difference between Implied and Book Value	345,000
	Investment in Sand Company ($2,276,000 + $64,000)	2,340,000
	Noncontrolling Interest ($569,000 + ($780,000 – $700,000) x 0.20)	585,000
To eliminate investment account and create noncontrolling interest account
(3) Beginning Retained Earnings-Piper Company ($36,000 + $5,000)	41,000
Noncontrolling Interest ($9,000 + $1,250)	10,250
Depreciation Expense		6,250
Equipment (net) ($50,000 – $6,250 – $6,250)	37,500
Goodwill		250,000
	Difference between Implied and Book Value	345,000
To allocate and depreciate the difference between implied and book value
Alternative to entry (3)
(3a) Beginning Retained Earnings-Piper Company	36,000
Noncontrolling Interest		9,000
Equipment (net)		50,000
Goodwill		250,000
	Difference between Implied and Book Value	345,000
(3b) Beginning Retained Earnings-Piper Company	5,000
Noncontrolling Interest		1,250
Depreciation Expense ($50,000/8)		6,250
	Equipment (net)		12,500

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Exercise 5-11 (continued)
2012
(1) Equity in Subsidiary Income (0.80	$80,000)	64,000
	Dividends Declared (0.80	$15,000)	12,000
	Investment in Sand Company	52,000
To eliminate intercompany dividends and income
Part 2 – Partial Equity Method

(2) Beginning Retained Earnings-Sand	900,000
Common Stock- Sand Company		1,800,000
Difference between Implied and Book Value	345,000
	Investment in Sand Company ($2,276,000 + $160,000)	2,436,000
	Noncontrolling Interest ($569,000 + ($900,000 – $700,000) x 0.20)	609,000
To eliminate investment account and create noncontrolling interest account
(3) Beginning Retained Earnings-Piper Company ($41,000 + $5,000)	46,000
Noncontrolling Interest ($10,250 + $1,250)	11,500
Depreciation Expense		6,250
Equipment (net)		31,250
Goodwill		250,000
	Difference between Implied and Book Value	345,000
To allocate and depreciate the difference between implied and book value
Alternative to entry (3)
(3a) Beginning Retained Earnings-Piper Company	36,000
Noncontrolling Interest		9,000
Equipment (net)		50,000
Goodwill		250,000
	Difference between Implied and Book Value	345,000
(3b) Beginning Retained Earnings-Piper Company	10,000
Noncontrolling Interest		2,500
Depreciation Expense ($50,000/8)		6,250
	Equipment (net)		18,750

5 – 15

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Exercise 5-11 (Continued)

Part 3 – Complete Equity Method

Computation and Allocation of Difference ScheduleParentNon-EntireShareControllingValueSharePurchase price and implied value

	$2,276,000		569,000			2,845,000
Less: Book value of equity acquired	2,000,000		500,000			2,500,000

Difference between implied and book value

	276,000		69,000		345,000
Inventory	(36,000)	(9,000)		(45,000)
Equipment	(40,000)	(10,000)		(50,000)

Balance

	200,000		50,000			250,000
Goodwill	(200,000)	(50,000)		(250,000)
Balance	-0-	-0-			-0-

Investment in Sand Corporation (Complete Equity)

Cost of investment

		2,276,000P
2010 equity income (.8)($100,000)		80,000		2010 Dividends (.8)($20,000)	16,000

2010 depreciationand cost of goods sold41,000Balance 2010

		2,299,000
2011 equity income (.8)($150,000)		120,000		2011 Dividends (.8)($30,000)	24,000

2011 depreciationand cost of goods sold5,000Balance 2011

		2,390,000
2012 equity income (.8)($80,000)		64,000		2012 Dividends (.8)($15,000)	12,000

2012 depreciationand cost of goods sold5,000Balance 2012

		2,437,000
2010
(1) Equity in Subsidiary Income ((0.80	$100,000) – $51,000)	29,000
		Dividends Declared (0.80	$20,000)		16,000
		Investment in Sand Company			13,000
	To eliminate intercompany dividends and income
(2) Beginning Retained Earnings-Sand				700,000
	Capital Stock- Sand				1,800,000
	Difference between Implied and Book Value		345,000
		Investment in Sand Company			2,276,000
		Noncontrolling Interest				569,000

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Exercise 5-11 (continued)
(3) Cost of Goods Sold (Beginning Inventory)	45,000
Depreciation Expense ($50,000/8)		6,250
Equipment (net) ($50,000 – $6,250)	43,750
Goodwill		250,000
	Difference between Implied and Book Value	345,000
To allocate and depreciate the difference between implied and book value
Part 3 – Complete Equity Method
Alternative to entry (3)
(3a) Cost of Goods Sold (Beginning Inventory)	45,000
Equipment (net)		50,000
Goodwill		250,000
	Difference between Implied and Book Value	345,000
(3b) Depreciation Expense ($50,000/8)		6,250
	Equipment (net)		6,250
2011
(1) Equity in Subsidiary Income ((0.80 $150,000) – $15,000)	105,000
	Dividends Declared (0.80	$30,000)	24,000
	Investment in Sand Company	81,000
To eliminate intercompany dividends and income
(2) Beginning Retained Earnings-Sand Company	780,000
Capital Stock- Sand Company		1,800,000
Difference between Implied and Book Value	345,000
	Investment in Sand Company ($2,276,000 + $64,000)	2,340,000
	Noncontrolling Interest ($569,000 + ($780,000 – $700,000) x 0.20)	585,000
To eliminate investment account and create noncontrolling interest account
(3) Investment in Sand Company ($36,000 + $5,000)	41,000
Noncontrolling interest ($9,000 + $1,250)	10,250
Depreciation expense		6,250
Equipment (net) ($50,000 – $6,250 – $6,250)	37,500
Goodwill		250,000
	Difference between Implied and Book Value	345,000
To allocate and depreciate the difference between implied and book value
Alternative to entry (4)
(3a) Investment in Sand Company		36,000
Noncontrolling Interest		9,000
Equipment (net)		50,000
Goodwill		250,000
	Difference between Implied and Book Value	345,000

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Exercise 5-11 (continued)

(3b) Investment in Sand Company		5,000
	Noncontrolling interest		1,250
	Depreciation Expense ($50,000/8)		6,250
		Equipment (net)		12,500
Part 3 – Complete Equity Method
2012
(1)	Equity in Subsidiary Income ((0.80 $80,000) – $15,000)	49,000
		Dividends Declared (0.80	$15,000)	12,000
		Investment in Sand Company	37,000
	To eliminate intercompany dividends and income
(2)	Beginning Retained Earnings-Sand	900,000
	Common Stock- Sand Company		1,800,000
	Difference between Implied and Book Value	345,000
		Investment in Sand Company ($2,276,000 + $160,000)	2,436,000
		Noncontrolling Interest ($569,000 + ($900,000 – $700,000) x 0.20)	609,000
	To eliminate investment account and create noncontrolling interest account
(3) Investment in Sand Company ($41,000 + $5,000)	46,000
	Noncontrolling Interest ($10,250 + $1,250)	11,500
	Depreciation Expense		6,250
	Equipment (net)		31,250
	Goodwill		250,000
		Difference between Implied and Book Value	345,000
	To allocate and depreciate the difference between implied and book value
Alternative to entry (3)
(3a) Investment in Sand Company		36,000
	Noncontrolling Interest		9,000
	Equipment (net)		50,000
	Goodwill		250,000
		Difference between Implied and Book Value	345,000
(3b) Investment in Sand Company		10,000
	Noncontrolling Interest		2,500
	Depreciation Expense ($50,000/8)		6,250
		Equipment (net)		18,750

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Exercise 5-12Part A (1) Investment in Saxton Corporation225,000Beginning Retained Earnings-Palm Inc.225,000To establish reciprocity/convert to equity (0.90

($1,250,000 – $1,000,000))

Computation and Allocation of Difference ScheduleParentNon-EntireShareControllingValueSharePurchase price and implied value

	$3,750,000		416,667			4,166,667 *
Less: Book value of equity acquired	3,600,000		400,000			4,000,000

Difference between implied and book value150,00016,667166,667Inventory

	(90,000)	(10,000)		(100,000)
Land	(360,000)	(40,000)		(400,000)

Balance (excess of FV over implied value)

(300,000)

(33,333)

(333,333)

Gain300,000Increase Noncontrolling interest to fair value of assets

33,333

Total allocated bargain333,333Balance-0–0–0-

*$3,750,000/.90
(2) Beginning Retained Earnings-Saxton Co.	1,250,000
Capital Stock- Saxton Co.	3,000,000
Difference between Implied and Book Value	166,667
Investment in Saxton Co. ($3,750,000 + $225,000)	3,975,000
Noncontrolling Interest [$416,667 + ($1,250,000 – $1,000,000) x .10]	441,667
To eliminate the investment amount and create noncontrolling interest account
(3) Beginning Retained Earnings-Palm Inc.	90,000
Noncontrolling Interest	10,000
Land	400,000
Difference between Implied and Book Value	166,667
Gain on Acquisition	300,000
Noncontrolling Interest	33,333
To allocate and depreciate the difference between implied and book value

5 – 19

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Exercise 5-12 (continued)Part B Palm Incorporated’s Retained Earnings on 12/31/2012

$2,000,000

Palm Incorporated’s share of the increase in Saxton Corporation’s Retained

Earnings from acquisition date to 12/31/2012 ($1,550,000 – $1,000,000) 0.9

495,000

Less the cumulative effect to 12/31/2012 of the amortization of the differencebetween implied and book value20112012Current Assets (inventory)$90,000$0Gain(300,000)(0)Total$(210,000)$(0)210,000Consolidated Retained Earnings on 12/31/2012$2,705,000Exercise 5-13Net AssetsImputed Value ($2,070,000/0.9)$2,300,000Recorded Value ($1,200,000 + $600,000)1,800,000Unrecorded Values$500,000Allocated to identifiable assets

Inventory ($725,000 – $600,000)

$125,000

Equipment ($1,075,000 – $900,000)175,000300,000Goodwill$200,000Inventory125,000Equipment175,000Goodwill200,000Revaluation Capital500,000

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Exercise 5-14Part AComputation and Allocation of Difference ScheduleParentNon-EntireShareControllingValueSharePurchase price and implied value$3,750,000416,6674,166,667*Less: Book value of equity acquired3,600,000400,0004,000,000Difference between implied and book value150,00016,667166,667Inventory(90,000)(10,000)(100,000)Land

(360,000)

(40,000)

(400,000)

Balance (excess of FV over implied value)

(300,000)

(33,333)

(333,333)

Gain300,000Increase Noncontrolling interest to fair value of assets33,333Total allocated bargain333,333Balance-0–0–0-*$3,750,000/.90Investment in Saxton Corporation (Partial Equity)Cost of investment3,750,000P2011 equity income (.9)($250,000)225,0002011 Dividends0Balance 20113,975,0002012 equity income (.9)($300,000)270,0002012 Dividends0Balance 20124,245,000

(1)	Equity in Subsidiary Income	270,000
	Investment in Saxton Corporation.		270,000
	To eliminate subsidiary income ($270,000)
(2)	Beginning Retained Earnings-Saxton Co.	1,250,000
	Capital Stock- Saxton Co	3,000,000
	Difference between Implied and Book Value	166,667
	Investment in Saxton Co. ($3,750,000 + $225,000)		3,975,000
	Noncontrolling Interest $416,667 + [($1,250,000 – $1,000,000) x .10]	441,667
To eliminate the investment amount and create noncontrolling interest account
(3)	Beginning Retained Earnings-Palm Inc.	90,000
	Noncontrolling Interest	10,000
	Land	400,000
Difference between Implied and Book Value	166,667
Gain on Acquisition	300,000
Noncontrolling Interest	33,333

To allocate and depreciate the difference between implied and book value

5 – 21

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Exercise 5-14 (continued)Part B Palm Incorporated’s Retained Earnings on 12/31/2012$2,495,000

Less the cumulative effect to 12/31/2012 of the amortization of the difference

between implied and book value20112012Current Assets (inventory)$90,000$0Gain(300,000)(0)Total$(210,000)$(0)210,000Consolidated Retained Earnings on 12/31/2012$2,705,000Exercise 5-15Part AComputation and Allocation of Difference ScheduleParentNon-EntireShareControllingValueSharePurchase price and implied value$3,750,000416,6674,166,667 *Less: Book value of equity acquired3,600,000400,0004,000,000Difference between implied and book value150,00016,667166,667Inventory(90,000)(10,000)(100,000)Land(360,000)(40,000)(400,000)Balance (excess of FV over implied value)(300,000)(33,333)(333,333)Gain300,000Increase Noncontrolling interest to fair value of assets33,333Total allocated bargain333,333Balance-0–0–0-*$3,750,000/.90Investment in Saxton CorporationCost of investment3,750,000P2011 equity income (.9)($250,000)225,0002011 Dividends02011 amortization (equity income)75,000Balance 20113,900,0002012 equity income (.9)($300,000)270,0002012 Dividends02012 amortization (equity income)15,000Balance 20124,155,000

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Exercise 5-15 (continued)
(1) Equity in Subsidiary Income	255,000
Investment in Saxton Corporation.		255,000
To eliminate subsidiary income ((.90)($300,000) – $15,000)
(2) Beginning Retained Earnings-Saxton Co.	1,250,000
Capital Stock- Saxton Co.	3,000,000
Difference between Implied and Book Value	166,667
Investment in Saxton Co.		3,975,000
Noncontrolling Interest [$416,667 + ($1,250,000 – 1,000,000) x .10]	441,667
To eliminate the investment amount and create noncontrolling interest account
(3) Investment in Saxton Co.		90,000
Noncontrolling Interest		10,000
Land		400,000
Difference between Implied and Book Value		166,667
Beginning Retained Earnings-P (gain on acquisition)		300,000
Noncontrolling Interest		33,333
To allocate and depreciate the difference between implied and book value
Part B Palm Incorporated’s Retained Earnings on 12/31/2012			$2,705,000

Consolidated Retained Earnings on 12/31/2012		$2,705,000

Under the complete equity method, Palm’s retained earnings will equal consolidated retained earnings.

Exercise 5-16
Part A.
2011: Step 1: Fair value of the reporting unit	$400,000

Carrying value of unit:

			Carrying value of identifiable net assets	$330,000
			Carrying value of goodwill ($450,000 – $375,000)	75,000

405,000

Excess of carrying value over fair value

$ 5,000

The excess of carrying value over fair value means that step 2 is required.
Step 2: Fair value of the reporting unit	$400,000
Fair value of identifiable net assets	340,000
Implied value of goodwill		60,000
Recorded value of goodwill ($450,000 – $375,000)	75,000
Impairment loss	$ 15,000

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Exercise 5-16 (continued)
2012: Step 1: Fair value of the reporting unit	$400,000
	Carrying value of unit:

	Carrying value of identifiable net assets	$320,000
	Carrying value of goodwill ($75,000 – $15,000)	60,000
			380,000
	Excess of fair value over carrying value	$ 20,000

The excess of fair value over carrying value means that step 2 is not required.

2013: Step 1: Fair value of the reporting unit	$350,000
	Carrying value of unit:

	Carrying value of identifiable net assets	$300,000
	Carrying value of goodwill ($75,000 – $15,000)	60,000
			360,000
	Excess of carrying value over fair value	$ 10,000

The excess of carrying value over fair value means that step 2 is required.

	Step 2: Fair value of the reporting unit	$350,000
		Fair value of identifiable net assets	325,000
		Implied value of goodwill		25,000
		Recorded value of goodwill ($75,000 – $15,000)		60,000
		Impairment loss	$ 35,000
Part B.
Part B.

1.	2011: Impairment Loss—Goodwill	15,000
		Goodwill	15,000
	2012: Retained Earnings-Porsche	15,000
		Goodwill	15,000
	2013: Impairment Loss—Goodwill	35,000
		Retained Earnings – Porsche	15,000
		Goodwill	50,000
2.	2011: Impairment Loss—Goodwill	15,000
		Goodwill	15,000
	2012: Investment in Saab	15,000
		Goodwill	15,000
	2013: Impairment Loss—Goodwill	35,000
		Investment in Saab	15,000
		Goodwill	50,000

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ANSWERS TO PROBLEMSProblem 5-1Calculations:Computation and Allocation of Difference ScheduleParentNon-EntireShareControllingValueSharePurchase price and implied value$2,800,000700,0003,500,000 *Less: Book value of equity acquired1,200,000300,0001,500,000Difference between implied and book value1,600,000400,0002,000,000Equipment (net) ($1,500,000 – $600,000(720,000)(180,000)(900,000)Balance880,000220,0001,100,000Goodwill(880,000)(220,000)(1,100,000)Balance-0–0–0-*$2,800,000/.80Depreciation of difference allocated to Palmero($720,000/10)$72,000Depreciation of difference allocated to Santos ($180,000/10)

$18,000

Part A 2011(1) Beginning Retained Earnings-Santos Co.1,000,000Capital Stock- Santos Co.500,000Difference between Implied and Book Value2,000,000Investment in Santos Co.2,800,000Noncontrolling Interest700,000

To eliminate investment account and create noncontrolling interest account

(2) Depreciation Expense90,000Property and Equipment (net) ($900,000 – $90,000)810,000Goodwill1,100,000Difference between Implied and Book Value2,000,000

To allocate and depreciate the difference between implied and book value

Alternative to entry (2)(2a)Property and Equipment (net)900,000Goodwill1,100,000Difference between Implied and Book Value2,000,000(2b) Depreciation Expense90,000Property and Equipment (net)90,000

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Problem 5-1 (continued)
	2012
	(1) Investment in Santos Company ($300,000 0.80)	240,000
		Beginning Retained Earnings-Palmero Co.		240,000
	To establish reciprocity/convert to equity as of 1/1/2012
	(2) Beginning Retained Earnings-Santos Company	1,300,000
	Capital Stock-Santos Company	500,000
	Difference between Implied and Book Value	2,000,000
		Investment in Santos Company ($2,800,000 + $240,000)		3,040,000
		Noncontrolling Interest $700,000 + [($1,300,000 – $1,000,000) x 0.20]	760,000
	To eliminate investment account.
	(3) Beginning Retained Earnings-Palmero Co.	72,000
	Noncontrolling Interest	18,000
	Depreciation Expense	90,000
	Property and Equipment (net) ($900,000 – $90,000 – $90,000)	720,000
	Goodwill	1,100,000
		Difference between Implied and Book Value		2,000,000
	To allocate and depreciate the difference between implied and book value
Alternative to entry (3)
	(3a)
	Property and Equipment (net)	900,000
	Goodwill	1,100,000
		Difference between Implied and Book Value		2,000,000
	(3b) Beginning Retained Earnings-Palmero Co.	72,000
		Noncontrolling Interest	18,000
		Depreciation Expense	90,000
		Property and Equipment (net)		180,000

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Problem 5-1 (continued)Part B Controlling Interest in Consolidated Net Income

2011

2012

Palmero Company’s Net Income from Independent Operations

	$400,000			$425,000
Palmero Company’s Share of Reported Income of Santos Company	240,000			320,000

Less: Depreciation of Difference betweenImplied and Book ValueAllocated to:Property and Equipment

		(72,000)			(72,000)
Controlling Interest in Consolidated Net Income	$568,000			$673,000

Noncontrolling Interest in Consolidated Income (2011)

	Amortization of the difference between	Net income reported by Santos	$	300,000
implied and book value related to
equipment ($900,000/10)	90,000
			Adjusted net income of Santos		210,000
			Noncontrolling Ownership percentage interest		20%

Noncontrolling Interest in Consolidated Net Income

$ 42,000

Controlling Interest in Consolidated Income (2011)

Palmero Company’s net income from its independent

operations

400,000

Palmero Company’s share of the adjusted income ofSantos Company (.8 X $210,000)168,000


				Controlling Interest in Consolidated Net Income	$	568,000

Noncontrolling Interest in Consolidated Income (2012)

	Amortization of the difference between	Net income reported by Santos	$ 400,000
implied and book value related to
equipment ($900,000/10)	90,000
		Adjusted net income of Santos	310,000
		Noncontrolling Ownership percentage interest	20%

		Noncontrolling Interest in Consolidated Net Income	$ 62,000

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Problem 5-1 (continued)

Controlling Interest in Consolidated Income (2012)

Palmero Company’s net income from its independent
operations	$	425,000
Palmero Company’s share of the adjusted income of
Santos Company (.8 X $310,000)		248,000

Controlling Interest in Consolidated Net Income	$	673,000

Problem 5-2Computation and Allocation of Difference ScheduleParentNon-EntireShareControllingValueSharePurchase price and implied value$1,300,000557,1431,857,143 *Less: Book value of equity acquired1,050,000450,0001,500,000Difference between implied and book value250,000107,143357,143Unamortized Discount on Bonds Payable(106,143)(45,490)(151,633)Balance143,85761,653205,510Goodwill(143,857)(61,653)(205,510)Balance-0–0–0-*$1,300,000/.70Present Value on 1/1/2011 of 6% Bonds PayableDiscounted at 10%, 5 periodsPrincipal ($1,000,000 0.62092)$620,920Interest ($60,000 3.79079)227,447Fair value of bonds$848,367Face value of bonds1,000,000Total Discount$151,633

Amortization of amount of difference between implied and book value allocated to unamortized

discount on bonds payable(1)(2)(3)(4)(5)CarryingInterest at 10%Interest at 6%DifferenceYearValue (1/1)of Carrying Valueof Par Value[(3)-(4)]2011$848,367$84,837$60,000$24,8372012$873,204$87,320$60,000$27,320

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	Problem 5-2 (continued)
	Part A 2011

		(1) Equity in Subsidiary Income (.70)($100,000)	70,000
			Investment in Sagon Co.		70,000
		To eliminate subsidiary income
		(2) Beginning Retained Earnings-Sagon Co.	500,000
		Capital Stock- Sagon Co.	1,000,000
		Difference between Implied and Book Value	357,143
			Investment in Sagon Co.		1,300,000
			Noncontrolling Interest		557,143
		To eliminate investment amount and create noncontrolling interest account
		(3) Interest Expense	24,837
		Unamortized Discount on Bonds Payable ($151,633 – $24,837)	126,796
		Goodwill	205,510
			Difference between Implied and Book Value		357,143
		To allocate and amortize the difference between Implied and book value
Alternative to entry (3)

	(3a) Unamortized Discount on Bonds Payable	151,633
		Goodwill	205,510
			Difference between Implied and Book Value		357,143
	(3b) Interest Expense	24,837
			Unamortized Discount on Bonds Payable		24,837
	2012
		(1) Equity in Subsidiary Income (.70)($120,000)	84,000
			Investment in Sagon Co.		84,000
		To eliminate subsidiary income
		(2) Beginning Retained Earnings-Sagon Company	600,000
		Common Stock- Sagon Company	1,000,000
		Difference between Implied and Book Value	357,143
			Investment in Sagon Company ($1,300,000 + $70,000)		1,370,000
			Noncontrolling Interest ($557,143 + ($600,000 – $500,000) x 0.30)	587,143
		To eliminate the investment account and create noncontrolling interest account
		(3) Beginning Retained Earnings-Paxton Company	17,386	*
		Noncontrolling Interest	7,451
		Interest Expense	27,320
		Unamortized Discount on Bonds Payable ($151,633 – $24,837 – $27,320) 99,476
		Goodwill	205,510
			Difference between Implied and Book Value		357,143
		To allocate and amortize the difference between implied and book value

*$24,837 x 70% = $17,386

Alternative to entry (3)

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Problem 5-2 (continued)(3a) Unamortized Discount on Bonds Payable

	151,633
Goodwill	205,510
	Difference between Implied and Book Value	357,143
(3b) Beginning Retained Earnings-Paxton Company	17,386
Noncontrolling Interest	7,451
Interest Expense	27,320
	Unamortized Discount on Bonds Payable	52,157
(4) Impairment Loss – Goodwill**	25,510
	Goodwill	25,510
**Step 1: Fair value of the reporting unit	$1,500,000

Carrying value of unit:

	Carrying value of identifiable net assets	$1,409,000
	Carrying value of goodwill	205,510

1,614,510Excess of carrying value over fair value

	$ 114,510
The excess of carrying value over fair value means that step 2 is required.
Step 2: Fair value of the reporting unit	$1,500,000
Fair value of identifiable net assets	1,320,000
Implied value of goodwill		180,000
Recorded value of goodwill		205,510
Impairment loss	$ 25,510

Part B Controlling Interest in Consolidated Net Income	2011		2012
Paxton Company’s Net Income from Independent Operations	$300,000	$250,000
Paxton Company’s Share of Reported Income of Sagon Company	70,000	84,000

Less: Amortization of Difference between Implied and Book ValueAllocated to:Bonds Payable

(17,386)

(19,124)*

Controlling Interest in Consolidated Net Income

$352,614

$314,876

* $27,320 x 70% = $19,124

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Problem 5-2 (continued)

Noncontrolling Interest in Consolidated Income (2011)

Amortization of the difference between

Net income reported by Sagon

100,000

implied and book value related tobonds payable24,837Adjusted net income of Sagon75,163Noncontrolling Ownership percentage interest30%

Noncontrolling Interest in Consolidated Net Income

$ 22,549

Controlling Interest in Consolidated Income (2011)Paxton Company’s net income from its independentoperations$300,000Paxton Company’s share of the adjusted income ofSagon Company (.7 X $75,163)52,614Controlling interest in Consolidated Net Income$352,614Noncontrolling Interest in Consolidated Income (2012)Amortization of the difference between

Net income reported by S

120,000

implied and book value related tobonds payable27,320Goodwill Impairment25,510Adjusted net income of S67,170Noncontrolling Ownership percentage interest30%Noncontrolling Interest in Consolidated Net Income$20,151Controlling Interest in Consolidated Income (2012)Paxton Company’s net income from its independentoperations$250,000Paxton Company’s share of the adjusted income ofSagon Company (.7 X $67,170)47,019Controlling interest in Consolidated Net Income$297,019

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Problem 5-3Computation and Allocation of Difference ScheduleParentNon-EntireShareControllingValueSharePurchase price and implied value

$1,970,000

492,500

2,462,500 *

Less: Book value of equity acquired1,440,000360,0001,800,000Difference between implied and book value530,000132,500662,500Inventory ($725,000 – $600,000)

	(100,000)	(25,000)		(125,000)
Equipment ($1,075,000 – $900,000)	(140,000)	(35,000)		(175,000)

Balance290,00072,500362,500Goodwill

(290,000)

(72,500)

(362,500)

Balance-0–0–0-*$1,970,000/.802012 Amortization ScheduleInventory (60% in 2012)60,00015,00075,000Equipment ($175,000/7)20,0005,00025,000Total80,00020,000100,0002013 Amortization ScheduleInventory (40% in 2013)40,00010,00050,000Equipment ($175,000/7)20,0005,00025,000Total60,00015,00075,000Part A 2012Investment in Superstition Company1,970,000Cash1,970,000Cash (0.8$150,000)120,000Investment in Superstition Company120,000Investment in Superstition Company600,000Equity in Subsidiary Income (.80)($750,000)600,000Equity in Subsidiary Income80,000Investment in Superstition Company80,0002013Cash (0.8$225,000)180,000Investment in Superstition Company180,000Investment in Superstition Company720,000Equity in Subsidiary Income (.80)($900,000)720,000Equity in Subsidiary Income60,000Investment in Superstition Company60,000

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Problem 5-3 (continued)
Part B 2012

	(1)	Equity in Subsidiary Income ((.80)($750,000) – $80,000)	520,000
			Dividends Declared (0.80	$150,000)		120,000
			Investment in Superstition Company		400,000
	To eliminate intercompany income and dividends
(2)	Beginning Retained Earnings – Superstition Company	600,000
		Common Stock- Superstition Company	1,200,000
		Difference between Implied and Book Value	662,500
			Investment in Superstition Company		1,970,000
			Noncontrolling Interest			492,500
	To eliminate the investment account and create noncontrolling interest account
(3)	Inventory ($125,000 – $75,000)		50,000
		Cost of Goods Sold		75,000
		Depreciation Expense		25,000
		Equipment (net $175,000 – $25,000)	150,000
		Goodwill		362,500
			Difference between Implied and Book Value		662,500
	To allocate and depreciate the difference between implied and book value
Alternative to entry (3)
(3a)	Inventory		50,000
		Cost of Good Sold		75,000
		Equipment (net		175,000
		Goodwill		362,500
			Difference between Implied and Book Value		662,500
(3b)	Depreciation Expense		25,000
			Equipment (net			25,000
	2013
(1)	Equity in Subsidiary Income ((.80)($900,000) – $60,000)	660,000
			Dividends Declared (0.80	$225,000)		180,000
			Investment in Superstition Company		480,000
	To eliminate intercompany income and dividends
(2)	Beginning Retained Earnings-Superstition Company	1,200,000
		Common Stock – Superstition Company.	1,200,000
		Difference between Implied and Book Value	662,500
			Investment in Superstition Company ($1,970,000 + $480,000)		2,450,000
			Noncontrolling Interest ($492,500 + ($1,200,000 – $600,000) x .20)	612,500
	To eliminate investment account and create noncontrolling interest account

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Problem 5-3 (continued)

(3)	Investment in Superstition Company
	($60,000 + $20,000)	80,000
	Noncontrolling Interest ($15,000 + $5,000)	20,000
	Cost of Good Sold	50,000
	Depreciation Expense	25,000
	Equipment (net) ($175,000 – $25,000 – $25,000)	125,000
	Goodwill	362,500
	Difference between Implied and Book Value		662,500
	To allocate and depreciate the difference between implied and book value
Alternative to entry (3)
	(3a) Investment in Superstition Company	60,000
	Noncontrolling Interest	15,000
	Cost of Good Sold	50,000
	Equipment (net	175,000
	Goodwill	362,500
	Difference between Implied and Book Value		662,500
	(3b) Investment in Superstition Company	20,000
	Noncontrolling Interest	5,000
	Depreciation Expense	25,000
	Equipment (net		50,000
Part C Perke Corporation’s Net Income from Independent Operations
	($1,000,000 – $120,000)		$880,000
	Perke Corporation’s Share of Superstition Company’s net income (0.8	$750,000)	600,000
	Less: Assignment, amortization, and depreciation of:
	Inventory		(60,000)
	Equipment			(20,000)

	Controlling Interest in Consolidated Net Income		$1,400,000

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Problem 5-4

Part A

Computation and Allocation of Difference Schedule

			Parent			Non-	Entire
				Share	Controlling	Value

SharePurchase price and implied value

$850,000

212,500

1,062,500 *

Less: Book value of equity acquired504,000126,000630,000Difference between implied and book value346,00086,500432,500Equipment

	(104,000)	(26,000)	(130,000)
Land	(52,000)	(13,000)	(65,000)
Inventory	(32,000)	(8,000)	(40,000)

Balance158,00039,500197,500Goodwill

(158,000)

(39,500)

(197,500)

Balance-0–0–0-*$850,000/.80Part B and C – Worksheet EntriesCost Method Workpaper entries – Year 2010(1) Dividend Income ($25,000 .80)20,000Dividends Declared20,000To eliminate intercompany dividends(2) Beginning Retained Earnings – Salem Co.80,000Common Stock – Salem550,000Difference between Implied and Book Value432,500Investment in Salem Company850,000Noncontrolling Interest212,500To eliminate investment account and create noncontrolling interest account

(3) Cost of Goods Sold40,000Land65,000Plant and Equipment (5 year life)130,000Goodwill197,500Difference between Implied and Book Value

432,500

To allocate the difference between implied and book value(4) Depreciation Expense ($130,000/5)26,000Plant and Equipment26,000

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Problem 5-4 (continued)

Cost Method – Worksheet Entries – Year 2011

(1) Investment in Salem Company (.80	($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 .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
Noncontrolling Interest ($212,500 + ($155,000 – $80,000) .2)	227,500
To eliminate investment account and create noncontrolling interest account
(4) 1/1 Retained Earnings – Porter Company	32,000
Noncontrolling 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
Noncontrolling 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	.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
Noncontrolling Interest			212,500
To eliminate investment account and create noncontrolling interest account

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Problem 5-4 (continued)
(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	.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
	Noncontrolling Interest ($212,500 + ($155,000 – $80,000) .2)	227,500
	To eliminate investment account and create noncontrolling interest account
(3)	1/1 Retained Earnings – Porter Company	32,000
	Noncontrolling 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
	Noncontrolling 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	.80)		20,000
	Investment in Salem Company			7,200
	To eliminate intercompany dividends

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Problem 5-4 (continued)

(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
	Noncontrolling Interest	212,500
	To eliminate investment account and create noncontrolling 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 .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
	Noncontrolling Interest ($212,500 + ($155,000 – $80,000) .2)	227,500
	To eliminate investment account and create noncontrolling interest account
(3)	Investment in Salem Company	32,000
	Noncontrolling 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
	Noncontrolling Interest	5,200
	Depreciation Expense ($130,000/5)	26,000
	Plant and Equipment	52,000

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Problem 5-4 (continued)Part DPorterSalemEliminationsNoncontrollingConsolidatedIncome StatementCompanyCompanyDebitCreditInterestBalancesSales$1,100,000$450,000$1,550,000Dividend Income48,000(2)48,000Total Revenue1,148,000450,0001,550,000Cost of Goods Sold900,000200,0001,100,000Depreciation Expense40,00030,000(4b)26,00096,000Impairment loss(5)47,50047,500Other Expenses60,00050,000110,000Total Cost and Expense1,000,000280,0001,353,500Net/Consolidated Income148,000170,000196,500Noncontrolling Interest in Consolid. Income*19,300(19,300)Net Income to Retained Earnings$148,000$170,000$121,500$19,300$177,200Retained Earnings Statement1/1 Retained Earnings:Porter Company$500,000(4a)32,000(1)$120,000$546,400(4b)41,600Salem Company230,000(3) 230,000Net Income from Above148,000170,000121,50019,300177,200Dividends Declared:Porter Company(90,000)(90,000)Salem Company(60,000)(2)48,000(12,000)12/31 Retained Earnings to Balance Sheet$558,000$340,000$425,100$168,000$7,300$633,600

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Problem 5-4 (continued)PorterSalemEliminationsNoncontrollingConsolidatedBalance SheetCompanyCompanyDebitCreditInterestBalancesCash$70,000$65,000$135,000Accounts Receivable260,000190,000$450,000Inventory240,000175,000$415,000Investment in Salem Company850,000(1)120,000(3)970,000Difference between Implied and Book Value(3)432,500(4a)432,500Land320,000(4a)65,000385,000Plant and Equipment360,000280,000(4a)130,000(4b)78,000692,000Goodwill(4a)197,500(5)47,500150,000Total Assets$1,780,000$1,030,000$2,227,000Accounts Payable$132,000$110,000$242,000Notes Payable90,00030,000120,000Common Stock:Porter Company1,000,0001,000,000Salem Company550,000(3)550,000Retained Earnings from above558,000340,000425,100168,0007,300633,6001/1 Noncontrolling Interest in Net(4a)8,000(3)242,500 **224,100Assets(4b)10,40012/31 Noncontrolling Interest in Net$231,400231,400AssetsTotal Liabilities and Equity$1,780,000$1,030,000$1,938,500$1,938,500$2,227,000

Noncontrolling Interest in Income =.2 $170,000 – (.2 x $26,000) – (.2 x $47,500) = $19,300

$212,500 + ($230,000 – $80,000) x .20 = $242,500

Explanations of workpaper entries are on the following page.

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Problem 5-4D explanationComputation and Allocation of Difference ScheduleParentNon-EntireShareControllingValueSharePurchase price and implied value$850,000212,5001,062,500Less: Book value of equity acquired504,000126,000630,000Difference between implied and book value346,00086,500432,500Equipment

	(104,000)	(26,000)	(130,000)
Land	(52,000)	(13,000)	(65,000)
Inventory	(32,000)	(8,000)	(40,000)

Balance158,00039,500197,500Goodwill

(158,000)

(39,500)

(197,500)

Balance-0–0–0-Explanations of Workpaper entries:(1)Investment in Salem Company [.80 ($230,000 – $80,000)]120,000Beginning Retained Earnings – Porter Co.120,000

To establish reciprocity/convert to equity method as of 1/1/12

(2)Dividend Income ($60,000 .80)48,000Dividends Declared48,000To eliminate intercompany dividends(3) Beginning Retained Earnings – Salem Co.230,000Common Stock – Salem550,000Difference between Implied and Book Value432,500Investment in Salem Company ($850,000 + $120,000)970,000Noncontrolling Interest242,500

To eliminate the investment account and create noncontrolling interest account

(4a) Beginning Retained Earnings- Porter Company32,000Noncontrolling Interest8,000Land65,000Plant and Equipment130,000Goodwill197,500Difference between Implied and Book Value432,500(4b) Beginning Retained Earnings – Porter Company (two years)

41,600

Noncontrolling Interest (two years)10,400Depreciation Expense26,000Plant and Equipment78,000

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Problem 5-4D explanation

Alternative to entries (4a) and (4b)
(4) Beginning Retained Earnings – Porter Company ^a	73,600
Noncontrolling Interest ^b	18,400
Depreciation Expense	26,000
Land	65,000
Plant and Equipment ^c	52,000
Goodwill	197,500
Difference between Implied and Book Value	432,500
To allocate and depreciate the difference between implied and book value
^a($32,000 + $20,800) + ($20,800) = $73,600
^b($8,000 + $5,200) + ($5,200) = $18,400
^c($130,000 – [3 $26,000]) = $52,000
(5) Impairment Loss ($197,500 – $150,000)	47,500
Goodwill	47,500
To record goodwill impairment

Part E	PORTER COMPANY AND SUBSIDIARY
	Consolidated Financial Statements
	For the Year Ended December 31, 2012
	Consolidated Income Statement
	Sales		$1,550,000
	Cost of Goods Sold		1,100,000
	Gross Profit	450,000
	Expenses:
	Depreciation Expense	$96,000
	Impairment Loss	47,500
	Other Expenses	110,000 253,500
	Consolidated Income			196,500
	Noncontrolling Interest in Consolidated Income		19,300
	Net Income	$177,200
	Consolidated Statement of Retained Earnings
	Consolidated Statement of Retained Earnings
	Retained Earnings – Beginning of Year	$546,400
	Add: Net Income		177,200
				723,600
	Less Dividends		90,000
	Retained Earnings – End of Year	$633,600

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Problem 5-4 (continued)
Part E

PORTER COMPANY AND SUBSIDIARYConsolidated Statement of Financial PositionDecember 31, 2012

Assets

		Current Assets:
			Cash	$135,000
			Accounts Receivable	450,000
			Inventory	415,000
$1,000,000
	Noncurrent Assets:
			Plant and Equipment (net)	692,000
			Land	385,000
			Goodwill	150,000

1,227,000

	Total Assets	$2,227,000
Liabilities And Stockholders’ Equity
Liabilities And Stockholders’ Equity

Liabilities:

	Accounts Payable	$242,000
	Notes Payable		120,000
		Total Liabilities	362,000
Stockholders’ Equity
	Noncontrolling Interest in Net Assets	231,400
	Capital Stock	1,000,000
	Retained Earnings	633,600

1,865,000

Total Liabilities and Stockholders’ Equity

$2,227,000

Part F Ending inventory would be higher by $40,000 if LIFO is assumed because it would not have been sold. Beginning controlling retained earnings and noncontrolling interest would also be $32,000 and $8,000 higher, because cost of goods sold in the year of acquisition was lower.

Part G Porter Company’s Retained Earnings on 12/31/12$558,000Porter Company’s Share of the Increase in SalemCompany’s Retained Earnings from January 1, 2010 to December 31, 2012

($340,000 – $80,000).8208,000Cumulative Effect to December 31, 2012 of the Allocation and Depreciation


of the Difference between Implied and Book value (Parent’s share)

Allocated to:201020112012Inventory$32,000$0$0Equipment

20,800

$52,800

$20,800

(94,400)

Goodwill Impairment (2012)(38,000)Controlling Interest in Consolidated Retained Earnings on 12/31/12

$633,600

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Problem 5-5

Part A – The firm uses the cost method because the firm recognizes dividend income from the investment.

Computation and Allocation of Difference ScheduleParentNon-EntireShareControllingValueSharePurchase price and implied value

$1,000,000

111,111

1,111,111

Less: Book value of equity acquired621,00069,000690,000Difference between implied and book value379,00042,111421,111Equipment ($390,000 – $300,000)

	(81,000)	(9,000)	(90,000)
Less:Accumulated Depreciation ($130,000 – $100,000) 27,000	3,000		30,000
Inventory ($210,000 – $160,000)	(45,000)	(5,000)	(50,000)
Land ($290,000 – 190,000)	(90,000)	(10,000)	(100,000)
Bond Discount ($205,556 – $150,000)	(50,000)	(5,556)	(55,556)

Balance140,00015,555155,555Goodwill

(140,000)

(15,555)

(155,555)

Balance-0–0–0-*$1,000,000/.902011 Amortization ScheduleEquipment (10 year life)5,4006006,000Inventory (sold in 2011)45,0005,00050,000Bond Discount50,0005,55655,556Total100,40011,156111,5562012 Amortization ScheduleEquipment (10 year life)5,4006006,000Inventory (sold in 2011)000Bond Discount000Total5,4006006,000

*The goodwill may also be calculated analytically as follows:
Cost of Investment ($1,000,000/0.9)	$1,111,111
Fair value acquired	(955,556)

Goodwill	$155,555

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Problem 5-5 (Continued)
Part B 2011

	Cost of Goods Sold	50,000
	Gain on Early Extinguishment of Debt	55,556
	Land	100,000
	Equipment	90,000
	Goodwill	155,555
		Accumulated Depreciation	30,000
		Difference between Implied and Book Value	421,111
	Depreciation Expense ($60,000/10)	6,000
		Accumulated Depreciation	6,000
	Treatment of the Amount of the Difference Assigned to Bond Discount
	Date of Acquisition
	Unamortized Discount on Bonds Payable	55,556
	Difference between Implied And Book Value	55,556
	2011
	Book entry to record retirement in 2011 on Stevens books
	Bonds Payable	205,556
		Cash	150,000
		Gain on Retirement of Debt	55,556
	But from consolidated point of view the gain should be $0
	Bonds Payable		205,556
		Unamortized Discount on Bonds Payable	55,556
		Cash	150,000

So entry in Consolidated Statements Workpaper for year ended December 31, 2011 is:

Gain on Early Extinguishment of Debt	55,556
Difference between Implied And Book Value	55,556
Workpaper entries in years after 2011:
Beginning Retained Earnings-Palmer		50,000
Noncontrolling Interest	5,556
Difference between Implied And Book Value	55,556

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Problem 5-5 (continued)

PALMER COMPANY AND SUBSIDIARY

Consolidated Statement WorkpaperPart C

For the Year Ended December 31, 2013

PalmerStevensEliminationsNoncontrollingConsolidatedCompanyCompanyDr.Cr.InterestBalancesIncome StatementSales$620,000$340,000$960,000Cost of Goods Sold430,000240,000670,000Gross Margin190,000100,000290,000Depreciation Expense30,00020,000(4b)6,00056,000Other Expenses60,00035,00095,000Income from Operations100,00045,000139,000Dividend Income31,500(2)31,500Net/Consolidated Income131,50045,000139,000Noncontrolling Interest in Income *3,900(3,900)Net Income to Retained Earnings$131,500$45,000$37,500$0$3,900$135,100Statement of Retained Earnings1/1Retained EarningsPalmer Company$297,600(4a)95,000(1)18,000$209,800(4b)10,800Stevens Company210,000(3)210,000Net Income from above131,50045,00037,5003,900135,100Dividends DeclaredPalmer Company(120,000)(120,000)Stevens Company(35,000)(2)31,500(3,500)12/31Retained Earnings to Balance Sheet$309,100$220,000$353,300$49,500$400$224,900

* ($45,000 .10) – $600 = $3,900.

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Problem 5-5 (continued) Part CPalmerStevensEliminationsNoncontrollingConsolidatedCompanyCompanyDr.Cr.InterestBalancesBalance SheetCash$201,200$151,000$352,200Accounts Receivable221,000173,000394,000Inventory100,40081,000181,400Investment in Stevens Company1,000,000(1)18,000(3)1,018,000Difference between Implied & Bk Value(3)421,111(4a)421,111Equipment450,000300,000(4a)90,000840,000Accumulated Depreciation(300,000)(140,000)(4a)30,000(488,000)(4b)18,000Land360,000290,000(4a) 100,000750,000Goodwill(4a) 155,555155,555Total Assets$2,032,600$855,000$2,185,155Accounts Payable$323,500$135,000$458,500Bonds Payable400,000400,000Capital Stock:Palmer Company1,000,0001,000,000Stevens Company500,000(3)500,000Retained Earnings from above309,100220,000353,30049,500400224,9001/1 Noncontrolling Interest in Net(4a)10,556(3)113,111101,355Assets(4b)1,20012/31 Noncontrolling Interest in Net$101,755101,755AssetsTotal Liabilities & Equity$2,032,600$855,000$1,649,722$1,649,722$2,185,155Noncontrolling Interest in Income = 0.10$45,000 – $600 = $3,900

Explanations of workpaper entries are on separate page

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Problem 5-5 (continued)

Explanations of workpaper entries
	Explanation of workpaper entries – Year 2013
(1)	Investment in Stevens Company [0.9	($210,000 – $190,000)]	18,000
		Beginning Retained Earnings-Palmer Company	18,000
		To establish reciprocity/convert to equity as of 1/1/2013
(2)	Dividend Income ($35,000	0.90)			31,500
		Dividends Declared				31,500
		To eliminate intercompany dividends
(3)	Beginning Retained Earnings – Stevens Company	210,000
		Common Stock-Stevens Company			500,000
		Difference between Implied and Book Value	421,111
		Investment in Stevens Company ($1,000,000 + $18,000)	1,018,000
		Noncontrolling Interest ($111,111 + ($210,000 – $190,000) x .10)	113,111
		To eliminate investment account and create noncontrolling interest account
(4)	Beginning Retained Earnings-Palmer Company
		[$45,000 + $50,000 + (2	$5,400)]			105,800
		Noncontrolling Interest [$5,000 + $5,556 + (2 x $600)]	11,756
		Depreciation Expense ($60,000/10)			6,000
		Plant and Equipment				90,000
		Land				100,000
		Goodwill				155,555
		Accumulated Depreciation [$30,000 + (3 $6,000)]	48,000
		Difference between Implied and Book Value	421,111
		To allocate and depreciate the difference between implied and book value
Alternative to entry (4)
(4a)	Beginning Retained Earnings-Palmer Company
		[$45,000 + $50,000]					95,000
		Noncontrolling Interest [$5,000 + $5,556]	10,556
		Plant and Equipment				90,000
		Land				100,000
		Goodwill				155,555
		Accumulated Depreciation			30,000
		Difference between Implied and Book Value	421,111
(4b)	Beginning Retained Earnings-Palmer Company	10,800
		Noncontrolling Interest ($600 x 2)			1,200
		Depreciation Expense ($60,000/10)			6,000
		Accumulated Depreciation [(3	$6,000)]	18,000

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Problem 5-5
Part D Palmer Company’s net income from its own operations		$100,000
Palmer Company’s share of Stevens Company’s income (0.90	$45,000)	40,500
Less: Depreciation		(5,400)

	Controlling Interest in Consolidated Net Income	$135,100
	Noncontrolling Interest in Consolidated Income (2013)
	Noncontrolling Interest in Consolidated Income (2013)
Amortization of the difference between		Net income reported by Stevens	$	45,000
implied and book value related to
Property and equipment ($60,000/10)	6,000
			Adjusted net income of Stevens			39,000
			Noncontrolling Ownership percentage interest			10%

			Noncontrolling Interest in Consolidated Net Income	$	3,900

Controlling Interest in Consolidated Income (2013)

Palmer Company’s net income from its independent
operations	$	100,000
Palmer Company’s share of the adjusted income of
Stevens Company (.9 X $39,000)		35,100

Controlling interest in Consolidated Net Income	$	135,100

Problem 5-6Computation and Allocation of Difference ScheduleParentNon-EntireShareControllingValueSharePurchase price and implied value

$400,000

70,588

470,588

Less: Book value of equity acquired255,00045,000300,000Difference between implied and book value145,00025,588170,588Equipment*

(76,500)

(13,500)

(90,000)

Less:Accumulated Depreciation*25,5004,50030,000Balance94,00016,588110,588Goodwill

(94,000)

(16,588)

(110,588)

Balance-0–0–0-*$400,000/.85

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Problem 5-6 (continued)*Schedule of Book Value and Fair Value on Date of AcquisitionFairBookFair ValueValueValueMinus Book ValueEquipment$450,000 ¹$360,000$90,000 ³Accumulated Depreciation150,000 ²120,00030,000 ⁴Equipment (net)$300,000$240,000$60,000¹$300,000/($240/$360) = $450,000²$450,000($120/$360) = $150,000³$60,000/($240/$360) = $90,000⁴$90,000($120/$360) = $30,000Allocation of Difference between Implied and Book ValueAnnualAmountAmortizationEquipment (net)$60,000/6 yr$10,000Goodwill110,5880Difference between Implied and Book Value$170,588$10,000Part APart 1 – Cost Method(1) Dividend Income ($30,0000.85)25,500Dividends Declared25,500(2) Beginning Retained Earnings – Silvas Company210,000Common Stock – Silvas Company90,000Difference between Implied and Book Value170,588Investment in Silvas Company400,000Noncontrolling Interest70,588(3) Depreciation Expense10,000Equipment90,000Goodwill110,588

Accumulated Depreciation – Equipment ($30,000 + $10,000)

40,000

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Problem 5-6 (continued)Part 2 – Partial Equity Method(1)Equity in Subsidiary Income ($40,0000.85)34,000Dividends Declared ($30,000 0.85)25,500Investment in Silvas Company8,500To eliminate intercompany dividends and income(2)Beginning Retained Earnings – Silvas Company210,000Common Stock – Silvas Company90,000Difference between Implied and Book Value170,588Investment in Silvas Company400,000Noncontrolling Interest70,588(3)Depreciation Expense10,000Equipment90,000Goodwill110,588

Accumulated Depreciation – Equipment ($30,000 + $10,000)

40,000

Difference between Implied and Book Value170,588Alternative to entry (3)(3a)Equipment90,000Goodwill110,588Accumulated Depreciation – Equipment30,000Difference between Implied and Book Value170,588(3b)Depreciation Expense10,000Accumulated Depreciation – Equipment10,000Part BPart 1 – Cost MethodSilvas CompanyDifferenceConsolidatedCost$360,000$90,000$450,000Accumulated Depreciation

160,000

40,000

200,000

Undepreciated Basis

200,000

50,000

250,000

Sales Proceeds220,000220,000Gain (Loss)

$ 20,000

$50,000

$(30,000)

(1)Investment in Silvas Company ($10,0000.85)8,500Beginning Retained Earnings – Perini Company8,500To establish reciprocity/convert to equity as of 1/1/2012(2)Dividend Income ($30,000 0.85)25,500Dividends Declared-Silvas Company25,500To eliminate intercompany dividends

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Problem 5-6 (continued)(3) Beginning Retained Earnings-Silvas Co.220,000Common Stock -Silvas Company90,000Difference between Implied and Book Value170,588Investment in Silvas Company ($400,000 + $8,500)

	408,500
Noncontrolling Interest ($70,588 + ($220,000 – $210,000) x .15)	72,088
To eliminate investment account and create noncontrolling interest account

(4) Beginning Retained Earnings-Perini Company8,500Noncontrolling Interest1,500Gain on Disposal of Equipment20,000Loss on Disposal of Equipment30,000Goodwill110,588Difference between Implied and Book Value170,588To allocate and depreciate difference between Implied and book value

Note: $20,000 Dr. to Gain + $30,000 Dr. to Loss =$50,000Unamortized difference associated with equipment on date sold to

outsiders equals $60,000 – $10,000 =$50,000Part BPart 2 – Partial Equity MethodSilvas CompanyDifferenceConsolidatedCost

	$360,000		$90,000		$450,000
Accumulated Depreciation	160,000		40,000		200,000

Undepreciated Basis

200,000

50,000

250,000

Sales Proceeds220,000220,000Gain (Loss)

$20,000

$50,000

$(30,000)

(1) Equity in Subsidiary Income ($40,0000.85)34,000Investment in Silvas Company34,000To eliminate intercompany dividends and income(2) Investment in Silvas Company25,500Dividends Declared-Silvas Company ($30,0000.85)25,500To eliminate intercompany dividends(3) Beginning Retained Earnings-Silvas Co.220,000Common Stock -Silvas Company90,000Difference between Implied and Book Value170,588Investment in Silvas Company ($400,000 + $8,500)

	408,500
Noncontrolling Interest ($70,588 + ($220,000 – $210,000) x .15)	72,088
To eliminate investment account and create noncontrolling interest account

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Problem 5-6 (continued)(4) Beginning Retained Earnings-Perini Company8,500Noncontrolling Interest1,500Gain on Disposal of Equipment20,000Loss on Disposal of Equipment30,000Goodwill110,588Difference between Implied and Book Value170,588To allocate and depreciate difference between implied and book value

Note: $20,000 Dr. to Gain + $30,000 Dr. to Loss =$50,000

	Unamortized difference associated with equipment on date sold to

outsiders equals $60,000 – $10,000 =$50,000Problem 5-7Computation and Allocation of Difference ScheduleParentNon-EntireShareControllingValueSharePurchase price and implied value$900,000300,0001,200,000*Less: Book value of equity acquired506,250168,750675,000Difference between implied and book value393,750131,250525,000Equipment (net)

(135,000)

(45,000)

(180,000)

Balance258,75086,250345,000Goodwill

(258,750)

(86,250)

(345,000)

Balance-0–0–0-*$900,000/.75

Amount of Difference Between Implied and Book Value Allocated to Equipment

Fair

Book

Fair Value Minus

ValueValueBook Value3Equipment

	$990,000 ¹	$720,000		$270,000
Accumulated Depreciation		330,000	2		(240,000)	(90,000)⁴

Net

$660,000

$480,000

$180,000

¹$660,000/($480/$720) = $990,000

²$990,000 ($240/$720) = $330,000

³$180,000/($480/$720) = $270,000

⁴$270,000 ($240/$720) = $90,000

Annual Depreciation of Difference

Equipment ($180,000/10)) = $18,000

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Problem 5-7 (Continued)90,000Part AInvestment in Sanchez CompanyDividend Declared-Sanchez Co. ($120,000 0.75)90,000(1)

Equity in Subsidiary Income (($123,000

0.75) – $13,500)

78,750

Investment in Sanchez Company78,750(2)Beginning Retained Earnings-Sanchez Company375,000Common Stock-Sanchez Company300,000Difference between Implied and Book Value525,000Investment in Sanchez Company900,000Noncontrolling Interest300,000

To eliminate investment and create noncontrolling interest account

(3)Depreciation Expense18,000Equipment270,000Goodwill345,000

Accumulated Depreciation-Equipment ($90,000 + $18,000)

108,000

Difference between Implied and Book Value525,000

To allocate and depreciate the difference between implied and book value

Alternative to entry (3)(3a)Equipment270,000Goodwill345,000Accumulated Depreciation-Equipment90,000Difference between Implied and Book Value525,000(3b)Depreciation Expense18,000Accumulated Depreciation-Equipment18,000Part B (1) & (2)

Book Value

Difference

Consolidated

1Equipment$720,000$270,000 ³$990,000Accumulated Depreciation

(240,000)

(90,000)

(330,000)

Carrying Value 1/1/2011$480,000$180,000$660,0008/108/10Carrying Value 1/1/2013384,000528,000Proceeds from Sale(450,000)(450,000)(Gain) Loss on Sale$(66,000)$78,000(3) Investment in Sanchez Company36,000Gain on Disposal of Equipment – Sanchez66,000Loss on Disposal of Equipment78,000Difference between Implied and Book Value180,000

In all subsequent years, the $180,000 difference between implied and book value that was allocated to the equipment that was disposed of will be debited to the Investment in Sanchez Company in the consolidated statements workpaper for the cumulative amount of additional depreciation expense ($18,000 + $18,000 = $36,000) and for the amount of adjustment to the reported gain or loss on the disposal of equipment ($66,000 + $78,000 = $144,000) recognized in the consolidated financial statements in prior years.

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Problem 5-7 (continued)

Note: The $66,000 reduction of the gain plus the $78,000 loss equals $144,000 which is equal to the unamortized difference associated with the equipment on the date it was sold to outsiders ($180,000 – $18,000 – $18,000 = $144,000)

Problem 5-8

Part A

Computation and Allocation of Difference ScheduleParentNon-EntireShareControllingValueSharePurchase price and implied value

$3,100,000

547,059

3,647,059 *

Less: Book value of equity acquired2,295,000405,0002,700,000Difference between implied and book value805,000142,059947,059Inventory

	(42,500)	(7,500)	(50,000)
Plant and Equipment	(340,000)	(60,000)	(400,000)
Land	(425,000)	(75,000)	(500,000)

Balance (excess of FV over implied value)

(2,500)

(441)

(2,941)

Gain2,500Increase Noncontrolling interest to fair value of assets441Total allocated bargain2,941Balance-0–0–0-*$3,100,000/.85Amortization Schedule – Parent20112012Inventory$42,500$0Plant and Equipment ($400,000/10 x .85)34,00034,000Gain2,5000Total$79,000$34,000Amortization Schedule – Noncontrolling interest20112012Inventory$7,500$0Plant and Equipment ($400,000/10 x .15)6,0006,000FV adjustment4410Total$13,941$6,000

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Problem 5-8 (continued)

Part B (1) – Cost method

20112012(1)Investment in Savage ($110,000 .85)93,500

Beginning Retained Earnings – Patten

93,500

(2)Beginning Retained Earnings – Savage700,000810,000Common Stock – Savage2,000,0002,000,000Difference between Implied and Book Value947,059947,059

	Investment in Savage		3,100,000	3,193,50
	Noncontrolling Interest [$547,059 + ($110,000 x .15)]	547,059			563,559

(3)Beginning Retained Earnings – Patten ($42,500 + $34,000)76,500Noncontrolling Interest ($7,500 + $6,000)13,500Cost of Goods Sold50,000Depreciation Expense40,00040,000Plant and Equipment ($400,000 – $40,000)360,000320,000Land500,000500,000

Difference between Implied and Book Value	947,059	947,059
Gain on Acquisition (P’s share)	2,500
Beginning Retained Earnings – Patten (gain)			2,500

Noncontrolling Interest441441Alternative to entry (3)

(3a)Beginning Retained Earnings – Patten42,500Noncontrolling Interest7,500Cost of Goods Sold50,000Plant and Equipment400,000400,000Land500,000500,000

Difference between Implied and Book Value	947,059	947,059
Gain on Acquisition (P’s share)	2,500
Beginning Retained Earnings – Patten (gain)			2,500

Noncontrolling Interest441441(3b)Beginning Retained Earnings – Patten34,000Noncontrolling Interest6,000Depreciation Expense40,00040,000

	Plant and Equipment (net)		40,000			80,000
Part B (2) – Partial Equity Method

20112012(1)

	Equity in Sub. Income ($110,000)(.85), ($180,000)(.85)	93,500		153,000
	Investment in Savage		93,500			153,000

(2)Beginning Retained Earnings – Savage700,000810,000Common Stock – Savage2,000,0002,000,000Difference between Implied and Book Value947,059947,059

	Investment in Savage		3,100,000	3,193,50
	Noncontrolling Interest		547,059			563,559

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Problem 5-8 (continued)

(3)

	Beginning Retained Earnings – Patten				76,500
	Noncontrolling Interest ($7,500 + $6,000)				13,500
	Cost of Goods Sold	50,000
	Depreciation Expense	40,000			40,000
	Plant and Equipment	360,000			320,000
	Land	500,000			500,000
	Difference between Implied and Book Value		947,059	947,059
	Gain on Acquisition (P’s share)		2,500
	Beginning Retained Earnings – Patten (gain)				2,500
	Noncontrolling Interest		441		441
Alternative to entry (3)
(3a)	Beginning Retained Earnings – Patten				42,500
	Noncontrolling Interest				7,500
	Cost of Goods Sold	50,000
	Plant and Equipment	400,000			400,000
	Land	500,000			500,000
	Difference between Implied and Book Value		947,059	947,059
	Gain on Acquisition (P’s share)		2,500
	Beginning Retained Earnings – Patten (gain)				2,500
	Noncontrolling Interest		441		441
(3b)	Beginning Retained Earnings – Patten				34,000
	Noncontrolling Interest				6,000
	Depreciation Expense	40,000			40,000
	Plant and Equipment (net)		40,000	80,000
Part B (3) – Complete Equity Method

20112012(1)

	Equity in Subsidiary Income	17,160*	119,160**
	Investment in Savage	17,160		119,160
	*($110,000)(.85) – $42,500 – $33,840
	**($180,000)(.85) – $33,840
(2)	Beginning Retained Earnings – Savage	700,000				810,000
	Common Stock – Savage	2,000,000			2,000,000
	Difference between Implied and Book Value	947,059				947,059
	Investment in Savage		3,100,000	3,193,50
	Noncontrolling Interest		547,059		563,559
(3)	Investment in Savage					76,500
	Noncontrolling Interest ($7,500 + $6,000)					13,500
	Cost of Goods Sold	50,000
	Depreciation Expense	40,000				40,000
	Plant and Equipment	360,000				320,000
	Land	500,000				500,000
	Difference between Implied and Book Value		947,059		947,059

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Gain on Acquisition (P’s share)2,500Beginning Retained Earnings – Patten (gain)2,500Noncontrolling Interest441441Alternative to entry (3)(3a)Investment in Savage42,500Noncontrolling Interest7,500Cost of Goods Sold50,000

Plant and Equipment	400,000	400,000
Land	500,000	500,000
Difference between Implied and Book Value			947,059	947,059

Gain on Acquisition (P’s share)2,500Beginning Retained Earnings – Patten (gain)2,500Noncontrolling Interest441441(3b)Investment in Savage34,000Noncontrolling Interest6,000Depreciation Expense40,00040,000

Plant and Equipment (net)

40,000

80,000

Part C20112012Patten Corporation’s Income from its own operations

			$950,000	$675,000
Patten Corporation’s share of Savage Company’s Income (85%)			93,500	153,000

Less: amortization/depreciation:Inventory(42,500)

Plant and Equipment

(34,000) (34,000)

Gain2,5000Consolidated Net Income

$969,500

$794,000

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Problem 5-9Computation and Allocation of Difference Schedule

Parent

Non-

Entire

ShareControllingValueSharePurchase price and implied value

	556,000		0			556,000
Less: Book value of equity acquired	294,000		0			294,000

Difference between implied and book value

	262,000		0		262,000
Receivables	10,690		0		10,690
Inventory	(48,000)	(0)		(48,000)
Building	(44,000)	(0)		(44,000)
Accumulated Depreciation	35,200	(0)		35,200
Equipment	15,000	(0)		15,000
Accumulated Depreciation	(11,250)	(0)		(11,250)
Land	(270,000)	(0)		(270,000)
Bonds Payable *	(49,640)	(0)		(49,640)

Balance (excess of FV over implied value)	(100,000)	(0)		(100,000)

Gain100,000Increase Noncontrolling interest to fair value of assets

Total allocated bargain100,000Balance-0–0–0-

* Fair value of $300,000, 8%, Bonds
Present Value of annuity of 1, 5%,	36 periods = 16.54685	$12,000	=	$198,562
Present Value of annuity of 1, 5%,	36 periods = .17266	$300,000	=	$51,798
				$250,360

Part A (1) Beginning Retained Earnings-Sound Company	14,000
Common Stock-Sound Company	200,000
Premium on Common Stock-Sound Company	80,000
Difference Between Implied and Book Value	262,000
Investment in Sound Company	556,000
(2) Buildings	44,000
Accumulated Depreciation-Equipment	17,250^a
Land	270,000
Cost of Goods Sold	48,000
Interest Expense	1,062 ^b
Unamortized Discount on Bonds Payable	48,578 ^c
Depreciation Expense	1,600^d
Equipment	15,000
Loss on Write-down of Receivables	10,690
Accumulated Depreciation-Buildings	39,600^e
Gain on Acquisition	100,000
Difference between Implied and Book Value	262,000

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Alternative to entry (2)
(2a) Buildings	44,000
Accumulated Depreciation-Equipment	11,250
Land	270,000
Cost of Goods Sold	48,000
Unamortized Discount on Bond Payable	49,640
Equipment	15,000
Loss on Write-down of Receivables	10,690
Accumulated Depreciation-Buildings	35,200
Gain on Acquisition	100,000
Difference between Implied and Book Value	262,000
(2b) Depreciation Expense ($44,000/10)	4,400
Accumulated Depreciation – Building	4,400
Accumulated Depreciation – Equipment (15,000/2.5)	6,000
Depreciation Expense	6,000
(2c) Interest Expense	1,062
Unamortized Discount on Bonds Payable	1,062
^a$11,250 +$6,000 = $17,250
^b[($250,360 0.05) – $12,000 + ($250,878 0.05) – $12,000] = $1,062
^c$49,640 – $1,062 = $48,578
^d(15,000/2.5) – ($44,000/10) = $1,600
^e$35,200 + $4,400 = $39,600
Part B Pump Company’s net income from its independent operations	$500,000
Pump Company’s share of the reported income of Sound Company	80,000
Less allocation and depreciation of Difference between
Implied and Book Value assigned to:
Increase cost of goods sold	(48,000)
Increase interest expense	(1,062)
Decrease on asset write-down	10,690
Decrease depreciation		1,600
Consolidated Net Income – 2011	$543,228

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Problem 5-10Computation and Allocation of Difference ScheduleParentNon-EntireSandersShareControllingValue100%ShareTaylorPurchase price and implied value$1,300,000144,4441,444,444*800,000Less: Book value of equity acquired990,000110,0001,100,000700,000Difference between impliedand book value310,00034,444344,444100,000Inventory(67,500)(7,500)(75,000)0Plant and equipment000(50,000)Land(67,500)(7,500)(75,000)0Balance175,00019,444194,44450,000Goodwill(175,000)(19,444)(194,444)(50,000)Balance-0–0–0–0-*$1,300,000/.90Amortization Schedule for 2011SandersTaylorInventory$0$50,000 ($75,0002/3)Plant and Equipment ($50,000/10 yr)5,000Land0Part A Investment in Sanders800,000Cash800,000Investment in Taylor1,300,000Cash1,300,000Cash100,000Dividend Income (Sanders)100,000Cash ($200,000 .90)180,000Dividend Income (Taylor)180,000

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Problem 5-10 (continued)

Part B (1) Dividend Income			100,000
	Dividends Declared-Sanders	100,000
(2) Common Stock- Sanders			500,000
Retained Earnings-Sanders			200,000
Difference between Implied and Book Value	100,000
	Investment in Sanders			800,000
(3) Depreciation Expense			5,000
Plant and Equipment			45,000
Goodwill			50,000
	Difference between Implied and Book Value	100,000
(4) Dividend Income ($200,000	0.90)		180,000
	Dividends Declared-Taylor	180,000
(5) Common Stock – Taylor			800,000
Retained Earnings – Taylor			300,000
Difference between Implied and Book Value	344,444
	Investment in Taylor			1,300,000
	Noncontrolling Interest	144,444
(6) Inventory ($75,000 1/3)			25,000
Cost of Goods Sold			50,000
Land			75,000
Goodwill			194,444
	Difference between Implied and Book Value	344,444
Problem 5-11
Part A – Partial Equity Method Workpaper entries – Year 2010
(1) Equity in Subsidiary Income ($100,000)(.80)		80,000
Dividends Declared ($25,000	.80)		20,000
Investment in Salem Company			60,000
To eliminate intercompany dividends and equity income
(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
Noncontrolling Interest			212,500
To eliminate investment account and create noncontrolling interest account

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Problem 5-11 (continued)
(3)	Cost of Goods Sold		40,000
	Land	65,000
	Plant and Equipment	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
Part B – Partial Equity Method – Worksheet Entries – Year 2011
(1)	Equity in Subsidiary Income ($110,000)(.80)	88,000
	Dividends Declared ($35,000 .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
	Noncontrolling Interest ($212,500 + ($155,000 – $80,000) .2)	227,500
	To eliminate investment account and create noncontrolling interest account
(3)	1/1 Retained Earnings – Porter Company	32,000
	Noncontrolling 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
	Noncontrolling Interest	5,200
	Depreciation Expense ($130,000/5)	26,000
	Plant and Equipment	52,000

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Problem 5-11 (continued)

Investment in Salem Corporation (Partial Equity)

Cost of investment	850,000
2010 equity income (.8)($100,000)	80,000	2010 Dividends (.8)($25,000)	20,000
Balance 2010	910,000
2011 equity income (.8)($110,000)	88,000	2011 Dividends (.8)($35,000)	28,000

Balance 2011	970,000
2012 equity income (.8)($170,000)	136,000	2012 Dividends (.8)($60,000)	48,000

Balance 2012	1,058,000

Part C

T-account Calculation of Controlling and Noncontrolling Interest in Consolidated Income For Year Ended December 31, 2012

Non-Controlling Interest in Consolidated Income

Additional depreciation
of the difference between implied and		Net income reported by Salem Company	170,000
book value related to:
Depreciation Expense ($130,000/5)	26,000
Goodwill Impairment ($197,500 – $150,000)	47,500
		Adjusted income of Salem	96,500
		Noncontrolling Ownership percentage interest	20%

		Noncontrolling Interest in Consolidated Income	19,300
Controlling Interest in Consolidated Income
Controlling Interest in Consolidated Income
		Porter Company’s net income from its independent
		operations ($236,000 reported net income
		less $136,000 equity in subsidiary income
		included therein)	$100,000
		Porter Company’s share of the adjusted income of
		Salem Company (.8 X $96,500)	77,200

		Controlling interest in Consolidated Net Income	$177,200

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Problem 5-11 (continued)
Part D		Porter	Salem		Eliminations	Noncontrolling	Consolidated

Income StatementCompanyCompanyDebitCreditInterestBalancesSales

	$1,100,000	$450,000					$1,550,000
Equity in Subsidiary Income	136,000		(1)	136,000
Total Revenue	1,236,000	450,000					1,550,000
Cost of Goods Sold	900,000	200,000					1,100,000
Depreciation Expense	40,000	30,000	(4)	26,000			96,000
Impairment Loss			(5)	47,500			47,500
Other Expenses	60,000	50,000					110,000
Total Cost and Expense	1,000,000	280,000					1,353,500
Net/Consolidated Income	236,000	170,000					196,500
Noncontrolling Interest in Consolid. Income						19,300*	(19,300)
Net Income to Retained Earnings	$236,000	$170,000		$209,500	$0	$19,300	$177,200
Retained Earnings Statement
Retained Earnings Statement

1/1 Retained Earnings:Porter Company

$620,000

(3)

32,000

$546,400

(4)41,600Salem Company

		$230,000 (2)	230,000
Net Income from above	236,000	170,000		209,500	0	19,300	177,200
Dividends Declared:
Porter Company	(90,000)						(90,000)
Salem Company		(60,000)		(1)	48,000	(12,000)
12/31/ Retained Earnings to Balance Sheet	$766,000	$340,000		$513,100	$48,000	$7,300	$633,600

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Problem 5-11 (continued)PorterSalemEliminationsNoncontrollingConsolidatedBalance SheetCompanyCompanyDebitCreditInterestBalancesCash$70,000$65,000$135,000Accounts Receivable260,000190,000450,000Inventory240,000175,000415,000Investment in Salem Comp.1,058,000(1)88,0000(2)970,000Difference between Implied and Book Value(2)432,500(3)432,500Land320,000(3)65,000385,000Plant and Equipment360,000280,000(3)130,000(4)78,000692,000Goodwill(3)197,500(5)47,500150,000Total Assets$1,988,000$1,030,000$2,227,000Accounts Payable$132,000$110,000$242,000Notes Payable90,00030,000120,000Common stock:Porter Company1,000,0001,000,000Salem Company550,000(2)550,000Retained Earnings from above766,000340,000513,10048,0007,300633,6001/1 Noncontrolling Interest in Net(3)8,000(2)242,500 **224,100Assets(4)10,40012/31 Noncontrolling Interest inNet Assets$231,400231,400Total Liabilities and Equity$1,988,000$1,030,000$1,906,500$1,906,500$2,227,000

Noncontrolling Interest in Income =.2 $170,000 – (.2 x $26,000) – (.2 x $47,500) = $19,300

$212,500 + ($230,000 – $80,000) x .20 = $242,500

Explanations of workpaper entries are on the following page

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Problem 5-11 (continued)Computation and Allocation of Difference ScheduleParentNon-EntireShareControllingValueSharePurchase price and implied value

$850,000

212,500

1,062,500 *

Less: Book value of equity acquired504,000126,000630,000Difference between implied and book value346,00086,500432,500Equipment

	(104,000)	(26,000)	(130,000)
Land	(52,000)	(13,000)	(65,000)
Inventory	(32,000)	(8,000)	(40,000)

Balance158,00039,500197,500Goodwill

(158,000)

(39,500)

(197,500)

Balance-0–0–0-*$850,000/.80Explanations of workpaper entries:(1) Equity in Subsidiary Income136,000Dividends Declared ($60,000 .8)48,000Investment in Salem Company88,000To reverse the effect of parent company entries during the year for subsidiary

dividends and income(2) Beginning Retained Earnings – Salem Co.230,000Common Stock – Salem550,000Difference between Implied and Book Value432,500Investment in Salem Company970,000Noncontrolling Interest242,500To eliminate investment account and create noncontrolling interest account

(3) Beginning Retained Earnings – Porter Company32,000Noncontrolling Interest8,000Land65,000Plant and Equipment130,000Goodwill197,500Difference between Implied and Book Value

432,500

To allocate the difference between implied and book value(4) Beginning Retained Earnings – Porter Company (2)($20,800)

41,600

Noncontrolling Interest (2)($5,200)10,400Depreciation Expense ($130,000/5)26,000Plant and Equipment, net78,000(5) Impairment Loss ($197,500 – $150,000)47,500Goodwill47,500To record goodwill impairment

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Problem 5-11 (continued)

Part E

PORTER COMPANY AND SUBSIDIARYConsolidated Financial StatementsFor the Year Ended December 31, 2012Consolidated Income Statement

Sales	$1,550,000
Cost of Sales		1,100,000
Gross Profit		450,000

Expenses:

	Depreciation Expense	$96,000
	Impairment Loss	47,500
	Other Expenses		110,000	253,500
Consolidated Net Income				196,500
Noncontrolling Interest in Consolidated Income					19,300
Controlling Interest in Consolidated Net Income				$177,200

Consolidated Statement of Retained Earnings

	Retained Earnings – Beginning of Year					$546,400
	Add: Net Income						177,200

723,600

	Less Dividends						90,000
	Retained Earnings – End of Year					$633,600

PORTER COMPANY AND SUBSIDIARYConsolidated Statement of Financial PositionDecember 31, 2012AssetsCurrent Assets:

		Cash	$135,000
		Accounts Receivable	450,000
		Inventory	415,000

$1,000,000Noncurrent Assets:

		Plant and Equipment (net)	692,000
		Land	385,000
		Goodwill	150,000

1,227,000

Total Assets

$2,227,000

Liabilities And Stockholders’ EquityLiabilities:

Accounts Payable

$242,000

Notes Payable120,000Total Liabilities362,000Stockholders’ Equity

		Noncontrolling Interest in Net Assets	231,400
		Capital Stock	1,000,000
		Retained Earnings	633,600

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1,865,000

Total Liabilities and Stockholders’ Equity	$2,227,000

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Problem 5-11 (continued)

Part F If the subsidiary uses the LIFO assumption in pricing its inventory, a workpaper entry would be made each year debiting Inventory and crediting the Difference between Implied and Book Value, so long as there was no reduction in inventory quantities. The effect on the consolidated balances would be an additional $40,000 in inventory, with a corresponding additional $32,000 and $8,000 in beginning consolidated retained earnings and noncontrolling interest. The increase in inventory results from the additional amount assigned to the inventory account at acquisition, and will remain there because of the LIFO assumption. Beginning consolidated retained earnings and noncontrolling interest accounts are increased because under the LIFO assumption the $40,000 additional inventory has not passed through cost of goods sold.

Part G Porter Company’s retained earnings on 12/31/2012				$766,000
Less Cumulative Effect to December 31, 2012 of the Assignment and
Depreciation of the Difference between Implied and Book Value

Assigned to:201020112012Inventory$32,000$0$0Equipment20,80020,80020,800Goodwill000$52,800$20,800$20,800(94,400)Goodwill Impairment (2012)(38,000)Controlling Retained Earnings on 12/31/2012

$633,600

Problem 5-12Computation and Allocation of Difference ScheduleParentNon-EntireShareControllingValueSharePurchase price and implied value

$1,000,000

111,111

1,111,111 *

Less: Book value of equity acquired621,00069,000690,000Difference between implied and book value379,00042,111421,111Equipment ($390,000 – $300,000)

(81,000)

(9,000)

(90,000)

Less: Accumulated Depreciation ($130,000 – $100,000)27,0003,00030,000Inventory ($210,000 – $160,000)

	(45,000)	(5,000)	(50,000)
Land ($290,000 – $190,000)	(90,000)	(10,000)	(100,000)
Bond Discount ($205,556 – $150,000)	(50,000)	(5,556)	(55,556)

Balance140,00015,555155,555Goodwill

(140,000)

(15,555)

(155,555)

Balance-0–0–0-*$1,000,000/.90

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Problem 5-12 (continued)2011 Amortization ScheduleEquipment (10 year life)

	5,400	600	6,000
Inventory (sold in 2011)	45,000	5,000	50,000
Bond Discount	50,000	5,556	55,556

Total

100,400

11,156

111,556

2012 Amortization ScheduleEquipment (10 year life)

	5,400	600	6,000
Inventory (sold in 2011)	0	0	0
Bond Discount	0	0		0
Total	5,400	600	6,000

*The Goodwill may also be calculated analytically as follows:
Cost of Investment ($1,000,000/0.9)	$1,111,111
Fair value acquired		(955,556)

Goodwill		$155,555
Part A 2011
Part A 2011

	Cost of Goods Sold	50,000
	Gain on Early Extinguishment of Debt	55,556
	Land	100,000
	Equipment	90,000
	Goodwill	155,555
		Accumulated Depreciation	30,000
		Difference between Implied and Book Value	421,111
	Depreciation Expense ($60,000/10)	6,000
		Accumulated Depreciation	6,000

To allocate and depreciate the difference between implied and book value
Treatment of the Amount of the Difference Assigned to Bond Discount
Date of Acquisition
Unamortized Discount on Bonds Payable	55,556
Difference between Implied and Book Value	55,556

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Problem 5-12 (continued)
2011
	Book entry to record retirement in 2011 on Stevens books
	Bonds Payable	205,556
	Cash	150,000
	Gain on Retirement of Debt	55,556
	But from a consolidated point of view the gain should be $0:
	Bonds Payable	205,556
	Unamortized Discount on Bonds Payable	55,556
	Cash	150,000
	So entry in Consolidated Statements Workpaper for year ended December 31, 2011 is:
	Gain on Retirement of Debt	55,556
	Difference between Implied and Book Value	55,556
	Workpaper entries in years after 2011:
	Beginning Retained Earnings-Palmer		50,000
	Noncontrolling Interest	5,556
	Difference between Implied and Book Value	55,556

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Problem 5-12 (continued)

PALMER COMPANY AND SUBSIDIARY

Consolidated Statement WorkpaperPart B

For the Year Ended December 31, 2013

PalmerStevensEliminationsNoncontrollingConsolidatedCompanyCompanyDr.Cr.InterestBalancesIncome StatementSales$620,000$340,000$960,000Cost of Good Sold430,000240,000670,000Gross Margin190,000100,000290,000Depreciation Expense30,00020,000(3b)6,00056,000Other Expenses60,00035,00095,000Income from Operations100,00045,000139,000Equity in Subsidiary Income40,500(1)40,500Net/Consolidated Income140,50045,000139,000Noncontrolling Interest in Income3,900 *(3,900)*Net Income to Retained Earnings$140,500$45,00046,5003,900$135,100Statement of Retained Earnings1/1Retained EarningsPalmer Company$315,600(3a) 95,000$209,800(3b)10,800Stevens Company$210,000(2) 210,000Net Income from above140,50045,00046,5003,900135,100Dividends DeclaredPalmer Company(120,000)(120,000)Stevens Company(35,000)(1)31,500(3,500)12/31Retained Earnings to Balance Sheet$336,100$220,000362,30031,500$400$224,900

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Problem 5-12 (continued)PalmerStevensEliminationsNoncontrollingConsolidatedCompanyCompanyDr.Cr.InterestBalancesBalance SheetCash$201,200$151,000$352,200Accounts Receivable221,000173,000394,000Inventory100,40081,000181,400Investment in Stevens Company1,027,000(1)9,000(2) 1,018,000Difference between Implied & BookValue(2) 421,111(3)421,111Equipment450,000300,000(3a) 90,000840,000Accumulated Depreciation(300,000)(140,000)(3a)30,000(488,000)(3b)18,000Land360,000290,000(3a)100,000750,000Goodwill(3a)155,555155,555Total Assets2,059,600855,0002,185,155Accounts Payable$323,500$135,000$458,500Bonds Payable400,000400,000Capital Stock:Palmer Company1,000,0001,000,000Stevens Company500,000(2) 500,000Retained Earnings from above336,100220,000362,30031,500400224,9001/1 Nonconntrolling Interest in Net(3a)10,556(2)113,111101,355Assets(3b)1,20012/31 Noncontrolling Interest In NetAssets$101,755$101,755Total Liabilities and Equity$2,059,600$855,000$1,640,722$1,640,722$2,185,155*Noncontrolling Interest in Consolidated Income = 0.10$45,000 – $600 = $3,900Explanations of workpaper entries are on separate page.

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Problem 5-12 (continued)

	Explanations of workpaper entries:
(1)	Equity in Subsidiary Income			40,500
		Dividends Declared ($35,000	.90)		31,500
		Investment in Stevens Company		9,000
		To reverse effect of parent company entries during the year for subsidiary
		dividends and income
(2)	Beginning Retained Earnings-Stevens Company		210,000
		Common Stock-Stevens Company			500,000
		Difference between Implied and Book Value		421,111
		Investment in Stevens Company ($1,027,000 – $9,000)	1,018,000
		Noncontrolling Interest ($111,111 + ($210,000 – $190,000) x .10)	113,111
		To eliminate investment account and create noncontrolling interest account
(3)	Beginning Retained Earnings-Palmer Company
		[$45,000 + $50,000 + (2 $5,400)]			105,800
		Noncontrolling Interest [$5,000 + $5,556 + (2 x $600)]		11,756
		Depreciation Expense ($60,000/10)			6,000
		Plant and Equipment			90,000
		Land			100,000
		Goodwill^a			155,555
		Accumulated Depreciation [$30,000 + (3 $6,000)]		48,000
		Difference between Implied and Book Value		421,111
		To allocate and depreciate the difference between implied and book value
Alternative to entry (3)
(3a)	Beginning Retained Earnings-Palmer Company
		[$45,000 + $50,000 ]				95,000
		Noncontrolling Interest [$5,000 + $5,556]		10,556
		Equipment			90,000
		Land			100,000
		Goodwill			155,555
		Accumulated Depreciation			30,000
		Difference between Implied and Book Value		421,111
(3b)	Beginning Retained Earnings-Palmer Company		10,800
		Noncontrolling Interest ($600 x 2)			1,200
		Depreciation Expense ($60,000/10)			6,000
		Accumulated Depreciation [(3	$6,000)]		18,000
Part C Palmer Company’s net income from its own operations		$100,000
	Palmer Company’s share of Stevens Company’s income (0.90	$39,000*)		35,100
	Controlling interest in consolidated net income		$135,100

*$45,000 – ($60,000/10) = $39,000

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Problem 5-13
Part A	Equipment					61,467
	Land					40,978
	Patents					102,444
		Revaluation Capital				204,889
	Implied fair value ($800,000/0.9)			$888,889
	Book Value ($300,000 + $164,000 + $220,000)	684,000
	Amount to push down				$204,889
	Adjustment to:
	Adjustment to:
	Equipment	$204,889	0.30	=	$61,467
	Land	$204,889	0.20	=	$40,978
	Patents	$204,889	0.50	=	$102,444
Part B Worksheet entries
(1)	Common Stock – Sensor				300,000
	Other Contributed Capital – Sensor			164,000
	Retained Earnings – Sensor				220,000
	Revaluation Capital				204,889
		Investment in Sensor				800,000
		Noncontrolling Interest ($800,000/0.9 x 0.1)	88,889

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Problem 5-13 (continued)

PRESS COMPANY AND SUBSIDIARY

Consolidated Balance Sheet WorkpaperPart BJanuary 1, 2011PressSensorEliminationsNoncontrollingConsolidatedCompanyCompanyDr.Cr.InterestBalancesCash$265,000$38,000$303,000Receivables422,50076,000498,500Inventory216,500124,000340,500Investment in Sensor Company800,000(1) 800,000Buildings465,000322,000787,000Equipment229,000246,467475,467Land188,000140,978328,978Patents167,500190,444357,944Total Assets$2,753,500$1,137,889$3,091,389Liabilities:$667,000$249,000$916,000Common Stock:Press Company700,000700,000Sensor Company300,000(1) 300,000Other Contributed Capital:Press Company846,000846,000Sensor Company164,000(1) 164,000Retained Earnings:Press Company540,500540,500Sensor Company220,000(1) 220,000Revaluation Capital204,889(1) 204,889Noncontrolling Interest in Net Assets(1) 88,889$88,88988,889Total Liabilities and Equity$2,753,500$1,137,889$888,889$888,889$3,091,389

(1) To eliminate the investment account and create noncontrolling interest account.

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Problem 5-14
					Net Assets
Part A Imputed Fair Value ($820,000/0.8)	$1,025,000
	Recorded Book Value ($100,000 + $500,000)		600,000
	Unrecorded Values	$425,000
	Allocated to Identifiable Assets:
	Equipment		$125,000
	Land	62,500
	Inventory	37,500 225,000
	Goodwill			$200,000

Entry on Books of WayDown Company, January 2, 2009:

Inventory	37,500
Equipment	125,000
Land	62,500
Goodwill	200,000
	Revaluation Capital	425,000

Additional expense recorded on books of WayDown Company because of push down of values based on fair value of WayDown Company as a whole implied by the transaction

200920102011Cost of Goods Sold

	$37,500	$0		$0
Depreciation Expense ($125,000/5)		25,000		25,000	25,000
	$62,500	$25,000	$25,000

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Problem 5-14 (continued)

PUSH COMPANY AND SUBSIDIARY

Consolidated Statement WorkpaperPart B

For the Year Ended December 31, 2009

PushWayDownEliminationsNoncontrollingConsolidatedCompanyCompanyDr.Cr.InterestBalancesIncome StatementSales$1,050,000$400,000$1,450,000Dividend Income40,000(2) 40,000Total Revenue1,090,000400,0001,450,000Cost of Goods Sold Expense$850,000180,0001,030,000Depreciation Expense35,00050,00085,000Other Expenses65,00050,000115,000Total Cost & Expense950,000280,0001,230,000Net/Consolidated income140,000120,000220,000Noncontrolling Interest In Income24,000(24,000)*Net Income to Retained Earnings$140,000$120,000$40,000$24,000$196,000Statement of Retained Earnings1/1Retained EarningsPush Company$480,000(1)2,000$482,000WayDown Company$102,500(3) 102,500Net Income from above140,000120,00040,00024,000196,000Dividends DeclaredPush Company(100,000)(100,000)WayDown Company(50,000)(2)40,000(10,000)12/31Retained Earnings to Balance Sheet$520,000$172,500$142,500$42,000$14,000$578,000

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Problem 5-14 (continued)PushWayDownEliminationsNoncontrollingConsolidatedCompanyCompanyDr.Cr.InterestBalancesBalance SheetCash$ 80,000$ 35,000$115,000Accounts Receivable250,000170,000420,000Inventory230,000150,000380,000Investment in WayDown Company820,000(1)2,000(3) 822,000Land362,500362,500Plant and Equipment350,000300,000650,000Goodwill200,000200,000Total assets$1,730,000$1,217,500$2,127,500Accounts Payable$ 160,000$ 100,000$260,000Notes Payable50,00020,00070,000Revaluation Capital-WayDown Co.425,000(3) 425,000Capital Stock:Push Company1,000,0001,000,000WayDown Company500,000(3) 500,000Retained Earnings from above520,000172,500142,50042,00014,000578,0001/1 Noncontrolling Interest in Net Assets(3) 205,500205,50012/31 Noncontrolling Interest$219,500219,500Total liabilities & equity$1,730,000$1,217,500$1,069,500$1,069,500$2,127,500* Noncontrolling Interest in Income = 0.20$120,000 = $24,000

Explanations of workpaper entries are on separate page

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Problem 5-14 (continued)

Explanations of workpaper entries:
(1)	Investment in WayDown	2,000
	Beginning Retained Earnings – Push	2,000
	To establish reciprocity/convert to equity (.80 ($102,500 – $100,000)]
(2)	Dividend Income	40,000
	Dividends Declared (.80)($50,000)	40,000
	To eliminate intercompany dividends
(3)	1/1 Retained Earnings – WayDown	102,500
	Capital Stock – WayDown	500,000
	Revaluation Capital	425,000
	Investment in WayDown Company ($820,000 + $2,000)	822,000
	Noncontrolling Interest [($820,000/0.8 x 0.2) + ($102,500 – $100,000) x .2)]	205,500
	To eliminate investment account and create noncontrolling interest account

Part C (1) Consolidated net incomes are the same

Consolidated retained earnings are the same

& (4) Consolidated net assets and noncontrolling interest in consolidated net assets are the same

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Problem 5-15Computation and Allocation of Difference Schedule

			Parent			Non-	Entire
				Share	Controlling	Value

SharePurchase price and implied value

$850,000

212,500

1,062,500 *

Less: Book value of equity acquired504,000126,000630,000Difference between implied and book value346,00086,500432,500Equipment

	(104,000)	(26,000)	(130,000)
Land	(52,000)	(13,000)	(65,000)
Inventory	(32,000)	(8,000)	(40,000)

Balance158,00039,500197,500Goodwill

(158,000)

(39,500)

(197,500)

Balance-0–0–0-*$850,000/.80Complete Equity Method Workpaper entries – Year 2010(1) Equity in Subsidiary Income (($100,000)(.80) – $32,000 – $20,800)

27,200

Dividends Declared ($25,000 .80)20,000Investment in Salem Company7,200To eliminate intercompany dividends(2) Beginning Retained Earnings – Salem Co.80,000Common Stock – Salem550,000Difference between Implied and Book Value432,500Investment in Salem Company850,000Noncontrolling Interest212,500To eliminate investment account and create noncontrolling interest account

(3) Cost of Goods Sold40,000Land65,000Plant and Equipment (5 year life)130,000Goodwill197,500Difference between Implied and Book Value

432,500

To allocate the difference between implied and book value(4) Depreciation Expense ($130,000/5)26,000Plant and Equipment26,000

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Problem 5-15 (continued)

Complete Equity Method – Worksheet Entries – Year 2011

(1)	Equity in Subsidiary Income ($110,000)(.80) – $20,800	67,200
	Dividends Declared ($35,000 .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
	Noncontrolling Interest ($212,500 + ($155,000 – $80,000) .2)	227,500
	To eliminate investment account and create noncontrolling interest account
(3)	Investment in Salem Company	32,000
	Noncontrolling 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
	Noncontrolling Interest	5,200
	Depreciation Expense ($130,000/5)	26,000
	Plant and Equipment	52,000

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Problem 5-15 (continued)

Part C

T-account Calculation of Controlling and Noncontrolling Interest in Consolidated Income For Year Ended December 31, 2012

Noncontrolling Interest in Consolidated Income

Additional depreciation
of the difference between implied and		Net income reported by Salem Company	170,000
book value related to:
Depreciation Expense ($130,000/5)	26,000
Goodwill Impairment ($197,500 – $150,000)	47,500
		Adjusted income of Salem	96,500
		Noncontrolling Ownership percentage interest	20%

		Noncontrolling Interest in Consolidated Income	19,300
Controlling Interest in Consolidated Income
Controlling Interest in Consolidated Income
		Porter Company’s net income from its independent
		operations ($177,200 reported net income
		less $77,200 equity in subsidiary income
		included therein)	$100,000
		Porter Company’s share of the adjusted income of
		Salem Company (.8 X $96,500)	77,200


		Controlling interest in Consolidated Net Income	$177,200

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Problem 5-15 (continued)
Part D		Porter	Salem		Eliminations	Noncontrolling	Consolidated

Income StatementCompanyCompanyDebitCreditInterestBalancesSales

	$1,100,000	$450,000					$1,550,000
Equity in Subsidiary Income	77,200		(1)	77,200
Total Revenue	1,177,200	450,000					1,550,000
Cost of Goods Sold	900,000	200,000					1,100,000
Depreciation Expense	40,000	30,000	(4)	26,000			96,000
Impairment Loss			(5)	47,500			47,500
Other Expenses	60,000	50,000					110,000
Total Cost and Expense	1,000,000	280,000					1,353,500
Net/Consolidated Income	177,200	170,000					196,500
Noncontrolling Interest in Consolid. Income						19,300*	(19,300)
Net Income to Retained Earnings	$177,200	$170,000		$150,700	$0	$19,300	$177,200

Retained Earnings Statement1/1 Retained Earnings:


Porter Company	$546,400						$546,400
Salem Company		$230,000 (2)	230,000
Net Income from Above	177,200	170,000		150,700	0	19,300	177,200
Dividends Declared:
Porter Company	(90,000)						(90,000)
Salem Company		(60,000)		(1)	48,000	(12,000)
12/31/ Retained Earnings to Balance Sheet	$633,600	$340,000		$380,700	$48,000	$7,300	$633,600

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Problem 5-15 (continued)PorterSalemEliminationsNoncontrolling ConsolidatedBalance SheetCompanyCompanyDebitCreditInterestBalancesCash$70,000$65,000$135,000Accounts Receivable260,000190,000450,000Inventory240,000175,000415,000Investment in Salem Comp.925,600(3)32,000(1)29,200(4)41,600(2)970,000Difference between Implied and Book Value(2)432,500(3)432,500Land320,000(3)65,000385,000Plant and Equipment360,000280,000(3)130,000(4)78,000692,000Goodwill(3)197,500(5)47,500150,000Total Assets$1,855,600$1,030,000$2,227,000Accounts Payable$132,000$110,000$242,000Notes Payable90,00030,000120,000Common stock:Porter Company1,000,0001,000,000Salem Company550,000(2)550,000Retained earnings from above633,600340,000380,70048,0007,300633,6001/1 Noncontrolling Interest in Net(3)8,000(2)242,500**224,100Assets(4)10,40012/31 Noncontrolling Interest inNet Assets$231,400231,400Total Liabilities and Equity$1,855,600$1,030,000$1,847,700$1,847,700$2,227,000

Noncontrolling Interest in Income =.2 $170,000 – (.2 x $26,000) – (.2 x $47,500) = $19,300

$212,500 + ($230,000 – $80,000) x .20 = $242,500

Explanations of workpaper entries are on the following page

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Problem 5-15 (continued)Computation and Allocation of Difference ScheduleParentNon-EntireShareControllingValueSharePurchase price and implied value

$850,000

212,500

1,062,500 *

Less: Book value of equity acquired504,000126,000630,000Difference between implied and book value346,00086,500432,500Equipment

	(104,000)	(26,000)	(130,000)
Land	(52,000)	(13,000)	(65,000)
Inventory	(32,000)	(8,000)	(40,000)

Balance158,00039,500197,500Goodwill

(158,000)

(39,500)

(197,500)

Balance-0–0–0-*$850,000/.80Explanations of workpaper entries:(1) Equity in Subsidiary Income77,200Dividends Declared ($60,000 .8)48,000Investment in Salem Company29,200To reverse the effect of parent company entries during the year for subsidiary

(3) Investment in Salem Company32,000Noncontrolling Interest8,000Land65,000Plant and Equipment130,000Goodwill197,500Difference between Implied and Book Value

432,500

To allocate the difference between implied and book value(4) Investment in Salem Company (2)($20,800)41,600Noncontrolling Interest (2)($5,200)10,400Depreciation Expense ($130,000/5)26,000Plant and Equipment, net78,000(5) Impairment Loss ($197,500 – $150,000)47,500Goodwill47,500To record goodwill impairment

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Problem 5-15 – Part E

PORTER COMPANY AND SUBSIDIARYConsolidated Financial StatementsFor the Year Ended December 31, 2012Consolidated Income Statement

Sales	$1,550,000
Cost of Goods Sold		1,100,000
Gross Profit		450,000

Expenses:

	Depreciation Expense	$96,000
	Impairment Loss	47,500
	Other Expenses		110,000	253,500
Consolidated Income				196,500
Noncontrolling Interest in Consolidated Income					19,300
Net Income				$177,200

Consolidated Statement of Retained Earnings

	Retained Earnings – Beginning of Year					$546,400
	Add: Net Income						177,200

723,600

	Less Dividends						90,000
	Retained Earnings – End of Year					$633,600

PORTER COMPANY AND SUBSIDIARYConsolidated Statement of Financial PositionDecember 31, 2012AssetsCurrent Assets:

		Cash	$135,000
		Accounts Receivable	450,000
		Inventory	415,000

$1,000,000Noncurrent Assets:

		Plant and Equipment (net)	692,000
		Land	385,000
		Goodwill	150,000

1,227,000

Total Assets

$2,227,000

Liabilities And Stockholders’ EquityLiabilities:

Accounts Payable

$242,000

Notes Payable120,000Total Liabilities362,000Stockholders’ Equity

		Noncontrolling Interest in Net Assets	231,400
		Capital Stock	1,000,000
		Retained Earnings	633,600

1,865,0005 – 88 HYPERLINK “http://downloadslide.blogspot.com”

Total Liabilities and Stockholders’ Equity	$2,227,000

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Problem 5-15 (continued)

Part F If the subsidiary uses the LIFO assumption in pricing its inventory, a workpaper entry would be made each year debiting Inventory and crediting the Difference between Implied and Book Value, so long as there was no reduction in inventory quantities. The effect on the consolidated balances would be an additional $40,000 in inventory, with a corresponding additional $32,000 and $8,000 in the investment account and noncontrolling interest. The increase in inventory results from the additional amount assigned to the inventory account at acquisition, and will remain there because of the LIFO assumption. The investment account and noncontrolling interest account are increased because under the LIFO assumption the $40,000 additional inventory has not passed through cost of goods sold.

Part G Porter Company’s retained earnings on 12/31/2012

$766,000

Less Cumulative Effect to December 31, 2012 of the Assignment

and Depreciation of the Difference between Implied and Book Value

Assigned to:201020112012Inventory$32,000$0$0Equipment20,80020,80020,800$52,800$20,800$20,800(94,400)Goodwill Impairment (2012)(38,000)Controlling Retained Earnings on 12/31/2012

$633,600

Problem 5-16Computation and Allocation of Difference ScheduleParentNon-EntireShareControllingValueSharePurchase price and implied value

$1,000,000

111,111

1,111,111

Less: Book value of equity acquired621,00069,000690,000Difference between implied and book value379,00042,111421,111Equipment ($390,000 – $300,000)

(81,000)

(9,000)

(90,000)

Less:Accumulated Depreciation ($130,000 – $100,000)27,0003,00030,000Inventory ($210,000 – $160,000)

	(45,000)	(5,000)	(50,000)
Land ($290,000 – $190,000)	(90,000)	(10,000)	(100,000)
Bond Discount ($205,556 – $150,000)	(50,000)	(5,556)	(55,556)

Balance140,00015,555155,555Goodwill

(140,000)

(15,555)

(155,555)

Balance-0–0–0-*$1,000,000/.902011 Amortization ScheduleEquipment (10 year life)5,4006006,000Inventory (sold in 2011)45,0005,00050,000Bond Discount50,0005,55655,556Total100,40011,156111,556

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Problem 5-16 (continued)

	2012 Amortization Schedule
Equipment (10 year life)	5,400	600	6,000
Inventory (sold in 2011)	0	0	0
Bond Discount	0	0		0
Total	5,400	600	6,000

*The Goodwill may also be calculated analytically as follows:
Cost of Investment ($1,000,000/0.9)	$1,111,111
Fair value acquired		(955,556)

Goodwill

		$155,555
Part A 2011
Part A 2011

	Cost of Goods Sold	50,000
	Gain on Early Extinguishment of Debt	55,556
	Land	100,000
	Equipment	90,000
	Goodwill	155,555
		Accumulated Depreciation	30,000
		Difference between Implied and Book Value	421,111
	Depreciation Expense ($60,000/10)	6,000
		Accumulated Depreciation	6,000
	To allocate and depreciate the difference between implied and book value
	Treatment of the Amount of the Difference Assigned to Bond Discount
	Date of Acquisition
	Discount on Bonds Payable	55,556
		Difference between Implied and Book Value	55,556

2011

Book entry to record retirement in 2011 on Stevens books
Bonds Payable	205,556
	Cash	150,000
	Gain on Retirement of Debt	55,556
But from consolidated point of view the gain should be $0:
Bonds Payable	205,556
	Discount on Bonds Payable	55,556
	Cash	150,000

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Problem 5-16 (continued)

So entry in Consolidated Statements Workpaper for year ended December 31, 2011 is:

Gain on Retirement of Debt	55,556
Difference between Implied and Book Value	55,556
Workpaper entries in years after 2011:
Beginning Retained Earnings-Palmer		50,000
Noncontrolling Interest	5,556
Difference between Implied and Book Value	55,556

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Problem 5-16 (continued)

PALMER COMPANY AND SUBSIDIARY

Consolidated Statement WorkpaperPart B

For the Year Ended December 31, 2013

PalmerStevensEliminationsNoncontrollingConsolidatedCompanyCompanyDr.Cr.InterestBalanceIncome StatementSales$620,000$340,000$960,000Cost of Good Sold430,000240,000670,000Gross Margin190,000100,000290,000Depreciation Expense30,00020,000(3b)6,00056,000Other Expenses60,00035,00095,000Income from Operations100,00045,000139,000Equity in Subsidiary Income35,100(1)35,100Net/Consolidated Income135,10045,000139,000Noncontrolling Interest in Income3,900(3,900)*Net Income to Retained Earnings$135,100$45,00041,1003,900$135,100Statement of Retained Earnings1/1Retained EarningsPalmer Company$209,800$209,800Stevens Company$210,000(2) 210,000Net Income from above135,10045,00041,1003,900135,100Dividends DeclaredPalmer Company(120,000)(120,000)Stevens Company(35,000)(1)31,500(3,500)12/31Retained Earnings to Balance Sheet$224,900$220,000251,10031,500$400$224,900

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Problem 5-16 (continued)PalmerStevensEliminationsNoncontrollingConsolidatedCompanyCompanyDr.Cr.InterestBalanceBalance SheetCash$201,200$151,000$352,200Accounts Receivable221,000173,000394,000Inventory100,40081,000181,400Investment in Stevens Company915,800(3a) 95,000(1)3,600(3b) 10,800(2) 1,018,000Difference between Implied & Book Value(2) 421,111(3a) 421,111Equipment450,000300,000(3a) 90,000840,000Accumulated Depreciation(300,000)(140,000)(3a)30,000(488,000)(3b)18,000Land360,000290,000(3a)100,000750,000Goodwill(3a)155,555155,555Total Assets1,948,400855,0002,185,155Accounts Payable$323,500$135,000$458,500Bonds Payable400,000400,000Capital Stock:Palmer Company1,000,0001,000,000Stevens Company500,000(2) 500,000Retained Earnings from above224,900220,000251,10031,500400224,9001/1 Nonconntrolling Interest in Net(3a)10,556(2)113,111101,355Assets(3b)1,20012/31 Noncontrolling Interest In Net Assets$101,755$101,755Total Liabilities and Equity$1,948,400$855,000$1,635,322$1,635,322$2,185,155*Noncontrolling Interest in Consolidated Income = 0.10$45,000 – $600 = $3,900Explanations of workpaper entries are on separate page.

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Problem 5-16 (continued)

	Explanations of workpaper entries:
	(1) Equity in Subsidiary Income			35,100
	Investment in Stevens Company			3,600
	Dividends Declared ($35,000 .90)		31,500
	To reverse effect of parent company entries during the year for
	subsidiary dividends and income
	(2) Beginning Retained Earnings-Stevens Company.		210,000
	Common Stock-Stevens Company			500,000
	Difference between Implied and Book Value		421,111
	Investment in Stevens Company *		1,018,000
	Noncontrolling Interest ($111,111 + ($210,000 – $190,000) x .10)	113,111
	To eliminate investment account and create noncontrolling interest account
* $1,000,000 + [$210,000 – $190,000)	.90)]
	(3) Investment in Stevens Company
[$45,000 + $50,000 + (2 $5,400)]			105,800
	Noncontrolling Interest [$5,000 + $5,556 + (2 x $600)]		11,756
	Depreciation Expense ($60,000/10)			6,000
	Plant and Equipment			90,000
	Land			100,000
	Goodwill			155,555
	Accumulated Depreciation [$30,000 + (3 $6,000)]		48,000
	Difference between Implied and Book Value		421,111
	To allocate and depreciate the difference between implied and book value
Alternative to entry (3)
	(3a) Investment in Stevens Company
[$45,000 + $50,000]				95,000
	Noncontrolling Interest [$5,000 + $5,556]		10,556
	Equipment			90,000
	Land			100,000
	Goodwill			155,555
	Accumulated Depreciation			30,000
	Difference between Implied and Book Value		421,111
	(3b) Investment in Stevens Company			10,800
	Noncontrolling Interest ($600 x 2)			1,200
	Depreciation Expense ($60,000/10)			6,000
	Accumulated Depreciation [(3	$6,000)]		18,000
Part C Palmer Company’s net income from its own operations		$100,000
	Palmer Company’s share of Stevens Company’s income (0.90	$39,000)		35,100
	Controlling interest in consolidated Net Income		$135,100

*$45,000 – ($60,000/10) = $39,000

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Problem 5-17Part AYearlyAmortization(1) Price with a P/E ratio of 10: (10)($15,000)$150,000Book Value of Equity Acquired($100,000 – $17,000 – $18,000)65,000Excess of cost over book value85,000Allocated to:In-process R&D$30,000Assets to fair value ($105,000 – $65,000)40,000$4,00070,000Goodwill$15,0000Yearly amortization$4,000Decrease in incomeYear 1Year 2-10Year 11-20In-process R&D$30,000Depreciation expense4,000$4,000Amortization expense000

Total decrease

$34,000

$4,000

YearlyAmortization(2) Price with a P/E ratio of 12: (12)($15,000)$180,000Book value of equity acquired($100,000 – $17,000 – $18,000)65,000Excess of cost over book value115,000Allocated to:In-process R&D$30,000Assets to fair value ($105,000 – $65,000)40,000$ 4,00070,000Goodwill$45,0000Yearly amortization$4,000Decrease in incomeYear 1Years 2-10Years 11-20In-process R&D$30,000Depreciation expense4,0004,000Amortization expense000

Total decrease

$34,000

$4,000

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Problem 5-17 (continued)Part B(1)

Decrease in income		Years 1-10	Years 11-20
In-process R&D ($30,000/20)	$1,500	$1,500
Depreciation expense	4,000
Amortization expense		0	0
Total decrease	$5,500	$1,500

(2)

Decrease in income		Years 1-10	Years 11-20
In-process R&D	$1,500	$1,500
Depreciation expense	4,000
Amortization expense	____	_____
Total decrease	$5,500	$1,500

Under all scenarios, the future profitability of the acquisition is decreased. If the in-process R&D is amortized over 20 years, the future profits are decreased even more. Many managers hope that one-time charges to income are ignored by the market. In general, a profitable acquisition is one that generates a return greater than the cost of capital.

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Problem 5-18

Part A	Investment in Shah Company ($28	714,000
	Common Stock ($2 25,500)			51,000
	Other Contributed Capital ($26 25,500)			663,000
Part B	Dividend Income (.85	$90,000)	76,500
	Dividends Declared – Shah Company			76,500
	Common Stock – S		120,000
	Other Contributed Capital – S	164,000
	1/1 Retained Earnings – S	267,000
	Difference between Implied and Book Value	289,000	*
	Investment in Shah Company			714,000
	Noncontrolling Interest ($714,000/.85 x .15)			126,000
	*$714,000/.85 – ($120,000 + $164,000 + $267,000)
	Inventory		28,000
	Land		33,500
	Plant Assets		100,000
	Patents		105,000
	Deferred Tax Asset ($60,000 x .35)	21,000
	Goodwill*		154,775	*
	Premium on Bonds Payable			60,000
	Deferred Tax Liability ($266,500 x .35)			93,275
	Difference between Implied and Book Value			289,000
	* $289,000 – [($28,000 + $33,500 + $100,000 + $105,000 – $60,000)	]

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Problem 5-18 (continued)

Cost of Goods Sold		28,000
Depreciation Expense ($100,000/10)	10,000
Amortization Expense – Patents ($105,000/8)	13,125
Premium on Bonds Payable ($60,000/10)	6,000
Inventory			28,000
Plant Assets			10,000
Patents			13,125
Interest Expense			6,000
Deferred Tax Liability*		17,894
Deferred Tax Asset (35% $6,000)		2,100
Income Tax Expense		15,794
*(35% ($28,000 + $10,000 + $13,125))
Part C Dividend Income (.85	$100,000)	85,000
Dividends Declared – Shah		85,000
Investment in Shah Company	107,100
1/1 Retained Earnings – Pruitt Company		107,100
(85% $393,000* – $267,000))
* $267,000 + $216,000 – $90,000 = $393,000
Common Stock – Shah		120,000
Other Contributed Capital – Shah	164,000
1 / 1 Retained Earnings – Shah ($267,000 + $216,000 – $90,000) 393,000
Difference between Implied and Book Value	289,000
Investment in Shah Company ($714,000 + $107,100)		821,100
Noncontrolling Interest [$126,000 + ($216,000 – $90,000) x .15]	144,900

Note: The next two entries may be combined into one or separated into various components. The two approaches presented are only two of various ways to split the effects:

Alternative One:
1/1 Retained Earnings – Pruitt Company*	24,931
Noncontrolling Interest**	4,400
Land	33,500
Depreciation Expense	10,000
Plant Assets ($100,000 – ($10,000 2))	80,000
Amortization Expense – Patents	13,125
Patents ($105,000 – ($13,125 2))	78,750
Goodwill*	154,775
Deferred Tax Asset ($21,000 – $2,100)	18,900
Interest Expense	6,000
Premium on Bonds Payable ($60,000 – ($6,000 2))	48,000
Deferred Tax Liability ($93,275 – $17,894)	75,381
Difference between Implied and Book Value	289,000
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Problem 5-18 (concluded)
* ($28,000 + $10,000 + $13,125 – $6,000 – $15,794) x .85
** ($28,000 + $10,000 + $13,125 – $6,000 – $15,794) x .15
Deferred Tax Liability (35%	($10,000 + $13,125))	8,094
Deferred Tax Asset (35%	$6,000)	2,100
Income Tax Expense			5,994
Alternative Two:
1/1 Retained Earnings – Pruitt Company*	23,800
Noncontrolling Interest			4,200
Land			33,500
Plant Assets			100,000
Patents			105,000
Goodwill			154,775
Deferred Tax Asset			21,000
Premium on Bonds Payable		60,000
Deferred Tax Liability			93,275
Difference between Implied and Book Value	289,000
* Inventory sold in prior year and reflected in cost of goods sold and hence retained earnings
Depreciation Expense			10,000
1/1 Retained Earnings – Pruitt			8,500
Noncontrolling Interest			1,500
Plant Assets (net)			20,000
Amortization Expense – Patent		13,125
1/1 Retained Earnings – Pruitt			11,156
Noncontrolling Interest			1,969
Patents			26,250
Premium on Bonds Payable			12,000
Interest Expense			6,000
1/1 Retained Earnings – Pruitt	5,100
Noncontrolling Interest			900
Deferred Tax Liability [35%	($10,000 + $13,125)] + $17,894	25,988
Deferred Tax Asset (35%	$6,000) + $2,100	4,200
Income Tax Expense (($10,000 + $13,125 – $6,000)	5,994
1/1 Retained Earnings – Pruitt ($15,794 x .85)	13,425
Noncontrolling Interest ($15,794 x .15)	2,369

5 – 100

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