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# Company

850,000</p><p>Land
-0320,000</p><p>Plant and equipment
360,000
280,000</p><p> Total
assets
\$ 1,780,000
\$1,030,000</p><p> </p><p>Accounts payable
\$ 132,000
\$ 110,000
</p><p>Notes
payable
90,000
30,000</p><p>Capital stock
1,000,000
550,000</p><p>Retained earnings
558,000
340,000</p><p> Total liabilities and equity
\$1,780,000
\$1,030,000</p><p>d.
Prepare a consolidated financial statements work paper for the year ended December 31, 2012. Although no
goodwill impairment was reflected at the end of 2010 or 2011, the goodwill impairment test conducted at December 31, 2012 revealed
implied goodwill from Salem to be only \$150,000. The impairment has not been recorded in the books of the parent. (Hint: You can infer the
method being used by the parent from the information in its trial balance.)</p><p>e.
Prepare a consolidated statement of financial
position and a consolidated income statement for the year ended December 31, 2012. Describe the effect on the consolidated balance if
Salem Company uses the LIFO cost flow assumption in pricing its inventory and there has been no decrease in ending inventories since
2010. Prepare an analytical calculation of consolidated retained earnings for the year ended December 31, 2012
Problem 5-6 Work paper Entries for Two Years and Sale Equipment in Year Two LO6 On January 1, 2011, Perini Company purchased an
85% interest in Silvas Company for \$400,000. On this date, Silvas Company had common stock of \$90,000 and retained earnings of
\$210,000. An examination of Silvas Company's assets and liabilities revealed that there book value was equal to their fair value except for
the equipment.</p><p>
Book Value
Fair Value</p><p>Equipment
\$360,000
</p><p>Accumulated depreciation
<u>(120,000)</u></p><p>
\$240,000
\$340,000</p><p> </p><p>The
equipment had an expected remaining life of six years and no salvage value. Straightline depreciation is used.</p><p>During 2011 and
2012, Perini Company reported net income from its own operations of \$80,000 ND Paid dividends of \$50,000 in each year. Silvas Company
had income of \$40,000 each year and paid dividends of \$30,000 on each December 31.</p><p>Accumulated depreciation is presented on a
separate row in the workpaper and in the consolidated financial statements.</p><p> Prepare eliminating entries for consolidated financial
statements workpaper for the year ended December 31, 2011, assuming:</p><p>1.
The cost method is used to account for the
investment.</p><p>2.
The partial equity method is used to account for the investment.</p><p>b.
On January 1, 2012, Silvas
Company sold all its equipment for \$220,000. Prepare the eliminating entries for the consolidated financial statements workpaper for the
year ended December 31, 2012, assuming:</p><p>1.
The cost method is used to account for the investment.</p><p>2.
The partial
equity method is used to account for the investment

P5-4)

Part A
Computation and Allocation of Difference Schedule
Parent
Share
Purchase price and implied value
Less: Book value of equity acquired
Difference between implied and book value
Equipment
Land
Inventory
Balance
Goodwill
Balance

\$850,000
504,000
346,000
(104,000)
(52,000)
(32,000)
158,000
(158,000)
-0-

NonControlling
Share
212,500
126,000
86,500
(26,000)
(13,000)
(8,000)
39,500
(39,500)
-0-

Entire
Value
1,062,500 *
630,000
432,500
(130,000)
(65,000)
(40,000)
197,500
(197,500)
-0-

*\$850,000/.80

## Part B and C Worksheet Entries

Cost Method Workpaper entries Year 2010
(1) Dividend Income (\$25,000.80)
Dividends Declared
To eliminate intercompany dividends

20,000
20,000

## (2) Beginning Retained Earnings - Salem Co.

Common Stock - Salem
Difference between Implied and Book Value
Investment in Salem Company
Noncontrolling Interest
To eliminate investment account and create noncontrolling interest account

80,000
550,000
432,500

## (3) Cost of Goods Sold

Land
Plant and Equipment (5 year life)

40,000
65,000
130,000

850,000
212,500

Goodwill
Difference between Implied and Book Value
To allocate the difference between implied and book value
(4) Depreciation Expense (\$130,000/5)
Plant and Equipment
Cost Method Worksheet Entries Year 2011

197,500
432,500
26,000
26,000

## (1) Investment in Salem Company (.80(\$100,000 - \$25,000))

Beginning Retained Earnings - Porter Co.
To establish reciprocity/convert to equity as of 1/1/2011

60,000

## (2) Dividend Income (\$35,000.80)

Dividends Declared
To eliminate intercompany dividends

28,000

60,000

28,000

## (3) Beginning Retained Earnings - Salem Co.(\$80,000 + \$100,000 \$25,000)

Common Stock - Salem
Difference between Implied and Book Value
Investment in Salem Company (\$850,000 + \$60,000)
Noncontrolling Interest (\$212,500 + (\$155,000 \$80,000).2)
To eliminate investment account and create noncontrolling interest account

155,000
550,000
432,500

## (4) 1/1 Retained Earnings Porter Company

Noncontrolling Interest
Land
Plant and Equipment (5 year life)
Goodwill
Difference between Implied and Book Value
To allocate the difference between implied and book value

32,000
8,000
65,000
130,000
197,500

## (5) 1/1 Retained Earnings Porter Company (previous years amount)

Noncontrolling Interest
Depreciation Expense (\$130,000/5)

910,000
227,500

432,500
20,800
5,200
26,000

## Plant and Equipment

Partial Equity Method Workpaper entries Year 2010
(1) Equity in Subsidiary Income (\$100,000)(.80)
Dividends Declared (\$25,000.80)
Investment in Salem Company
To eliminate intercompany dividends

52,000
80,000
20,000
60,000

## (2) Beginning Retained Earnings - Salem Co.

Common Stock - Salem
Difference between Implied and Book Value
Investment in Salem Company
Noncontrolling Interest
To eliminate investment account and create noncontrolling interest account

80,000
550,000
432,500

## (3) Cost of Goods Sold

Land
Plant and Equipment (5 year life)
Goodwill
Difference between Implied and Book Value
To allocate the difference between implied and book value

40,000
65,000
130,000
197,500

## (4) Depreciation Expense (\$130,000/5)

Plant and Equipment

850,000
212,500

432,500
26,000
26,000

## Partial Equity Method Worksheet Entries Year 2011

(1) Equity in Subsidiary Income (\$110,000)(.80)
Dividends Declared (\$35,000.80)
Investment in Salem Company
To eliminate intercompany dividends and income
(2) Beginning Retained Earnings - Salem Co.

88,000
28,000
60,000
155,000

## Common Stock - Salem

Difference between Implied and Book Value
Investment in Salem Company (\$850,000 + \$80,000 \$20,000)
Noncontrolling Interest (\$212,500 + (\$155,000 \$80,000).2)
To eliminate investment account and create noncontrolling interest account
(3) 1/1 Retained Earnings Porter Company
Noncontrolling Interest
Land
Plant and Equipment (5 year life)
Goodwill
Difference between Implied and Book Value
To allocate the difference between implied and book value
(4) 1/1 Retained Earnings Porter Company (previous years amount)
Noncontrolling Interest
Depreciation Expense (\$130,000/5)
Plant and Equipment
Complete Equity Method Workpaper entries Year 2010
(1) Equity in Subsidiary Income (\$100,000)(.80) \$32,000 \$20,800
Dividends Declared (\$25,000.80)
Investment in Salem Company
To eliminate intercompany dividends
(2) Beginning Retained Earnings - Salem Co.
Common Stock - Salem
Difference between Implied and Book Value
Investment in Salem Company
Noncontrolling Interest
To eliminate investment account and create noncontrolling interest account
(3) Cost of Goods Sold
Land

550,000
432,500
910,000
227,500
32,000
8,000
65,000
130,000
197,500
432,500
20,800
5,200
26,000
52,000

27,200
20,000
7,200
80,000
550,000
432,500
850,000
212,500
40,000
65,000

## Plant and Equipment (5 year life)

Goodwill
Difference between Implied and Book Value
To allocate the difference between implied and book value
(4) Depreciation Expense (\$130,000/5)
Plant and Equipment

130,000
197,500
432,500

26,000
26,000

## Complete Equity Method Worksheet Entries Year 2011

(1) Equity in Subsidiary Income (\$110,000)(.80) - \$20,800
Dividends Declared (\$35,000.80)
Investment in Salem Company
To eliminate intercompany dividends and income

67,200
28,000
39,200

## (2) Beginning Retained Earnings - Salem Co. (\$80,000 + \$75,000)

Common Stock - Salem
Difference between Implied and Book Value
Investment in Salem Company (\$850,000 + \$80,000 \$20,000)
Noncontrolling Interest (\$212,500 + (\$155,000 \$80,000).2)
To eliminate investment account and create noncontrolling interest account

155,000
550,000
432,500

## (3) Investment in Salem Company

Noncontrolling Interest
Land
Plant and Equipment (5 year life)
Goodwill
Difference between Implied and Book Value
To allocate the difference between implied and book value

32,000
8,000
65,000
130,000
197,500

## (4) Investment in Salem Company

Noncontrolling Interest
Depreciation Expense (\$130,000/5)

910,000
227,500

432,500
20,800
5,200
26,000

## Plant and Equipment

52,000

Part D

Porter
Company

Income Statement
Sales
Dividend Income
Total Revenue
Cost of Goods Sold
Depreciation Expense
Impairment loss
Other Expenses
Total Cost and Expense
Net/Consolidated Income

Salem
Company

\$1,100,000 \$450,000
48,000
(2)
1,148,000 450,000
900,000 200,000
40,000
30,000 (4b)
(5)
60,000
50,000
1,000,000 280,000
148,000 170,000

## Noncontrolling Interest in Consolid. Income*

Net Income to Retained Earnings

\$148,000 \$170,000

## Retained Earnings Statement

1/1 Retained Earnings:
Porter Company

\$500,000

Salem Company
Net Income from Above
Dividends Declared:
Porter Company
Salem Company
12/31 Retained Earnings to Balance Sheet

Balance Sheet
Cash
Accounts Receivable

Eliminations
Debit
Credit

148,000

Noncontrolling Consolidated
Interest
Balances
\$1,550,000

48,000
1,550,000
1,100,000
96,000
47,500
110,000
1,353,500
196,500

26,000
47,500

19,300
\$19,300

\$121,500

(4a)
(4b)

32,000
41,600

(1) \$120,000

## 230,000 (3) 230,000

170,000
121,500

\$546,400

19,300

(90,000)
(60,000)
\$558,000 \$340,000
Porter
Salem
Company Company
\$70,000
\$65,000
260,000
190,000

(19,300)
\$177,200

177,200
(90,000)

(2)
\$425,100

48,000
\$168,000

Eliminations
Debit
Credit

(12,000)
\$7,300

\$633,600

Noncontrolling Consolidated
Interest
Balances
\$135,000
\$450,000

Inventory
240,000
175,000
Investment in Salem Company
850,000
(1)
Difference between Implied and Book Value
(3)
Land
320,000 (4a)
Plant and Equipment
360,000
280,000 (4a)
Goodwill
(4a)
Total Assets
\$1,780,000 \$1,030,000

\$415,000
120,000 (3)
432,500 (4a)
65,000
130,000 (4b)
197,500 (5)

970,000
432,500
385,000
692,000
150,000
\$2,227,000

78,000
47,500

Accounts Payable
\$132,000 \$110,000
Notes Payable
90,000
30,000
Common Stock:
Porter Company
1,000,000
Salem Company
550,000 (3) 550,000
Retained Earnings from above
558,000
340,000
425,100
168,000
1/1 Noncontrolling Interest in Net
(4a)
8,000 (3) 242,500 **
Assets
(4b)
10,400
12/31 Noncontrolling Interest in Net
Assets
Total Liabilities and Equity
\$1,780,000 \$1,030,000
\$1,938,500
\$1,938,500
* 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.

\$242,000
120,000
1,000,000
7,300
224,100

633,600

\$231,400

231,400
\$2,227,000

## Computation and Allocation of Difference Schedule

Parent
Share
Purchase price and implied value
Less: Book value of equity acquired
Difference between implied and book value
Equipment
Land
Inventory
Balance
Goodwill
Balance

\$850,000
504,000
346,000
(104,000)
(52,000)
(32,000)
158,000
(158,000)
-0-

NonControlling
Share
212,500
126,000
86,500
(26,000)
(13,000)
(8,000)
39,500
(39,500)
-0-

Entire
Value
1,062,500
630,000
432,500
(130,000)
(65,000)
(40,000)
197,500
(197,500)
-0-

## Explanations of Workpaper entries:

(1) Investment in Salem Company [.80 (\$230,000 - \$80,000)]
Beginning Retained Earnings - Porter Co.
To establish reciprocity/convert to equity method as of 1/1/12
(2) Dividend Income (\$60,000.80)
Dividends Declared
To eliminate intercompany dividends

120,000
120,000
48,000
48,000

## (3) Beginning Retained Earnings - Salem Co.

Common Stock - Salem
Difference between Implied and Book Value
Investment in Salem Company (\$850,000 + \$120,000)
Noncontrolling Interest
To eliminate the investment account and create noncontrolling interest account

59

230,000
550,000
432,500
970,000
242,500

## (4a) Beginning Retained Earnings- Porter Company

Noncontrolling Interest
Land
Plant and Equipment
Goodwill
Difference between Implied and Book Value

32,000
8,000
65,000
130,000
197,500
432,500

## (4b) Beginning Retained Earnings - Porter Company (two years)

Noncontrolling Interest (two years)
Depreciation Expense
Plant and Equipment

41,600
10,400
26,000
78,000

## Alternative to entries (4a) and (4b)

(4) Beginning Retained Earnings - Porter Company a
Noncontrolling Interest b
Depreciation Expense
Land
Plant and Equipment c
Goodwill
Difference between Implied and Book Value
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)
Goodwill
To record goodwill impairment

73,600
18,400
26,000
65,000
52,000
197,500
432,500

47,500
47,500

5 10

Part E

## PORTER COMPANY AND SUBSIDIARY

Consolidated Financial Statements
For the Year Ended December 31, 2012
Consolidated Income Statement
Sales
Cost of Goods Sold
Gross Profit
Expenses:
Depreciation Expense
Impairment Loss
Other Expenses
Consolidated Income
Noncontrolling Interest in Consolidated Income
Net Income

\$1,550,000
1,100,000
450,000
\$96,000
47,500
110,000

## Consolidated Statement of Retained Earnings

Retained Earnings - Beginning of Year
Less Dividends
Retained Earnings - End of Year

253,500
196,500
19,300
\$177,200
\$546,400
177,200
90,000
\$633,600

## PORTER COMPANY AND SUBSIDIARY

Consolidated Statement of Financial Position
December 31, 2012
Assets
Current Assets:
Cash
Accounts Receivable
Inventory
Noncurrent Assets:
Plant and Equipment (net)

\$135,000
450,000
415,000
692,000

5 11

\$1,000,000

723,600

Land
Goodwill
Total Assets

385,000
150,000

## Liabilities And Stockholders' Equity

Liabilities:
Accounts Payable
Notes Payable
Total Liabilities
Stockholders' Equity
Noncontrolling Interest in Net Assets
Capital Stock
Retained Earnings
Total Liabilities and Stockholders' Equity

1,227,000
\$2,227,000

\$242,000
120,000
362,000
231,400
1,000,000
633,600

1,865,000
\$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
Porter Company's Share of the Increase in Salem
Company's Retained Earnings from January 1, 2010 to December 31, 2012
(\$340,000 \$80,000).8
Cumulative Effect to December 31, 2012 of the Allocation and Depreciation
of the Difference between Implied and Book value (Parents share)
Allocated to:
2010
2011
2012
Inventory
\$32,000
\$0
\$0
Equipment
20,800
20,800
20,800
\$52,800 \$20,800 \$20,800
Goodwill Impairment (2012)

5 12

\$558,000
208,000

(94,400)
(38,000)

## Controlling Interest in Consolidated Retained Earnings on 12/31/12

\$633,600

P5-6)
Computation and Allocation of Difference Schedule
Parent
Share
Purchase price and implied value
Less: Book value of equity acquired
Difference between implied and book value
Equipment*
Less:Accumulated Depreciation*
Balance
Goodwill
Balance

NonControlling
Share
70,588
45,000
25,588
(13,500)
4,500
16,588
(16,588)
-0-

\$400,000
255,000
145,000
(76,500)
25,500
94,000
(94,000)
-0-

Entire
Value
470,588 *
300,000
170,588
(90,000)
30,000
110,588
(110,588)
-0-

*\$400,000/.85
*Schedule of Book Value and Fair Value on Date of Acquisition

Equipment
Accumulated Depreciation
Equipment (net)

Fair
Value
\$450,000 1
150,000 2
\$300,000

Book
Value
\$360,000
120,000
\$240,000

Fair Value
Minus Book Value
\$90,000 3
30,000 4
\$60,000

\$300,000/(\$240/\$360) = \$450,000
\$450,000(\$120/\$360) = \$150,000

5 13

\$60,000/(\$240/\$360) = \$90,000
\$90,000(\$120/\$360) = \$30,000

## Allocation of Difference between Implied and Book Value

Equipment (net)
Goodwill
Difference between Implied and Book Value

Annual
Amount
Amortization
\$60,000/6 yr \$10,000
110,588
0
\$170,588
\$10,000

Part A
Part 1 Cost Method
(1) Dividend Income (\$30,0000.85)
Dividends Declared

25,500
25,500

## (2) Beginning Retained Earnings - Silvas Company

Common Stock - Silvas Company
Difference between Implied and Book Value
Investment in Silvas Company
Noncontrolling Interest

210,000
90,000
170,588

## (3) Depreciation Expense

Equipment
Goodwill
Accumulated Depreciation - Equipment (\$30,000 + \$10,000)
Difference between Implied and Book Value

10,000
90,000
110,588

400,000
70,588

## Alternative to entry (3)

(3a) Equipment
Goodwill
Accumulated Depreciation - Equipment

40,000
170,588
90,000
110,588
30,000

5 14

## Difference between Implied and Book Value

170,588

Depreciation Expense
Accumulated Depreciation - Equipment

10,000
10,000

## Part 2 Partial Equity Method

(1) Equity in Subsidiary Income (\$40,0000.85)
Dividends Declared (\$30,0000.85)
Investment in Silvas Company
To eliminate intercompany dividends and income

34,000
25,500
8,500

## (2) Beginning Retained Earnings - Silvas Company

Common Stock - Silvas Company
Difference between Implied and Book Value
Investment in Silvas Company
Noncontrolling Interest

210,000
90,000
170,588

## (3) Depreciation Expense

Equipment
Goodwill
Accumulated Depreciation - Equipment (\$30,000 + \$10,000)
Difference between Implied and Book Value

10,000
90,000
110,588

400,000
70,588

## Alternative to entry (3)

(3a) Equipment
Goodwill
Accumulated Depreciation - Equipment
Difference between Implied and Book Value

40,000
170,588
90,000
110,588
30,000
170,588

5 15

## (3b) Depreciation Expense

Accumulated Depreciation - Equipment

10,000
10,000

Part B
Part 1 Cost Method
Cost
Accumulated Depreciation
Undepreciated Basis
Sales Proceeds
Gain (Loss)

Silvas Company
\$360,000
160,000
200,000
220,000
\$ 20,000

## (1) Investment in Silvas Company (\$10,0000.85)

Beginning Retained Earnings - Perini Company
To establish reciprocity/convert to equity as of 1/1/2012
(2) Dividend Income (\$30,0000.85)
Dividends Declared-Silvas Company
To eliminate intercompany dividends

Difference
\$90,000
40,000
50,000
\$50,000

Consolidated
\$450,000
200,000
250,000
220,000
\$(30,000)
8,500
8,500
25,500
25,500

## (3) Beginning Retained Earnings-Silvas Co.

220,000
Common Stock -Silvas Company
90,000
Difference between Implied and Book Value
170,588
Investment 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 Company

8,500

5 16

Noncontrolling Interest
Gain on Disposal of Equipment
Loss on Disposal of Equipment
Goodwill
Difference between Implied and Book Value
To allocate and depreciate difference between Implied and book value

1,500
20,000
30,000
110,588

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

Unamortized difference associated with equipment on date sold to
outsiders equals \$60,000 - \$10,000 =

\$50,000

170,588

\$50,000

Part B
Part 2 Partial Equity Method
Cost
Accumulated Depreciation
Undepreciated Basis
Sales Proceeds
Gain (Loss)

Silvas Company
\$360,000
160,000
200,000
220,000
\$20,000

Difference
\$90,000
40,000
50,000
\$50,000

Consolidated
\$450,000
200,000
250,000
220,000
\$(30,000)

## (1) Equity in Subsidiary Income (\$40,0000.85)

Investment in Silvas Company
To eliminate intercompany dividends and income

34,000

## (2) Investment in Silvas Company

Dividends Declared-Silvas Company (\$30,0000.85)
To eliminate intercompany dividends

25,500

34,000

## (3) Beginning Retained Earnings-Silvas Co.

Common Stock -Silvas Company

25,500
220,000
90,000

5 17

## Difference between Implied and Book Value

170,588
Investment 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 Company

Noncontrolling Interest
Gain on Disposal of Equipment
Loss on Disposal of Equipment
Goodwill
Difference between Implied and Book Value
To allocate and depreciate difference between implied and book value

8,500
1,500
20,000
30,000
110,588

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

Unamortized difference associated with equipment on date sold to
outsiders equals \$60,000 - \$10,000 =

\$50,000

5 18

170,588

\$50,000