Problem 2-1
Current Assets
Plant and Equipment
Goodwill*
Liabilities
Common Stock [(20,000 shares @ $10/share)]
Other Contributed Capital [(20,000 × ($15 – $10))]
85,000
150,000
100,000
Acquisition Costs Expense
Cash
20,000
35,000
200,000
100,000
20,000
Other Contributed Capital
Cash
To record the direct acquisition costs and stock issue costs
6,000
6,000
* Goodwill = Excess of Consideration of $335,000 (stock valued at $300,000 plus debt assumed of
$35,000) over Fair Value of Identifiable Assets of $235,000 (total assets of $225,000 plus PPE fair
value adjustment of $10,000)
Problem 2-2
Acme Company
Balance Sheet
October 1, 2011
(000)
Part A.
Assets (except goodwill) ($3,900 + $9,000 + $1,300)
Goodwill (1)
Total Assets
$14,200
1,160
$15,360
Liabilities ($2,030 + $2,200 + $260)
Common Stock (180 × $20) + $2,000
Other Contributed Capital (180 × ($50 – $20))
Retained Earnings
Total Liabilities and Equity
$4,490
5,600
5,400
(130)
$15,360
(1) Cost (180 × $50)
Fair value of net assets acquired:
$9,000
$10,300
2,460
Fair value of assets of Baltic and Colt
Less liabilities assumed
Goodwill
Part B.
Baltic
2012: Step1: Fair value of the reporting unit
Carrying value of unit:
Carrying value of identifiable net assets
Carrying value of goodwill
3-1
7,840
$1,160
$6,500,000
6,340,000
200,000*
Total carrying value
6,540,000
*[(140,000 x $50) – ($9,000,000 – $2,200,000)]
The excess of carrying value over fair value means that step 2 is required.
Step 2: Fair value of the reporting unit
Fair value of identifiable net assets
Implied value of goodwill
Recorded value of goodwill
Impairment loss
$6,500,000
6,350,000
150,000
200,000
$ 50,000
(because $150,000 < $200,000)
Colt
2012: Step1: Fair value of the reporting unit
$1,900,000
Carrying value of unit:
Carrying value of identifiable net assets
$1,200,000
Carrying value of goodwill
960,000*
Total carrying value
2,160,000
*[(40,000 x $50) – ($1,300,000 – $260,000)]
The excess of carrying value over fair value means that step 2 is required.
Step 2: Fair value of the reporting unit
Fair value of identifiable net assets
Implied value of goodwill
Recorded value of goodwill
Impairment loss
$1,900,000
1,000,000
900,000
960,000
$ 60,000
(because $900,000 < $960,000)
Total impairment loss is $110,000.
Journal entry:
Impairment Loss
Goodwill
Problem 2-4
$110,000
$110,000
Part A January 1, 2011
Accounts Receivable
Inventory
Land
Buildings
Equipment
Goodwill*
Allowance for Uncollectible Accounts
Accounts Payable
Note Payable
Cash
Liability for Contingent Consideration
3-2
72,000
99,000
162,000
450,000
288,000
54,000
7,000
83,000
180,000
720,000
135,000
*Computation of Goodwill
Cash paid ($720,000 + $135,000)
Total fair value of net assets acquired ($1,064,000 - $263,000)
Goodwill
$855,000
801,000
$ 54,000
Part B January 2, 2013
Liability for Contingent Consideration
Cash
135,000
135,000
Part C January 2, 2013
Liability for Contingent Consideration
Income from Change in Estimate
135,000
135,000
Problem 3-1
P COMPANY AND SUBSIDIARY
Consolidated Balance Sheet Workpaper
November 30, 2011
Part I
Current Assets
Investment in S Company
Difference between Implied and Book
Value
Long-term Assets
Other Assets
Total Assets
Current Liabilities
Long-term Liabilities
Common Stock:
P Company
S Company
Retained Earnings
P Company
S Company
Noncontrolling Interest
Total Liabilities and Equity
Part II
Current Assets
Investment in S Company
Difference between Implied & Book
Value
Long-term Assets
Other Assets
Total Assets
Current Liabilities
Long-term Liabilities
P
S
Company Company
880,000
260,000
190,000
Eliminations
Dr.
Cr.
(1)
1,400,000
90,000
2,560,000
640,000
850,000
400,000 (2)
40,000
700,000
Noncontrolling Consolidated
Interest
Balance
1,140,000
(1) 190,000
71,111 (2) 71,111
71,111
1,871,111
130,000
3,141,111
270,000
290,000
910,000
1,140,000
600,000
600,000
180,000 (1) 180,000
470,000
470,000
(40,000)
2,560,000
700,000
780,000
190,000
280,000
(1) 40,000
(2) 21,111
322,222
322,222
400,000
70,000
750,000
700,000
920,000
260,000
270,000
3-3
21,111
3,141,111
1,060,000
(2)
1,200,000
70,000
2,240,000
21,111
(1) 190,000
8,889 (1)
8,889
(2)
8,889
1,591,111
140,000
2,791,111
960,000
1,190,000
Common Stock:
P Company
600,000
S Company
180,000 (1) 180,000
Retained Earnings
P Company
20,000
S Company
40,000 (1) 40,000
Noncontrolling Interest
(1) 21,111
Total Liabilities and Equity
2,240,000
750,000
228,889
228,889
(1) To eliminate investment account and create noncontrolling interest account
(2) To allocate the difference between implied value and book value to long-term assets.
600,000
20,000
21,111
Computation and Allocation of Difference (Case 2)
Parent
Share
Purchase price and implied value
Less: Book value of equity acquired
190,000
198,000
Difference between implied and book value
Decrease long-term assets to fair value
Balance
(8,000)
8,000
-0-
NonControlling
Share
21,111
22,000
(889)
889
-0-
Entire
Value
211,111*
220,000
(8,889)
8,889
-0–
* $190,000/.90
Problem 3-9
Part A
Computation and Allocation of Difference Schedule
Parent
Share
$5,800,000
NonTotal
Controlling
Value
Share
644,444 6,444,444*
4,725,000
356,400
1,732,500
(1,080,000)
5,733,900
525,000
39,600
192,500
(120,000)
637,100
5,250,000
396,000
1,925,000
(1,200,000)
6,371,000
Difference between implied and book value 66,100
Plant assets
(66,100)
Balance
-0-
7,344
(7,344)
-0-
73,444
(73,444)
-0-
Purchase price and implied value
Less: Book value of equity acquired:
Common stock (5,250,000 x .90)
Other contributed capital
Retained earnings
Less: Treasury stock
Total book value
*$5,800,000/.90
3-4
21,111
2,791,111
Pope Company and Subsidiary Worksheet, January 1, 2009
Pope
Part B
Sun
Company
Company
297,000
165,000
Cash
Accounts Receivable
432,000
468,000
Notes Receivable
90,000
Inventory
1,980,000
1,447,000
Investment in Sun Company
5,800,000
Difference between Implied and
& Book Value
Plant and Equipment (net)
5,730,000
3,740,000
Land
1,575,000
908,000
$15,904,000 $6,728,000
Total
Accounts Payable
Notes Payable
Common Stock ($15 par):
Pope Company
Sun Company
Other Contributed Capital
Pope Company
Sun Company
Treasury Stock Held:
Sun Company
Retained Earnings
Pope Company
Sun Company
Noncontrolling Interest
Total
698,000
2,250,000
Eliminations
Debit
Noncontrolling
Interest
Credit
(1)
90,000
3,427,000
(2) 5,800,000
(2)
(3)
247,000
110,000
73,444 (3)
73,444
73,444
9,543,444
2,483,000
$16,815,444
945,000
2,270,000
(1) 90,000
4,500,000
4,500,000
5,250,000
(2)5,250,000
396,000
(2) 396,000
5,198,000
5,198,000
(1,200,000)
(2)1,200,000
3,258,000
3,258,000
1,925,000
$15,904,000
(2)1,925,000
$6,728,000
7,807,888
(2) 644,444
7,807,888
644,444
(1) To eliminate intercompany note receivable and note payable
(2) To eliminate Investment in Sun Company and create noncontrolling interest account
(3) To allocate the difference between implied and book value to subsidiary plant and equipment.
Problem 4-1
Journal Entries - Cost Method
Year
2009
2010
2011
2012
Net Income Cumulative Net Cumulative
(Loss)
Income
Dividends
1,997,800
1,997,800
500,000
476,000
2,473,800
1,000,000
(179,600)
2,294,200
1,500,000
(323,800)
1,970,400
2,000,000
Part A – Cost Method
2009
Investment in Singer Co.
4-5
Consolidated
Balances
462,000
900,000
4,972,000
Undistributed
Income
1,497,800
1,473,800
794,200
(29,600)
644,444
$16,815,444
Cash
4,972,000
Cash (.90)($500,000)
Dividend Income
450,000
Cash (.90)($500,000)
Dividend Income
450,000
Cash (.90)($500,000)
Dividend Income
450,000
450,000
2010
450,000
2011
450,000
2012
Cash (.90)($500,000)
450,000
Dividend Income
Investment in Singer Co. (.90 × $29,600)
To account for liquidating dividend
423,360
26,640
Part B – Partial Equity Method
2009
Investment in Singer Co.
Cash
4,972,000
4,972,000
Cash (.90)($500,000)
Investment in Singer Co.
Investment in Singer Co.
Equity in Subsidiary Income
(.90)($1,997,800)
450,000
450,000
1,798,020
1,798,020
2010
Cash (.90)($500,000)
Investment in Singer Co.
Investment in Singer Co.
Equity in Subsidiary Income
(.90)($476,000)
Problem 4-1 (continued)
2011
Cash (.90)($500,000)
Investment in Singer Co.
450,000
450,000
428,400
428,400
450,000
450,000
Equity in Subsidiary Income (.90)($179,600) 161,640
Investment in Singer Co.
161,640
Cash (.90)($500,000)
Investment in Singer Co.
450,000
2012
450,000
Equity in Subsidiary Income (.90)($323,800) 291,420
Investment in Singer Co.
291,420
Part C – Complete Equity Method
Computation and Allocation of Difference between Implied and Book Value Acquired
4-6
Parent
Share
Purchase price and implied value
Less: Book value of equity acquired:
Difference between implied and book value
Undervalued depreciable assets (15 year life)
Balance
4,972,000
4,961,160
10,840
(10,840)
-0-
NonEntire
Controlling
Value
Share
552,444 5,524,444 *
551,240 5,512,400
1,204
12,044
(1,204)
(12,044)
-0-0-
* $4,972,000/.90
2009
Investment in Singer Co.
Cash
Cash (.90)($500,000)
Investment in Singer Co.
Investment in Singer Co.
Equity Income (.90)($1,997,800)
4,972,000
4,972,000
450,000
450,000
1,798,020
1,798,020
Equity in Subsidiary Income ($10,840/15 years)
Investment in Singer Co.
723
723
2010
Cash (.90)($500,000)
Investment in Singer Co.
450,000
Investment in Singer Co.
Equity Income (.90)($476,000)
428,400
450,000
Equity in Subsidiary Income ($10,840/15 years)
Investment in Singer Co.
4-7
428,400
723
723
2011
Cash (.90)($500,000)
Investment in Singer Co.
450,000
450,000
Equity in Subsidiary Income (.90)($179,600) 161,640
Investment in Singer Co.
Equity in Subsidiary Income ($10,840/15 years)
Investment in Singer Co.
161,640
723
723
2012
Cash (.90)($500,000)
Investment in Singer Co.
450,000
450,000
Equity in Subsidiary Income (.90)($323,800) 291,420
Investment in Singer Co.
Equity in Subsidiary Income ($10,840/15 years)
Investment in Singer Co.
291,420
723
723
Problem 4-2
Part A – Parry Corporation uses the cost method. If the cost method is used, Parry Corporation
recognizes dividends received as income.
Part B
Workpaper - Cost Method
Parry Corporation and Subsidiary
Consolidated Statements Workpaper
For the Year Ended December 31, 2009
Parry
Sent
Eliminating Entries Consolidated
Corp. Company
Balances
Dr.
Cr.
Income Statement
Sales
Dividend Income
Total Revenue
Cost of Goods Sold
Other Expenses
Total Cost and Expense
Net Income to Retained Earnings
476,000
3,500
479,500
285,600
45,500
331,100
148,400
Parry
Corp.
154,500
630,500
(1)
154,500
121,000
29,500
150,500
4,000
Sent
Company
3,500
630,500
406,600
75,000
481,600
3,500
148,900
Eliminating Entries Consolidated
Dr.
Cr.
Balances
Retained Earnings Statement
Retained Earnings 1/1
Parry Corporation
Sent Company
Net Income from above
Dividend Declared
4-8
76,000
148,400
76,000
19,500 (2) 19,500
4,000
3,500
148,900
Parry Corporation
Sent Company
Retained Earnings 12/31
(17,500)
206,900
(3,500)
20,000
(1)
23,000
3,500
3,500
(17,500)
0
207,400
Balance Sheet
Cash
Accounts Receivable
Inventory 12/31
Investment in Sent Company
Difference between Implied and Book Value
Land
Total Assets
Accounts Payable
Common Stock:
Parry Corporation
Sent Company
Retained Earnings from above
Total Liabilities and Equity
84,400
76,000
49,500
140,000
29,000
56,500
36,500
(2) 140,000
(2) 20,500 (3) 20,500
4,000 12,000 (3) 20,500
353,900 134,000
27,000 14,000
36,500
368,400
41,000
120,000
120,000
100,000 (2) 100,000
206,900 20,000
23,000
353,900 134,000
164,000
(1) To eliminate intercompany dividends
(2) To eliminate investment in Sent Company
(3) To eliminate difference between implied and book value
4-9
113,400
132,500
86,000
3,500
164,000
207,400
368,400
Computation and Allocation of Difference between Implied and Book Value
Acquired
Parent
Share
Purchase price and implied value
Less: Book value of equity acquired:
Difference between implied and book value
Undervalued land
Balance
140,000
119,500
20,500
(20,500)
-0-
NonControlling
Share
0
0
0
(0)
-0-
Entire
Value
140,000
119,500
20,500
(20,500)
-0-
Problem 4-7
Price Company and Subsidiary
Consolidated Statements Workpaper
Workpaper - Cost Method
For the Year Ended December 31, 2013
Price
Score
Company Company
Eliminating Entries Noncontrolling Consolidated
Interest
Balance
Dr.
Cr.
Income Statement
Sales
Dividend and Interest Income
Total Revenue
Cost of Goods Sold
Other Expenses
Total Cost and Expense
Net Income
Noncontrolling Interest
Net Income to Retained Earnings
1,420,000 500,000
52,500
(3) 45,000
(4) 7,500
1,472,500 500,000
1,920,000
822,000
250,500
1,072,500
400,000
1,064,000
367,000
1,431,000
489,000
(13,400)
475,600
242,000
124,000
366,000
134,000
400,000 134,000
1,920,000
(4)
52,500
7,500
7,500
13,400 *
13,400
Retained Earnings Statement
Retained Earnings 1/1
Price Company
Score Company
Net Income from above
Dividends Declared
Price Company
Score Company
Retained Earnings 12/31
* $134,000 × .10 = $13,400.
4 - 10
687,000
(1) 108,000
210,000 (5) 210,000
400,000 134,000
52,500
7,500
795,000
13,400
(70,000 )
(50,000 )
1,017,000 294,000
475,600
(70,000)
(3)
262,500
45,000
160,500
(5,000)
8,400
1,200,600
Score
Price
Company Company
Eliminating Entries Noncontrolling Consolida
Interest
Balance
Dr.
Cr.
Balance Sheet
Cash
109,000
Accounts Receivable
166,000
Note Receivable
75,000
309,000
Inventory 12/31
Investment in Score Company
450,000
Difference b/w Implied & Book Value
940,000
Plant and Equipment
Land
160,000
Goodwill
Total
2,209,000
Accounts Payable
Notes Payable
Common Stock:
Price Company
Score Company
Other Contributed Capital
Price Company
Score Company
Retained Earnings from above
Noncontrolling Interest 1/1
Noncontrolling Interest 12/31
132,000
300,000
78,000
94,000
187,000
260,000
(2)
75,000
158,000
467,000
(1) 108,000 (5) 558,000
(5) 50,000 (6) 50,000
420,000
70,000
1,360,000
230,000
50,000
2,554,000
(6) 50,000
820,000
46,000
120,000 (2) 75,000
178,000
345,000
500,000
500,000
200,000 (5) 200,000
260,000
1,017,000
2,209,000
260,000
160,000 (5) 160,000
294,000
262,500
1,200,600
820,000
70,400
2,554,000
160,500
8,400
(5) 62,000 ** 62,000
70,400
905,500
905,500
** $50,000 + [($210,000 – $90,000) x .10] = $62,000
(1) To establish reciprocity/convert to the equity method ($210,000 - $90,000) × .90
(2) To eliminate intercompany receivables and payables
(3) To eliminate intercompany dividends
(4) To eliminate intercompany interest expense and income
(5) To eliminate investment in Score Company and create noncontrolling interest
account
(6) To allocate the difference between implied and book value
Computation and Allocation of Difference between Implied and Book Value
Acquired
Parent
Share
Purchase price and implied value
4 - 11
450,000
NonControlling
Share
50,000
Entire
Value
500,000 *
Less: Book value of equity acquired:
Difference between implied and book value
Goodwill
Balance
405,000
45,000
(45,000)
-0-
45,000
5,000
(5,000)
-0-
450,000
50,000
(50,000)
-0-
*$450,000/.90
Problem 5-1
Calculations:
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 (net) ($1,500,000 - $600,000)
Balance
Goodwill
Balance
$2,800,000
1,200,000
1,600,000
(720,000)
880,000
(880,000)
-0-
NonEntire
Controlling Value
Share
700,000 3,500,000 *
300,000 1,500,000
400,000 2,000,000
(180,000) (900,000)
220,000 1,100,000
(220,000) (1,100,000)
-0-0-
*$2,800,000/.80
Depreciation of difference allocated to Palmero ($720,000/10)
Depreciation of difference allocated to Santos ($180,000/10)
$72,000
$18,000
Part A 2011
(1) Beginning Retained Earnings-Santos Co.
1,000,000
Capital Stock- Santos Co.
500,000
Difference between Implied and Book Value
2,000,000
Investment in Santos Co.
2,800,000
Noncontrolling Interest
700,000
To eliminate investment account and create noncontrolling interest account
(2) Depreciation Expense
90,000
Property and Equipment (net) ($900,000 - $90,000)
810,000
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 (2)
(2a)
Property and Equipment (net)
Goodwill
Difference between Implied and Book Value
(2b) Depreciation Expense
4 - 12
900,000
1,100,000
2,000,000
90,000
Property and Equipment (net)
2012
(1) Investment in Santos Company ($300,000 × 0.80)
Beginning Retained Earnings-Palmero Co.
To establish reciprocity/convert to equity as of 1/1/2012
0.20]
90,000
240,000
240,000
(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
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)
Goodwill
Difference between Implied and Book Value
(3b) Beginning Retained Earnings-Palmero Co.
Noncontrolling Interest
Depreciation Expense
Property and Equipment (net)
900,000
1,100,000
2,000,000
72,000
18,000
90,000
Part B Controlling Interest in Consolidated Net Income
2011
Palmero Company's Net Income from Independent Operations
$400,000
Palmero Company's Share of Reported Income of Santos Company 240,000
Less: Depreciation of Difference between
Implied and Book Value
Allocated to:
Property and Equipment
(72,000)
Controlling Interest in Consolidated Net Income
$568,000
180,000
2012
$425,000
320,000
(72,000)
$673,000
Noncontrolling Interest in Consolidated Income (2011)
Amortization of the difference between
Net income reported by Santos
implied and book value related to
equipment ($900,000/10)
90,000
Adjusted net income of Santos
Noncontrolling Ownership percentage interest
4 - 13
Noncontrolling Interest in Consolidated Net Inco
Controlling Interest in Consolidated Income (2011)
Palmero Company's net income from its independen
operations
Palmero Company's share of the adjusted income of
Santos Company (.8 X $210,000)
Controlling Interest in Consolidated Net Income
Noncontrolling Interest in Consolidated Income (2012)
Amortization of the difference between
Net income reported by Santos
implied and book value related to
equipment ($900,000/10)
90,000
Adjusted net income of Santos
Noncontrolling Ownership percentage interest
Noncontrolling Interest in Consolidated Net Inco
Controlling Interest in Consolidated Income (2012)
Palmero Company's net income from its independen
operations
Palmero Company's share of the adjusted income of
Santos Company (.8 X $310,000)
Controlling Interest in Consolidated Net Income
Problem 5-2
Computation and Allocation of Difference Schedule
Parent
Share
Purchase price and implied value
4 - 14
$1,300,000
NonEntire
Controlling Value
Share
557,143 1,857,143 *
Less: Book value of equity acquired
Difference between implied and book value
Unamortized Discount on Bonds Payable
Balance
Goodwill
Balance
1,050,000
250,000
(106,143)
143,857
(143,857)
-0-
450,000 1,500,000
107,143
357,143
(45,490) (151,633)
61,653
205,510
(61,653) (205,510)
-0-0-
*$1,300,000/.70
Present Value on 1/1/2011 of 6% Bonds Payable
Discounted at 10%, 5 periods
Principal ($1,000,000 × 0.62092)
Interest ($60,000 × 3.79079)
Fair value of bonds
Face value of bonds
Total Discount
$620,920
227,447
$848,367
1,000,000
$151,633
Amortization of amount of difference between implied and book value allocated to
unamortized discount on bonds payable
(1)
Year
2011
2012
(2)
Carrying
Value (1/1)
$848,367
$873,204
(3)
Interest at 10%
of Carrying Value
$84,837
$87,320
(4)
Interest at 6%
of Par Value
$60,000
$60,000
(5)
Difference
[(3)-(4)]
$24,837
$27,320
Part A 2011
(1) Equity in Subsidiary Income (.70)($100,000)
Investment in Sagon Co.
To eliminate subsidiary income
70,000
70,000
(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
Unamortized Discount on Bonds Payable ($151,633 - $24,837)
Goodwill
Difference between Implied and Book Value
To allocate and amortize the difference between Implied and book value
Alternative to entry (3)
(3a) Unamortized Discount on Bonds Payable
Goodwill
Difference between Implied and Book Value
4 - 15
24,837
126,796
205,510
357,143
151,633
205,510
357,143
(3b) Interest Expense
Unamortized Discount on Bonds Payable
24,837
24,837
2012
(1) Equity in Subsidiary Income (.70)($120,000)
Investment in Sagon Co.
To eliminate subsidiary income
84,000
84,000
(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
Noncontrolling Interest
Interest Expense
Unamortized Discount on Bonds Payable ($151,633 - $24,837 - $27,320)
Goodwill
Difference between Implied and Book Value
To allocate and amortize the difference between implied and book value
17,386 *
7,451
27,320
99,476
205,510
357,143
*$24,837
x 70% = $17,386
Alternative to entry (3)
(3a) Unamortized Discount on Bonds Payable
Goodwill
Difference between Implied and Book Value
151,633
205,510
357,143
(3b) Beginning Retained Earnings-Paxton Company
Noncontrolling Interest
Interest Expense
Unamortized Discount on Bonds Payable
17,386
7,451
27,320
52,157
(4) Impairment Loss – Goodwill**
Goodwill
**Step 1: Fair value of the reporting unit
$1,500,000
Carrying value of unit:
Carrying value of identifiable net assets
Carrying value of goodwill
25,510
25,510
$1,409,000
205,510
1,614,510
Excess of carrying value over fair value
114,510
The excess of carrying value over fair value means that step 2 is required.
4 - 16
$
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
Paxton Company's Net Income from Independent Operations
$300,000
Paxton Company's Share of Reported Income of Sagon Company
70,000
Less: Amortization of Difference between Implied and Book Value
Allocated to:
Bonds Payable
(17,386)
Controlling Interest in Consolidated Net Income
$352,614
2012
$250,000
84,000
(19,124)*
$314,876
* $27,320 x 70% = $19,124
Noncontrolling Interest in Consolidated Income (2011)
Amortization of the difference between
Net income reported by Sagon
implied and book value related to
bonds payable
24,837
Adjusted net income of Sagon
Noncontrolling Ownership percentage interest
Noncontrolling Interest in Consolidated Net Inc
Controlling Interest in Consolidated Income (2011)
Paxton Company's net income from its independent
operations
Paxton Company's share of the adjusted income of
Sagon Company (.7 X $75,163)
Controlling interest in Consolidated Net Income
Noncontrolling Interest in Consolidated Income (2012)
4 - 17
Amortization of the difference between
Net income reported by S
implied and book value related to
bonds payable
27,320
Goodwill Impairment
25,510
Adjusted net income of S
Noncontrolling Ownership percentage interest
Noncontrolling Interest in Consolidated Net Inco
Controlling Interest in Consolidated Income (2012)
Paxton Company's net income from its independen
operations
Paxton Company's share of the adjusted income of
Sagon Company (.7 X $67,170)
Controlling interest in Consolidated Net Income
4 - 18
Problem 5-3
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
Inventory ($725,000 - $600,000)
Equipment ($1,075,000 - $900,000)
Balance
Goodwill
Balance
$1,970,000
1,440,000
530,000
(100,000)
(140,000)
290,000
(290,000)
-0-
NonControlling
Share
492,500
360,000
132,500
(25,000)
(35,000)
72,500
(72,500)
-0-
Entire
Value
2,462,500 *
1,800,000
662,500
(125,000)
(175,000)
362,500
(362,500)
-0-
*$1,970,000/.80
2012 Amortization Schedule
Inventory (60% in 2012)
Equipment ($175,000/7)
Total
60,000
20,000
80,000
15,000
5,000
20,000
75,000
25,000
100,000
2013 Amortization Schedule
Inventory (40% in 2013)
Equipment ($175,000/7)
Total
40,000
20,000
60,000
10,000
5,000
15,000
50,000
25,000
75,000
Part A 2012
Investment in Superstition Company
Cash
1,970,000
Cash (0.8 × $150,000)
Investment in Superstition Company
120,000
Investment in Superstition Company
Equity in Subsidiary Income (.80)($750,000)
600,000
Equity in Subsidiary Income
Investment in Superstition Company
2013
Cash (0.8 × $225,000)
Investment in Superstition Company
Investment in Superstition Company
Equity in Subsidiary Income (.80)($900,000)
Equity in Subsidiary Income
Investment in Superstition Company
4 - 19
1,970,000
120,000
600,000
80,000
80,000
180,000
180,000
720,000
720,000
60,000
60,000
Part B 2012
(1) Equity in Subsidiary Income ((.80)($750,000) - $80,000)
Dividends Declared (0.80 × $150,000)
Investment in Superstition Company
To eliminate intercompany income and dividends
(2) Beginning Retained Earnings - Superstition Company
Common Stock- Superstition Company
Difference between Implied and Book Value
Investment in Superstition Company
Noncontrolling Interest
To eliminate the investment account and create noncontrolling interest
520,000
120,000
400,000
600,000
1,200,000
662,500
1,970,000
492,500
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
Cost of Good Sold
Equipment (net)
Goodwill
Difference between Implied and Book Value
(3b) Depreciation Expense
Equipment (net)
2013
(1) Equity in Subsidiary Income ((.80)($900,000) - $60,000)
Dividends Declared (0.80 × $225,000)
Investment in Superstition Company
To eliminate intercompany income and dividends
.20)
(3)
4 - 20
50,000
75,000
175,000
362,500
662,500
25,000
25,000
660,000
180,000
480,000
(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
612,500
To eliminate investment account and create noncontrolling interest account
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
Noncontrolling Interest
Cost of Good Sold
Equipment (net)
Goodwill
Difference between Implied and Book Value
60,000
15,000
50,000
175,000
362,500
662,500
(3b) Investment in Superstition Company
Noncontrolling Interest
Depreciation Expense
Equipment (net)
20,000
5,000
25,000
50,000
Part C Perke Corporation's Net Income from Independent Operations
($1,000,000 - $120,000)
Perke Corporation's Share of Superstition Company's net income
(0.8 × $750,000) 600,000
Less: Assignment, amortization, and depreciation of:
Inventory
Equipment
Controlling Interest in Consolidated Net Income
$1,400,000
$880,000
(60,000)
(20,000)
Problem 5-7
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 (net)
Balance
Goodwill
Balance
*$900,000/.75
4 - 21
$900,000
506,250
393,750
(135,000)
258,750
(258,750)
-0-
NonControlling
Share
300,000
168,750
131,250
(45,000)
86,250
(86,250)
-0-
Entire
Value
1,200,000 *
675,000
525,000
(180,000)
345,000
(345,000)
-0-
Amount of Difference Between Implied and Book Value Allocated to Equipment
Equipment
Accumulated Depreciation
Net
Fair
Value
$990,000 1
330,000 2
$660,000
Book
Value
$720,000
(240,000)
$480,000
Fair Value Minus
Book Value
$270,000 3
(90,000)4
$180,000
1
$660,000/($480/$720) = $990,000
$990,000 × ($240/$720) = $330,000
3
$180,000/($480/$720) = $270,000
4
$270,000 × ($240/$720) = $90,000
2
Annual Depreciation of Difference
Equipment ($180,000/10)) = $18,000
Part A Investment in Sanchez Company
Dividend Declared-Sanchez Co. ($120,000 × 0.75)
90,000
90,000
(1) Equity in Subsidiary Income (($123,000 × 0.75) – $13,500)
Investment in Sanchez Company
78,750
78,750
(2) Beginning Retained Earnings-Sanchez Company
Common Stock-Sanchez Company
Difference between Implied and Book Value
Investment in Sanchez Company
Noncontrolling Interest
To eliminate investment and create noncontrolling interest account
375,000
300,000
525,000
(3) Depreciation Expense
Equipment
Goodwill
Accumulated Depreciation-Equipment ($90,000 + $18,000)
Difference between Implied and Book Value
To allocate and depreciate the difference between implied and book value
18,000
270,000
345,000
Alternative to entry (3)
(3a) Equipment
Goodwill
Accumulated Depreciation-Equipment
Difference between Implied and Book Value
900,000
300,000
108,000
525,000
270,000
345,000
90,000
525,000
(3b) Depreciation Expense
Accumulated Depreciation-Equipment
18,000
18,000
Part B (1) & (2)
Equipment
Accumulated Depreciation
Carrying Value 1/1/2011
4 - 22
Book Value
$720,000
(240,000)
$480,000
Difference
$270,000 3
(90,000)
$180,000
Consolidated
$990,000 1
(330,000)
$660,000
× 8/10
Carrying Value 1/1/2013
Proceeds from Sale
(Gain) Loss on Sale
384,000
(450,000)
$(66,000)
× 8/10
528,000
(450,000)
$78,000
(3) Investment in Sanchez Company
Gain on Disposal of Equipment - Sanchez
Loss on Disposal of Equipment
Difference between Implied and Book Value
(4) 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.
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)
4 - 23
36,000
66,000
78,000
180,000