Advanced Accounting 4th Edition Solution by Jeter - Test Bank

Advanced Accounting 4th Edition Solution by Jeter – Test Bank

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Sample Questions Are Posted Below

CHAPTER 5

ANSWERS TO QUESTIONS

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

5 – 1

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.

5 – 2

ANSWERS TO EXERCISES

Exercise 5-1

Part A

Computation and Allocation of Difference Schedule

Parent

Non-

Entire

Controlling

Value

Purchase price and implied value

$540,000

95,294

635,294 *

Less: Book value of equity acquired:

Common stock

340,000

60,000

400,000

Retained earnings

119,000

21,000

140,000

Total book value

459,000

81,000

540,000

Difference 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)

Balance

42,750

7,544

50,294

Goodwill

(42,750)

(7,544)

(50,294)

Balance

-0-

*$540,000/.85

Part B

Marketable securities

$ 45,000

Equipment (net)

140,000

Goodwill

50,294

Exercise 5-2

Computation and Allocation of Difference Schedule

Parent

Non-

Entire

Controlling

Value

Purchase 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 value

135,000

45,000

180,000

Equipment ($705,000 – $525,000)

(135,000)

(45,000)

(180,000)

Balance

– 0 –

*$585,000/.75

Part A Equipment

180,000

Difference between Implied and Book Value

180,000

Depreciation Expense ($180,000/10)

18,000

Accumulated Depreciation

18,000

5 – 3

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)

270,000

Accumulated Depreciation (1/3

$270,000)

90,000

Difference between Implied and Book Value

180,000

Depreciation Expense ($180,000/10)

18,000

Accumulated Depreciation

18,000

Exercise 5-3

Part A Investment in Saddler Corporation

525,000

Cash

525,000

Part B Computation and Allocation of Difference Schedule

Parent

Non-

Entire

Controlling

Value

Purchase 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 value

45,000

11,250

56,250

Inventory

(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)

Gain

15,000

Increase Noncontrolling interest to fair value of assets

3,750

Total allocated bargain

18,750

Balance

-0-

*$525,000/.80

5 – 4

Exercise 5-4

Part A

Computation and Allocation of Difference Schedule

Parent

Non-

Entire

Controlling

Value

Purchase price and implied value

$260,000

65,000

325,000 *

Less: Book value of equity acquired

270,000

67,500

337,500

Difference 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)

Gain

58,000

Increase Noncontrolling interest to fair value of assets

14,500

Total allocated bargain

72,500

Balance

-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)

5 – 5

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
				Parent		Non-		Entire


				Share	Controlling			Value
						Share
Purchase price and implied value			$600,000		150,000		750,000
Less: Book value of equity acquired			520,000		130,000		650,000

Difference between implied and book value (patent)				80,000		20,000	100,000
Patent			(80,000)		(20,000)		(100,000)

Balance			-0-		-0-		-0-
*$600,000/.80
Exercise 5-6
					2012				2013
1/1 Retained Earnings-Park Co.* (12,000 x .85)							10,200
Noncontrolling Interest							1,800
Depreciation Expense ($120,000/10)					12,000		12,000
Equipment [$120,000/(10/15)]					180,000		180,000
	Accumulated Depreciation					72,000^a				84,000^b
	Difference between Implied and Book Value				120,000					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

5 – 6

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) = $280,000

Computation and Allocation of Difference Schedule

Parent

Non-

Entire

Controlling

Value

Purchase price and implied value

$600,000

150,000

750,000 *

Less: Book value of equity acquired

440,000

110,000

550,000

Difference between implied and book value

160,000

40,000

200,000

Equipment ($705,000 – $525,000)

(160,000)

(40,000)

(200,000)

Balance

– 0 –

*$600,000/.80

Alternative entries

2011

2012

Equipment [$200,000/(5/10)]

400,000

Accumulated Depreciation

200,000

Difference between Implied and Book Value

200,000

1/1 Retained Earnings – Packard Co.

32,000

1/1 Noncontrolling interest

8,000

Depreciation Expense ($400,000/10)

40,000

Accumulated Depreciation

40,000

80,000

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

Exercise 5-8
Part A Land ($31,000/0.8)							38,750
	Difference between Implied and Book Value						38,750
Part B Gain on subsidiary books							$50,000
Reduction for consolidated adjustment to fair market value											(38,750)
Consolidated gain												$11,250

Part C 1/1 Retained Earnings – Padilla Co.							38,750
	Difference between Implied and Book Value						38,750
Exercise 5-9
Part A
Computation and Allocation of Difference Schedule
			Parent			Non-			Entire
				Share	Controlling				Value
						Share
Purchase price and implied value		$2,000,000			500,000		2,500,000 *
Less: Book value of equity acquired		1,760,000			440,000		2,200,000

Difference between implied and book value		240,000			60,000		300,000
Land ($100,000 – $ 80,000)		(16,000)			(4,000)		(20,000)
Premium on Bonds Payable^a		31,941			7,985		39,926

Balance		255,941			63,985		319,926
Goodwill		(255,941)			(63,985)		(319,926)
Balance		-0-			-0-			-0-
*$2,000,000/.80
^aPresent Value on 1/1/2010 of 10% Bonds Payable
Discounted at 8% over 5 periods
Principal ($500,000 0.68058)							$340,290
Interest ($50,000 3.99271)										199,636
Fair value of bond							$539,926
Face value of bond										500,000
Bond premium							39,926

5 – 8

Exercise 5-9 (continued)
Part B
Land											20,000
Goodwill											319,926
	Interest Expense ($50,000 – ($539,926			0.08))							6,806
	Unamortized Premium on Bonds Payable ($39,926 – $6,806)										33,120
	Difference between Implied and Book Value										300,000
Alternative entries
Land											20,000
Goodwill											319,926
	Unamortized Premium on Bonds Payable										39,926
	Difference between Implied and Book Value										300,000
Unamortized Premium on Bonds Payable											6,806
	Interest Expense ($50,000 – ($539,926			0.08))							6,806
Exercise 5-10
Part A
Computation and Allocation of Difference Schedule
				Parent			Non-			Entire
					Share	Controlling				Value
							Share
Purchase price and implied value		$3,500,000				388,889		3,888,889			*
Less: Book value of equity acquired		3,150,000				350,000		3,500,000

Difference between implied and book value			350,000			38,889		388,889
Land ($200,000 – $ 120,000)				(72,000)		(8,000)		(80,000)
Premium on Bonds Payable^a				56,867		6,319		63,186

Balance		334,867				37,208		372,075
Goodwill			(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

5 – 9

Exercise 5-10 (continued)

Part B Land

80,000

Goodwill

372,075

Interest Expense

11,209^a

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

51,977

Difference between Implied and Book Value

388,889

^a Effective Interest (0.06

Year 2010

$563,186)

$(33,791)

Nominal Interest (0.09

$500,000)

45,000

Difference

11,209

Alternative entries

Land

80,000

Goodwill

372,075

Unamortized Premium on Bonds Payable

63,186

Difference between Implied and Book Value

388,889

Unamortized Premium on Bonds Payable

11,209

Interest Expense

11,209^a

Exercise 5-11

Part 1 – Cost

Method

Computation and Allocation of Difference Schedule

Parent

Non-

Entire

Controlling

Value

Purchase 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-

*$2,276,000/.80

2010

(1) Dividend Income

16,000

Dividends Declared (0.80

$20,000)

16,000

To eliminate intercompany dividends

5 – 10

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

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

Exercise 5-11 (continued)

Part 2 – Partial Equity Method

Computation and Allocation of Difference Schedule
				Parent			Non-			Entire
					Share	Controlling				Value
							Share
Purchase 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 (Partial Equity)
	Cost of investment		2,276,000P
	2010 equity income (.8)($100,000)		80,000	2010 Dividends (.8)($20,000)							16,000
	Balance 2010		2,340,000
	2011 equity income (.8)($150,000)		120,000	2011 Dividends (.8)($30,000)							24,000

	Balance 2011		2,436,000
	2012 equity income (.8)($80,000)		64,000	2012 Dividends (.8)($15,000)							12,000

	Balance 2012		2,488,000
2010
(1) Equity in Subsidiary Income (0.80			$100,000)					80,000
		Dividends Declared (0.80	$20,000)								16,000
		Investment in Sand Company									64,000
	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
(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

5 – 13

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

5 – 14

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

Exercise 5-11 (Continued)

Part 3 – Complete Equity Method

Computation and Allocation of Difference Schedule
		Parent			Non-			Entire
			Share	Controlling				Value
					Share
Purchase 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 depreciation
					and cost of goods sold	41,000
Balance 2010				2,299,000
2011 equity income (.8)($150,000)				120,000	2011 Dividends (.8)($30,000)	24,000
					2011 depreciation
					and cost of goods sold	5,000
Balance 2011				2,390,000
2012 equity income (.8)($80,000)				64,000	2012 Dividends (.8)($15,000)	12,000
					2012 depreciation
					and cost of goods sold	5,000
Balance 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

5 – 16

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

5 – 17

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

5 – 18

Exercise 5-12

Part A (1) Investment in Saxton Corporation

225,000

Beginning Retained Earnings-Palm Inc.

225,000

To establish reciprocity/convert to equity (0.90

($1,250,000 – $1,000,000))

Computation and Allocation of Difference Schedule

Parent

Non-

Entire

Controlling

Value

Purchase 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 value

150,000

16,667

166,667

Inventory

(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)

Gain

300,000

Increase Noncontrolling interest to fair value of assets

33,333

Total allocated bargain

333,333

Balance

-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

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 difference
	between implied and book value
			2011		2012
	Current Assets (inventory)		$90,000			$0
	Gain			(300,000)		(0)

		Total	$(210,000)			$(0)	210,000

	Consolidated Retained Earnings on 12/31/2012						$2,705,000
Exercise 5-13
Exercise 5-13
								Net Assets
	Imputed Value ($2,070,000/0.9)						$2,300,000
	Recorded Value ($1,200,000 + $600,000)								1,800,000
	Unrecorded Values						$500,000
	Allocated to identifiable assets
	Inventory ($725,000 – $600,000)					$125,000
	Equipment ($1,075,000 – $900,000)						175,000
300,000
	Goodwill						$200,000

	Inventory						125,000
	Equipment						175,000
	Goodwill						200,000
		Revaluation Capital					500,000

5 – 20

Exercise 5-14

Part A

Computation and Allocation of Difference Schedule

Parent

Non-

Entire

Controlling

Value

Purchase 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 value

150,000

16,667

166,667

Inventory

(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)

Gain

300,000

Increase Noncontrolling interest to fair value of assets

33,333

Total allocated bargain

333,333

Balance

-0-

*$3,750,000/.90

Investment in Saxton Corporation (Partial Equity)

Cost of investment

3,750,000P

2011 equity income (.9)($250,000)

225,000

2011 Dividends

Balance 2011

3,975,000

2012 equity income (.9)($300,000)

270,000

2012 Dividends

Balance 2012

4,245,000

(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

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 value
				2011				2012
	Current Assets (inventory)			$90,000					$0
	Gain				(300,000)				(0)

		Total		$(210,000)					$(0)					210,000

	Consolidated Retained Earnings on 12/31/2012													$2,705,000
Exercise 5-15
Exercise 5-15
Part A
Computation and Allocation of Difference Schedule
							Parent				Non-		Entire
							Share		Controlling				Value
											Share
Purchase 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 value						150,000				16,667		166,667
Inventory						(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)
Gain						300,000

Increase Noncontrolling interest to fair value of assets									33,333
Total allocated bargain												333,333
Balance						-0-			-0-				-0-
*$3,750,000/.90
			Investment in Saxton Corporation
Cost of investment				3,750,000P

2011 equity income (.9)($250,000)				225,000			2011 Dividends							0
							2011 amortization (equity income)							75,000
Balance 2011				3,900,000
2012 equity income (.9)($300,000)				270,000			2012 Dividends							0
							2012 amortization (equity income)							15,000
Balance 2012				4,155,000

5 – 22

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

5 – 23

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

5 – 24

ANSWERS TO PROBLEMS

Problem 5-1

Calculations:

Computation and Allocation of Difference Schedule

Parent

Non-

Entire

Controlling

Value

Purchase price and implied value

$2,800,000

700,000

3,500,000 *

Less: Book value of equity acquired

1,200,000

300,000

1,500,000

Difference between implied and book value

1,600,000

400,000

2,000,000

Equipment (net) ($1,500,000 – $600,000

(720,000)

(180,000)

(900,000)

Balance

880,000

220,000

1,100,000

Goodwill

(880,000)

(220,000)

(1,100,000)

Balance

-0-

*$2,800,000/.80

Depreciation of difference allocated to Palmero

($720,000/10)

$72,000

Depreciation of difference allocated to Santos ($180,000/10)

$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)

900,000

Goodwill

1,100,000

Difference between Implied and Book Value

2,000,000

(2b) Depreciation Expense

90,000

Property and Equipment (net)

90,000

5 – 25

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

5 – 26

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 between
Implied and Book Value
Allocated 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 of
				Santos 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

5 – 27

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 5-2
Computation and Allocation of Difference Schedule
								Parent		Non-				Entire
								Share	Controlling					Value
										Share
Purchase price and implied value					$1,300,000				557,143				1,857,143 *
Less: Book value of equity acquired					1,050,000				450,000				1,500,000

Difference between implied and book value						250,000			107,143				357,143
Unamortized Discount on Bonds Payable					(106,143)				(45,490)				(151,633)

Balance					143,857				61,653				205,510
Goodwill					(143,857)				(61,653)				(205,510)
Balance								-0-		-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)											$620,920
		Interest ($60,000 3.79079)														227,447
		Fair value of bonds											$848,367
		Face value of bonds													1,000,000
		Total 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)
			Carrying	Interest at 10%			Interest at 6%				Difference
	Year		Value (1/1)	of Carrying Value				of Par Value				[(3)-(4)]

2011			$848,367	$84,837	$60,000								$24,837
2012		$873,204		$87,320	$60,000								$27,320

5 – 28

	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)

5 – 29

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
			1,614,510
Excess 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 Value
Allocated to:
Bonds Payable		(17,386)	(19,124)*

Controlling Interest in Consolidated Net Income	$352,614		$314,876

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

5 – 30

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 to
	bonds payable		24,837
				Adjusted net income of Sagon				75,163
				Noncontrolling Ownership percentage interest				30%

				Noncontrolling Interest in Consolidated Net Income			$ 22,549


		Controlling Interest in Consolidated Income (2011)
					Paxton Company’s net income from its independent
						operations	$	300,000
					Paxton Company’s share of the adjusted income of
						Sagon Company (.7 X $75,163)		52,614

					Controlling interest in Consolidated Net Income		$	352,614


		Noncontrolling Interest in Consolidated Income (2012)
Amortization of the difference between				Net income reported by S			$	120,000
implied and book value related to
bonds payable			27,320
Goodwill Impairment			25,510
				Adjusted net income of S				67,170
				Noncontrolling Ownership percentage interest				30%

				Noncontrolling Interest in Consolidated Net Income			$	20,151


		Controlling Interest in Consolidated Income (2012)
						Paxton Company’s net income from its independent
						operations	$	250,000
						Paxton Company’s share of the adjusted income of
						Sagon Company (.7 X $67,170)		47,019

						Controlling interest in Consolidated Net Income	$	297,019

5 – 31

	Problem 5-3
Computation and Allocation of Difference Schedule
						Parent			Non-			Entire
							Share	Controlling				Value
									Share
Purchase price and implied value				$1,970,000				492,500			2,462,500 *
Less: Book value of equity acquired				1,440,000				360,000			1,800,000

Difference between implied and book value					530,000			132,500			662,500
Inventory ($725,000 – $600,000)				(100,000)				(25,000)			(125,000)
Equipment ($1,075,000 – $900,000)				(140,000)				(35,000)			(175,000)

Balance				290,000				72,500			362,500
Goodwill				(290,000)				(72,500)			(362,500)
Balance							-0-			-0-		-0-
*$1,970,000/.80
	2012 Amortization Schedule
Inventory (60% in 2012)				60,000				15,000			75,000
Equipment ($175,000/7)				20,000				5,000			25,000

Total				80,000				20,000			100,000
	2013 Amortization Schedule
Inventory (40% in 2013)				40,000				10,000			50,000
Equipment ($175,000/7)				20,000				5,000			25,000

Total				60,000				15,000			75,000
	Part A 2012

		Investment in Superstition Company									1,970,000
		Cash									1,970,000
		Cash (0.8	$150,000)								120,000
		Investment in Superstition Company									120,000
		Investment in Superstition Company									600,000
		Equity in Subsidiary Income (.80)($750,000)									600,000
		Equity in Subsidiary Income									80,000
		Investment in Superstition Company									80,000
		2013
		Cash (0.8	$225,000)								180,000
		Investment in Superstition Company									180,000
		Investment in Superstition Company									720,000
		Equity in Subsidiary Income (.80)($900,000)									720,000
		Equity in Subsidiary Income									60,000
		Investment in Superstition Company									60,000

5 – 32

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

5 – 33

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

5 – 34

Problem 5-4

Part A

Computation and Allocation of Difference Schedule
		Parent			Non-	Entire
			Share	Controlling		Value
					Share
Purchase price and implied value	$850,000			212,500		1,062,500 *
Less: Book value of equity acquired	504,000			126,000		630,000

Difference between implied and book value	346,000			86,500		432,500
Equipment	(104,000)			(26,000)		(130,000)
Land	(52,000)			(13,000)		(65,000)
Inventory	(32,000)			(8,000)		(40,000)

Balance	158,000			39,500		197,500
Goodwill	(158,000)			(39,500)		(197,500)
Balance	-0-			-0-			-0-
*$850,000/.80
Part B and C – Worksheet Entries
Cost Method Workpaper entries – Year 2010
(1) Dividend Income ($25,000 .80)						20,000
Dividends Declared						20,000
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
(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

5 – 35

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

5 – 36

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

5 – 37

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

5 – 38

Problem 5-4 (continued)
Part D			Porter	Salem			Eliminations			Noncontrolling	Consolidated
	Income Statement	Company		Company			Debit		Credit	Interest	Balances
	Sales	$1,100,000		$450,000							$1,550,000
	Dividend Income		48,000			(2)	48,000
	Total Revenue		1,148,000		450,000						1,550,000

	Cost of Goods Sold		900,000		200,000						1,100,000
	Depreciation Expense	40,000			30,000(4b)		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		148,000		170,000							196,500
	Noncontrolling Interest in Consolid. Income*									19,300	(19,300)
	Net Income to Retained Earnings	$148,000		$170,000			$121,500			$19,300	$177,200
	Retained Earnings Statement
	Retained Earnings Statement
	1/1 Retained Earnings:
	Porter Company	$500,000				(4a)	32,000	(1)	$120,000		$546,400
						(4b)	41,600
	Salem Company			230,000		(3) 230,000
	Net Income from Above	148,000		170,000			121,500			19,300	177,200
	Dividends 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

5 – 39

Problem 5-4 (continued)
		Porter	Salem		Eliminations			Noncontrolling		Consolidated
	Balance Sheet	Company	Company		Debit		Credit		Interest	Balances
	Cash	$70,000	$65,000							$135,000
	Accounts Receivable	260,000	190,000							$450,000
	Inventory	240,000	175,000							$415,000
	Investment in Salem Company	850,000		(1)	120,000	(3)	970,000
	Difference between Implied and Book Value			(3)	432,500	(4a)	432,500
	Land		320,000	(4a)	65,000					385,000
	Plant and Equipment	360,000	280,000	(4a)	130,000	(4b)	78,000			692,000
	Goodwill			(4a)	197,500	(5)	47,500			150,000
	Total Assets	$1,780,000	$1,030,000							$2,227,000

	Accounts Payable	$132,000	$110,000							$242,000
	Notes Payable	90,000	30,000							120,000
	Common Stock:

	Porter Company	1,000,000								1,000,000
	Salem Company		550,000	(3)	550,000
	Retained Earnings from above	558,000	340,000		425,100		168,000		7,300	633,600
	1/1 Noncontrolling Interest in Net			(4a)	8,000	(3)	242,500 **		224,100
	Assets			(4b)	10,400
	12/31 Noncontrolling Interest in Net								$231,400	231,400
	Assets
	Total Liabilities and Equity	$1,780,000	$1,030,000		$1,938,500		$1,938,500			$2,227,000
	Total 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.

5 – 40

Problem 5-4D explanation

Computation and Allocation of Difference Schedule
			Parent				Non-		Entire
				Share	Controlling				Value
						Share
Purchase price and implied value		$850,000			212,500			1,062,500
Less: Book value of equity acquired		504,000			126,000			630,000

Difference between implied and book value		346,000			86,500			432,500
Equipment		(104,000)			(26,000)			(130,000)
Land		(52,000)			(13,000)			(65,000)
Inventory		(32,000)			(8,000)			(40,000)

Balance		158,000			39,500			197,500
Goodwill		(158,000)			(39,500)			(197,500)
Balance		-0-			-0-				-0-
Explanations of Workpaper entries:
(1)	Investment in Salem Company [.80 ($230,000 – $80,000)]							120,000
	Beginning Retained Earnings – Porter Co.							120,000
	To establish reciprocity/convert to equity method as of 1/1/12
(2)	Dividend Income ($60,000 .80)							48,000
	Dividends Declared							48,000
	To eliminate intercompany dividends
(3) Beginning Retained Earnings – Salem Co.								230,000
	Common Stock – Salem							550,000
	Difference between Implied and Book Value							432,500
	Investment in Salem Company ($850,000 + $120,000)							970,000
	Noncontrolling Interest							242,500
	To eliminate the investment account and create noncontrolling interest account
(4a) Beginning Retained Earnings- Porter Company								32,000
	Noncontrolling Interest							8,000
	Land							65,000
	Plant and Equipment							130,000
	Goodwill							197,500
	Difference between Implied and Book Value							432,500
(4b) Beginning Retained Earnings – Porter Company (two years)								41,600
	Noncontrolling Interest (two years)							10,400
	Depreciation Expense							26,000
	Plant and Equipment							78,000

5 – 41

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

	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

5 – 42

Problem 5-4 (continued)
Part E
					PORTER COMPANY AND SUBSIDIARY
					Consolidated Statement of Financial Position
					December 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					$558,000
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				208,000
Cumulative Effect to December 31, 2012 of the Allocation and Depreciation
of the Difference between Implied and Book value (Parent’s share)
Allocated to:
		2010	2011	2012
Inventory	$32,000		$0	$0
Equipment	20,800		20,800	20,800

	$52,800		$20,800	$20,800	(94,400)

Goodwill Impairment (2012)						(38,000)
Controlling Interest in Consolidated Retained Earnings on 12/31/12					$633,600

5 – 43

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 Schedule
			Parent				Non-			Entire
				Share	Controlling					Value
						Share
Purchase price and implied value		$1,000,000			111,111				1,111,111			*
Less: Book value of equity acquired		621,000			69,000				690,000

Difference between implied and book value		379,000			42,111				421,111
Equipment ($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)

Balance		140,000			15,555				155,555
Goodwill		(140,000)			(15,555)				(155,555)
Balance				-0-				-0-		-0-
*$1,000,000/.90
	2011 Amortization Schedule
Equipment (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 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

5 – 44

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

5 – 45

Problem 5-5 (continued)	PALMER COMPANY AND SUBSIDIARY
	Consolidated Statement Workpaper
Part C	For the Year Ended December 31, 2013
	Palmer		Stevens		Eliminations			Noncontrolling	Consolidated
	Company		Company		Dr.		Cr.	Interest	Balances
Income Statement
Sales	$620,000	$340,000							$960,000
Cost of Goods Sold	430,000		240,000						670,000
Gross Margin	190,000	100,000							290,000
Depreciation Expense	30,000	20,000		(4b)	6,000				56,000
Other Expenses	60,000		35,000						95,000
Income from Operations	100,000	45,000							139,000
Dividend Income	31,500			(2)	31,500
Net/Consolidated Income	131,500	45,000							139,000
Noncontrolling Interest in Income *								3,900	(3,900)
Net Income to Retained Earnings	$131,500	$45,000			$37,500		$0	$3,900	$135,100
Statement of Retained Earnings
1/1Retained Earnings
Palmer Company	$297,600			(4a)	95,000	(1)	18,000		$209,800
				(4b)	10,800
Stevens Company		210,000		(3)	210,000
Net Income from above	131,500	45,000			37,500			3,900	135,100
Dividends Declared
Palmer 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.

5 – 46

Problem 5-5 (continued) Part C	Palmer		Stevens		Eliminations					Noncontrolling		Consolidated
	Company		Company	Dr.				Cr.		Interest		Balances
Balance Sheet
Cash	$201,200	$151,000									$352,200
Accounts Receivable	221,000	173,000									394,000
Inventory	100,400	81,000									181,400
Investment in Stevens Company	1,000,000			(1)	18,000	(3)		1,018,000
Difference between Implied & Bk Value				(3)	421,111		(4a)	421,111
Equipment	450,000	300,000		(4a)	90,000						840,000
Accumulated Depreciation	(300,000)	(140,000)					(4a)	30,000			(488,000)
							(4b)	18,000
Land	360,000	290,000		(4a) 100,000							750,000
Goodwill				(4a) 155,555								155,555
Total Assets	$2,032,600		$855,000								$2,185,155

Accounts Payable	$323,500		$135,000								$458,500
Bonds Payable	400,000										400,000
Capital Stock:

Palmer Company	1,000,000										1,000,000
Stevens Company		500,000		(3)	500,000
Retained Earnings from above	309,100	220,000			353,300			49,500	400		224,900
1/1 Noncontrolling Interest in Net				(4a)	10,556	(3)		113,111	101,355
Assets				(4b)	1,200
12/31 Noncontrolling Interest in Net									$101,755		101,755
Assets
Total Liabilities & Equity	$2,032,600		$855,000	$1,649,722		$1,649,722					$2,185,155

Noncontrolling Interest in Income = 0.10	$45,000 – $600 = $3,900

Explanations of workpaper entries are on separate page

5 – 47

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

5 – 48

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 5-6

Computation and Allocation of Difference Schedule

Parent

Non-

Entire

Controlling

Value

Purchase price and implied value

$400,000

70,588

470,588

Less: Book value of equity acquired

255,000

45,000

300,000

Difference between implied and book value

145,000

25,588

170,588

Equipment*

(76,500)

(13,500)

(90,000)

Less:Accumulated Depreciation*

25,500

4,500

30,000

Balance

94,000

16,588

110,588

Goodwill

(94,000)

(16,588)

(110,588)

Balance

-0-

*$400,000/.85

5 – 49

Problem 5-6 (continued)

*Schedule of Book Value and Fair Value on Date of Acquisition

Fair

Book

Fair Value

Value

Minus Book Value

Equipment

$450,000 ¹

$360,000

$90,000 ³

Accumulated Depreciation

150,000 ²

120,000

30,000 ⁴

Equipment (net)

$300,000

$240,000

$60,000

¹$300,000/($240/$360) = $450,000

²$450,000

($120/$360) = $150,000

³$60,000/($240/$360) = $90,000

⁴$90,000

($120/$360) = $30,000

Allocation of Difference between Implied and Book Value

Annual

Amount

Amortization

Equipment (net)

$60,000/6 yr

$10,000

Goodwill

110,588

Difference between Implied and Book Value

$170,588

$10,000

Part A

Part 1 – Cost Method

(1) Dividend Income ($30,000

0.85)

25,500

Dividends Declared

25,500

(2) Beginning Retained Earnings – Silvas Company

210,000

Common Stock – Silvas Company

90,000

Difference between Implied and Book Value

170,588

Investment in Silvas Company

400,000

Noncontrolling Interest

70,588

(3) Depreciation Expense

10,000

Equipment

90,000

Goodwill

110,588

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

40,000

Difference between Implied and Book Value

170,588

Alternative to entry (3)

(3a)

Equipment

90,000

Goodwill

110,588

Accumulated Depreciation – Equipment

30,000

Difference between Implied and Book Value

170,588

Depreciation Expense

10,000

Accumulated Depreciation – Equipment

10,000

5 – 50

Problem 5-6 (continued)

Part 2 – Partial Equity Method

(1)	Equity in Subsidiary Income ($40,000		0.85)		34,000
	Dividends Declared ($30,000 0.85)				25,500
	Investment in Silvas Company				8,500
	To eliminate intercompany dividends and income
(2)	Beginning Retained Earnings – Silvas Company				210,000
	Common Stock – Silvas Company				90,000
	Difference between Implied and Book Value				170,588
	Investment in Silvas Company				400,000
	Noncontrolling Interest				70,588
(3)	Depreciation Expense				10,000
	Equipment				90,000
	Goodwill				110,588
	Accumulated Depreciation – Equipment ($30,000 + $10,000)				40,000
	Difference between Implied and Book Value				170,588
Alternative to entry (3)
(3a)	Equipment				90,000
	Goodwill				110,588
	Accumulated Depreciation – Equipment				30,000
	Difference between Implied and Book Value				170,588
(3b)	Depreciation Expense				10,000
	Accumulated Depreciation – Equipment				10,000
Part B
Part 1 – Cost Method
		Silvas Company		Difference	Consolidated

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

Undepreciated Basis			200,000	50,000	250,000
Sales Proceeds			220,000		220,000

Gain (Loss)			$ 20,000	$50,000	$(30,000)

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

5 – 51

Problem 5-6 (continued)

(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
Noncontrolling Interest					1,500
Gain on Disposal of Equipment					20,000
Loss on Disposal of Equipment					30,000
Goodwill					110,588
Difference between Implied and Book Value					170,588
To 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 =					$50,000
Part B
Part B
Part 2 – Partial Equity Method
	Silvas Company			Difference	Consolidated
Cost		$360,000	$90,000		$450,000
Accumulated Depreciation		160,000	40,000		200,000

Undepreciated Basis		200,000	50,000		250,000
Sales Proceeds		220,000			220,000

Gain (Loss)		$20,000	$50,000		$(30,000)

(1) Equity in Subsidiary Income ($40,000		0.85)			34,000
Investment in Silvas Company					34,000
To eliminate intercompany dividends and income
(2) Investment in Silvas Company					25,500
Dividends Declared-Silvas Company ($30,000			0.85)		25,500
To eliminate intercompany dividends
(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

5 – 52

Problem 5-6 (continued)

(4) Beginning Retained Earnings-Perini Company

8,500

Noncontrolling Interest

1,500

Gain on Disposal of Equipment

20,000

Loss on Disposal of Equipment

30,000

Goodwill

110,588

Difference between Implied and Book Value

170,588

To 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 =

$50,000

Problem 5-7

Computation and Allocation of Difference Schedule

Parent

Non-

Entire

Controlling

Value

Purchase price and implied value

$900,000

300,000

1,200,000

Less: Book value of equity acquired

506,250

168,750

675,000

Difference between implied and book value

393,750

131,250

525,000

Equipment (net)

(135,000)

(45,000)

(180,000)

Balance

258,750

86,250

345,000

Goodwill

(258,750)

(86,250)

(345,000)

Balance

-0-

*$900,000/.75

Amount of Difference Between Implied and Book Value Allocated to Equipment

	Fair			Book		Fair Value Minus
	Value			Value			Book Value	3

Equipment	$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

5 – 53

Problem 5-7 (Continued)						90,000
Part A	Investment in Sanchez Company					90,000
	Dividend 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 Company					78,750
(2)	Beginning Retained Earnings-Sanchez Company					375,000
	Common Stock-Sanchez Company					300,000
	Difference between Implied and Book Value					525,000
	Investment in Sanchez Company					900,000
	Noncontrolling Interest					300,000
	To eliminate investment and create noncontrolling interest account
(3)	Depreciation Expense					18,000
	Equipment					270,000
	Goodwill					345,000
	Accumulated Depreciation-Equipment ($90,000 + $18,000)					108,000
	Difference between Implied and Book Value					525,000
	To allocate and depreciate the difference between implied and book value
Alternative to entry (3)
(3a)	Equipment					270,000
	Goodwill					345,000
	Accumulated Depreciation-Equipment					90,000
	Difference between Implied and Book Value					525,000
(3b)	Depreciation Expense					18,000
	Accumulated Depreciation-Equipment					18,000
Part B (1) & (2)
		Book Value			Difference	Consolidated
							1
Equipment			$720,000		$270,000 ³	$990,000	1
Accumulated Depreciation			(240,000)		(90,000)	(330,000)

Carrying Value 1/1/2011			$480,000		$180,000	$660,000
			8/10			8/10
			8/10			8/10
Carrying Value 1/1/2013			384,000			528,000
Proceeds from Sale				(450,000)		(450,000)

(Gain) Loss on Sale				$(66,000)		$78,000

(3) Investment in Sanchez Company						36,000
Gain on Disposal of Equipment – Sanchez						66,000
Loss on Disposal of Equipment						78,000
	Difference between Implied and Book Value					180,000

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.

5 – 54

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 Schedule
		Parent			Non-			Entire
		Share		Controlling				Value
					Share
Purchase price and implied value	$3,100,000			547,059			3,647,059 *
Less: Book value of equity acquired	2,295,000			405,000			2,700,000

Difference between implied and book value		805,000		142,059			947,059
Inventory	(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)
Gain	2,500
Increase Noncontrolling interest to fair value of assets				441
Total allocated bargain							2,941
Balance	-0-			-0-					-0-
*$3,100,000/.85
Amortization Schedule – Parent
		2011				2012
Inventory	$42,500						$0
Plant and Equipment ($400,000/10 x .85)	34,000						34,000
Gain			2,500				0
Total	$79,000						$34,000
Amortization Schedule – Noncontrolling interest
Amortization Schedule – Noncontrolling interest
		2011				2012
Inventory	$7,500						$0
Plant and Equipment ($400,000/10 x .15)	6,000						6,000
FV adjustment		441					0
Total	$13,941						$6,000

5 – 55

Problem 5-8 (continued)

Part B (1) – Cost method
			2011		2012
(1)	Investment in Savage ($110,000 .85)				93,500
	Beginning Retained Earnings – Patten				93,500
(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 + ($110,000 x .15)]		547,059		563,559
(3)	Beginning Retained Earnings – Patten ($42,500 + $34,000)				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 ($400,000 – $40,000)		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 (2) – Partial Equity Method
			2011		2012
(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 – 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
	5 – 56

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
		2011		2012
(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

5 – 57

	Gain on Acquisition (P’s share)		2,500
	Beginning Retained Earnings – Patten (gain)				2,500
	Noncontrolling Interest		441		441
Alternative to entry (3)
(3a)	Investment in Savage				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)	Investment in Savage				34,000
	Noncontrolling Interest				6,000
	Depreciation Expense	40,000			40,000
	Plant and Equipment (net)		40,000		80,000
Part C
			2011		2012
Patten 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)
	Gain			2,500		0
Consolidated Net Income			$969,500		$794,000

5 – 58

Problem 5-9
Computation and Allocation of Difference Schedule
		Parent	Non-		Entire
		Share	Controlling			Value
			Share
Purchase 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)
Gain	100,000

Increase Noncontrolling interest to fair value of assets			0
Total allocated bargain				100,000
Balance	-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

5 – 59

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

5 – 60

Problem 5-10
Computation and Allocation of Difference Schedule
		Parent		Non-					Entire			Sanders
		Share	Controlling						Value		100%
				Share					Taylor
Purchase price and implied value	$1,300,000		144,444				1,444,444			*	800,000
Less: Book value of equity acquired	990,000		110,000				1,100,000				700,000
Difference between implied
and book value	310,000		34,444				344,444				100,000
Inventory	(67,500)		(7,500)				(75,000)				0
Plant and equipment	0		0				0				(50,000)
Land	(67,500)		(7,500)				(75,000)				0

Balance	175,000		19,444						194,444		50,000
Goodwill	(175,000)		(19,444)				(194,444)				(50,000)
Balance	-0-				-0-			-0-				-0-
*$1,300,000/.90
Amortization Schedule for 2011						Sanders				Taylor
Inventory			$0								$50,000 ($75,000
2/3)
Plant and Equipment ($50,000/10 yr)			5,000
Land											0
Part A Investment in Sanders											800,000
Cash											800,000
Investment in Taylor											1,300,000
Cash											1,300,000
Cash											100,000
Dividend Income (Sanders)											100,000
Cash ($200,000 .90)											180,000
Dividend Income (Taylor)											180,000

5 – 61

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

5 – 62

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

5 – 63

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

5 – 64

Problem 5-11 (continued)
Part D	Porter	Salem		Eliminations		Noncontrolling	Consolidated
Income Statement	Company	Company		Debit	Credit	Interest	Balances
Sales	$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)	41,600
Salem 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

5 – 65

Problem 5-11 (continued)
	Porter	Salem		Eliminations			Noncontrolling		Consolidated
Balance Sheet	Company	Company		Debit		Credit		Interest	Balances
Cash	$70,000	$65,000							$135,000
Accounts Receivable	260,000	190,000							450,000
Inventory	240,000	175,000							415,000
Investment in Salem Comp.	1,058,000				(1)	88,000			0
					(2)	970,000
Difference between Implied and Book Value			(2)	432,500	(3)	432,500
Land		320,000	(3)	65,000					385,000
Plant and Equipment	360,000	280,000	(3)	130,000	(4)	78,000			692,000
Goodwill			(3)	197,500	(5)	47,500			150,000
Total Assets	$1,988,000	$1,030,000							$2,227,000

Accounts Payable	$132,000	$110,000							$242,000
Notes Payable	90,000	30,000							120,000
Common stock:

Porter Company	1,000,000								1,000,000
Salem Company		550,000	(2)	550,000
Retained Earnings from above	766,000	340,000		513,100		48,000		7,300	633,600
1/1 Noncontrolling Interest in Net			(3)	8,000	(2)	242,500 **		224,100
Assets			(4)	10,400
12/31 Noncontrolling Interest in
Net Assets								$231,400	231,400
Total Liabilities and Equity	$1,988,000	$1,030,000		$1,906,500		$1,906,500			$2,227,000
Total 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

5 – 66

Problem 5-11 (continued)

Computation and Allocation of Difference Schedule
		Parent				Non-		Entire
			Share	Controlling				Value
					Share
Purchase price and implied value	$850,000			212,500			1,062,500 *
Less: Book value of equity acquired	504,000			126,000			630,000

Difference between implied and book value	346,000			86,500			432,500
Equipment	(104,000)			(26,000)			(130,000)
Land	(52,000)			(13,000)			(65,000)
Inventory	(32,000)			(8,000)			(40,000)

Balance	158,000			39,500			197,500
Goodwill	(158,000)			(39,500)			(197,500)
Balance	-0-			-0-				-0-
*$850,000/.80
Explanations of workpaper entries:
(1) Equity in Subsidiary Income							136,000
Dividends Declared ($60,000 .8)							48,000
Investment in Salem Company							88,000
To reverse the effect of parent company entries during the year for subsidiary
dividends and income
(2) Beginning Retained Earnings – Salem Co.							230,000
Common Stock – Salem							550,000
Difference between Implied and Book Value							432,500
Investment in Salem Company							970,000
Noncontrolling Interest							242,500
To eliminate investment account and create noncontrolling interest account
(3) Beginning Retained Earnings – Porter Company							32,000
Noncontrolling Interest							8,000
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) Beginning Retained Earnings – Porter Company (2)($20,800)							41,600
Noncontrolling Interest (2)($5,200)							10,400
Depreciation Expense ($130,000/5)							26,000
Plant and Equipment, net							78,000
(5) Impairment Loss ($197,500 – $150,000)							47,500
Goodwill							47,500
To record goodwill impairment

5 – 67

Problem 5-11 (continued)

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 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
	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 SUBSIDIARY
			PORTER COMPANY AND SUBSIDIARY
			Consolidated Statement of Financial Position
				December 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
5 – 68

1,865,000

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

5 – 69

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:
	2010		2011		2012
Inventory	$32,000		$0		$0
Equipment	20,800		20,800		20,800
Goodwill	0		0		0
		$52,800		$20,800		$20,800	(94,400)

Goodwill Impairment (2012)								(38,000)
Controlling Retained Earnings on 12/31/2012							$633,600

Problem 5-12
Computation and Allocation of Difference Schedule
			Parent			Non-		Entire
			Share	Controlling				Value
					Share
Purchase price and implied value	$1,000,000			111,111			1,111,111 *
Less: Book value of equity acquired		621,000		69,000			690,000

Difference between implied and book value		379,000		42,111			421,111
Equipment ($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)

Balance		140,000		15,555			155,555
Goodwill		(140,000)		(15,555)			(155,555)
Balance		-0-		-0-				-0-
*$1,000,000/.90

5 – 70

Problem 5-12 (continued)

	2011 Amortization Schedule
Equipment (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 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


	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

5 – 71

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

5 – 72

Problem 5-12 (continued)	PALMER COMPANY AND SUBSIDIARY
	Consolidated Statement Workpaper
Part B	For the Year Ended December 31, 2013
	Palmer		Stevens		Eliminations				Noncontrolling	Consolidated
	Company		Company	Dr.			Cr.		Interest	Balances
Income Statement
Sales	$620,000	$340,000								$960,000
Cost of Good Sold	430,000		240,000							670,000
Gross Margin	190,000	100,000								290,000
Depreciation Expense	30,000	20,000		(3b)	6,000					56,000
Other Expenses	60,000		35,000							95,000
Income from Operations	100,000	45,000								139,000
Equity in Subsidiary Income	40,500			(1)	40,500
Net/Consolidated Income	140,500	45,000								139,000
Noncontrolling Interest in Income									3,900 *	(3,900)*
Net Income to Retained Earnings	$140,500	$45,000			46,500			3,900		$135,100
Statement of Retained Earnings
1/1Retained Earnings
Palmer Company	$315,600			(3a) 95,000						$209,800
				(3b)	10,800
Stevens Company		$210,000		(2) 210,000
Net Income from above	140,500	45,000			46,500			3,900		135,100
Dividends Declared
Palmer Company	(120,000)									(120,000)
Stevens Company			(35,000)			(1)	31,500		(3,500)
12/31Retained Earnings to Balance Sheet	$336,100		$220,000		362,300		31,500	$400		$224,900

5 – 73

	Problem 5-12 (continued)
		Palmer	Stevens		Eliminations				Noncontrolling			Consolidated
		Company	Company		Dr.		Cr.		Interest			Balances
	Balance Sheet
	Cash	$201,200	$151,000							$352,200
	Accounts Receivable	221,000	173,000							394,000
	Inventory	100,400	81,000							181,400
	Investment in Stevens Company	1,027,000				(1)	9,000
						(2) 1,018,000
	Difference between Implied & Book
	Value			(2) 421,111		(3)	421,111
	Equipment	450,000	300,000	(3a) 90,000						840,000
	Accumulated Depreciation	(300,000)	(140,000)			(3a)	30,000			(488,000)
						(3b)	18,000
	Land	360,000	290,000	(3a)100,000						750,000
	Goodwill			(3a)155,555								155,555
	Total Assets	2,059,600	855,000									2,185,155
	Accounts Payable	$323,500	$135,000							$458,500
	Bonds Payable	400,000								400,000
	Capital Stock:

	Palmer Company	1,000,000								1,000,000
	Stevens Company		500,000	(2) 500,000
	Retained Earnings from above	336,100	220,000		362,300		31,500	400		224,900
	1/1 Nonconntrolling Interest in Net			(3a)	10,556	(2)	113,111	101,355
	Assets			(3b)	1,200
	12/31 Noncontrolling Interest In Net
	Assets								$101,755			$101,755
	Total 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 = $3,900
	Explanations of workpaper entries are on separate page.

5 – 74

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

5 – 75

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

5 – 76

Problem 5-13 (continued)	PRESS COMPANY AND SUBSIDIARY
		Consolidated Balance Sheet Workpaper
Part B				January 1, 2011
	Press			Sensor	Eliminations		Noncontrolling			Consolidated
	Company			Company	Dr.	Cr.	Interest			Balances
Cash	$265,000	$38,000						$303,000
Receivables	422,500	76,000						498,500
Inventory	216,500	124,000						340,500
Investment in Sensor Company	800,000					(1) 800,000
Buildings	465,000	322,000						787,000
Equipment	229,000	246,467						475,467
Land	188,000	140,978						328,978
Patents	167,500			190,444						357,944
Total Assets	$2,753,500			$1,137,889						$3,091,389
Liabilities:	$667,000	$249,000						$916,000
Common Stock:

Press Company	700,000							700,000
Sensor Company		300,000			(1) 300,000
Other Contributed Capital:
Press Company	846,000							846,000
Sensor Company		164,000			(1) 164,000
Retained Earnings:

Press Company	540,500							540,500
Sensor Company		220,000			(1) 220,000
Revaluation Capital		204,889			(1) 204,889
Noncontrolling Interest in Net Assets						(1) 88,889	$88,889			88,889
Total 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.

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

	2009		2010		2011
Cost of Goods Sold	$37,500		$0		$0
Depreciation Expense ($125,000/5)		25,000		25,000		25,000
	$62,500		$25,000		$25,000

5 – 78

Problem 5-14 (continued)	PUSH COMPANY AND SUBSIDIARY
	Consolidated Statement Workpaper
Part B	For the Year Ended December 31, 2009
	Push			WayDown	Eliminations				Noncontrolling			Consolidated
	Company			Company	Dr.		Cr.		Interest			Balances
Income Statement
Sales	$1,050,000	$400,000								$1,450,000
Dividend Income	40,000				(2) 40,000
Total Revenue	1,090,000			400,000								1,450,000
Cost of Goods Sold Expense	$850,000	180,000								1,030,000
Depreciation Expense	35,000	50,000								85,000
Other Expenses	65,000			50,000								115,000
Total Cost & Expense	950,000			280,000								1,230,000
Net/Consolidated income	140,000	120,000								220,000
Noncontrolling Interest In Income									24,000			(24,000)*
Net Income to Retained Earnings	$140,000	$120,000			$40,000			$24,000		$196,000
Statement of Retained Earnings
1/1Retained Earnings
Push Company	$480,000				(1)		2,000			$482,000
WayDown Company		$102,500			(3) 102,500
Net Income from above	140,000	120,000			40,000			24,000		196,000
Dividends Declared
Push 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

5 – 79

	Problem 5-14 (continued)	Push		WayDown	Eliminations					Noncontrolling			Consolidated
		Company		Company	Dr.			Cr.		Interest			Balances
	Balance Sheet
	Cash	$ 80,000	$ 35,000								$115,000
	Accounts Receivable	250,000	170,000								420,000
	Inventory	230,000	150,000								380,000
	Investment in WayDown Company	820,000			(1)2,000	(3) 822,000
	Land		362,500								362,500
	Plant and Equipment	350,000	300,000								650,000
	Goodwill			200,000									200,000
	Total assets	$1,730,000		$1,217,500									$2,127,500
	Accounts Payable	$ 160,000	$ 100,000								$260,000
	Notes Payable	50,000	20,000								70,000
	Revaluation Capital-WayDown Co.		425,000		(3) 425,000
	Capital Stock:

	Push Company	1,000,000									1,000,000
	WayDown Company		500,000		(3) 500,000
	Retained Earnings from above	520,000	172,500		142,500	42,000			14,000		578,000
	1/1 Noncontrolling Interest in Net Assets					(3) 205,500				205,500
	12/31 Noncontrolling Interest									$219,500			219,500
	Total 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

5 – 80

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

5 – 81

Problem 5-15
Computation and Allocation of Difference Schedule
		Parent			Non-	Entire
			Share	Controlling		Value
					Share
Purchase price and implied value	$850,000			212,500		1,062,500 *
Less: Book value of equity acquired	504,000			126,000		630,000

Difference between implied and book value	346,000			86,500		432,500
Equipment	(104,000)			(26,000)		(130,000)
Land	(52,000)			(13,000)		(65,000)
Inventory	(32,000)			(8,000)		(40,000)

Balance	158,000			39,500		197,500
Goodwill	(158,000)			(39,500)		(197,500)

Balance	-0-			-0-		-0-
*$850,000/.80
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
(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

5 – 82

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

5 – 83

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

5 – 84

Problem 5-15 (continued)
Part D	Porter	Salem		Eliminations		Noncontrolling	Consolidated
Income Statement	Company	Company		Debit	Credit	Interest	Balances

Sales	$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 Statement
Retained Earnings Statement
1/1 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

5 – 85

Problem 5-15 (continued)
	Porter	Salem		Eliminations			Noncontrolling Consolidated
Balance Sheet	Company	Company		Debit		Credit		Interest	Balances

Cash	$70,000	$65,000							$135,000
Accounts Receivable	260,000	190,000							450,000
Inventory	240,000	175,000							415,000
Investment in Salem Comp.	925,600		(3)	32,000	(1)	29,200
			(4)	41,600	(2)	970,000
Difference between Implied and Book Value			(2)	432,500	(3)	432,500
Land		320,000	(3)	65,000					385,000
Plant and Equipment	360,000	280,000	(3)	130,000	(4)	78,000			692,000
Goodwill			(3)	197,500	(5)	47,500			150,000
Total Assets	$1,855,600	$1,030,000							$2,227,000

Accounts Payable	$132,000	$110,000							$242,000
Notes Payable	90,000	30,000							120,000
Common stock:

Porter Company	1,000,000								1,000,000
Salem Company		550,000	(2)	550,000
Retained earnings from above	633,600	340,000		380,700		48,000		7,300	633,600
1/1 Noncontrolling Interest in Net			(3)	8,000	(2)	242,500	**	224,100
Assets			(4)	10,400
12/31 Noncontrolling Interest in
Net Assets								$231,400	231,400
Total Liabilities and Equity	$1,855,600	$1,030,000		$1,847,700		$1,847,700			$2,227,000
Total 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

5 – 86

Problem 5-15 (continued)

Computation and Allocation of Difference Schedule
		Parent				Non-		Entire
			Share	Controlling				Value
					Share
Purchase price and implied value	$850,000			212,500			1,062,500 *
Less: Book value of equity acquired	504,000			126,000			630,000

Difference between implied and book value	346,000			86,500			432,500
Equipment	(104,000)			(26,000)			(130,000)
Land	(52,000)			(13,000)			(65,000)
Inventory	(32,000)			(8,000)			(40,000)

Balance	158,000			39,500			197,500
Goodwill	(158,000)			(39,500)			(197,500)
Balance	-0-			-0-				-0-
*$850,000/.80
Explanations of workpaper entries:
(1) Equity in Subsidiary Income							77,200
Dividends Declared ($60,000 .8)							48,000
Investment in Salem Company							29,200
To reverse the effect of parent company entries during the year for subsidiary
dividends and income
(2) Beginning Retained Earnings – Salem Co.							230,000
Common Stock – Salem							550,000
Difference between Implied and Book Value							432,500
Investment in Salem Company							970,000
Noncontrolling Interest							242,500
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							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 (2)($20,800)							41,600
Noncontrolling Interest (2)($5,200)							10,400
Depreciation Expense ($130,000/5)							26,000
Plant and Equipment, net							78,000
(5) Impairment Loss ($197,500 – $150,000)							47,500
Goodwill							47,500
To record goodwill impairment

5 – 87

Problem 5-15 – 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
			PORTER COMPANY AND SUBSIDIARY
			PORTER COMPANY AND SUBSIDIARY
			Consolidated Statement of Financial Position
				December 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
5 – 88

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

5 – 89

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:
	2010		2011		2012
Inventory	$32,000		$0		$0
Equipment		20,800		20,800		20,800
		$52,800		$20,800		$20,800	(94,400)

Goodwill Impairment (2012)								(38,000)
Controlling Retained Earnings on 12/31/2012							$633,600

Problem 5-16
Computation and Allocation of Difference Schedule
				Parent				Non-			Entire
					Share	Controlling					Value
							Share
Purchase price and implied value		$1,000,000				111,111				1,111,111		*
Less: Book value of equity acquired			621,000			69,000				690,000

Difference between implied and book value			379,000			42,111				421,111
Equipment ($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)

Balance			140,000			15,555				155,555
Goodwill			(140,000)			(15,555)				(155,555)
Balance			-0-						-0-		-0-
*$1,000,000/.90
	2011 Amortization Schedule
Equipment (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

5 – 90

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


	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

5 – 91

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

5 – 92

Problem 5-16 (continued)	PALMER COMPANY AND SUBSIDIARY
	Consolidated Statement Workpaper
Part B	For the Year Ended December 31, 2013
	Palmer		Stevens		Eliminations				Noncontrolling	Consolidated
	Company		Company		Dr.		Cr.		Interest	Balance
Income Statement
Sales	$620,000	$340,000								$960,000
Cost of Good Sold	430,000		240,000							670,000
Gross Margin	190,000	100,000								290,000
Depreciation Expense	30,000	20,000		(3b)	6,000					56,000
Other Expenses	60,000		35,000							95,000
Income from Operations	100,000	45,000								139,000
Equity in Subsidiary Income	35,100			(1)	35,100
Net/Consolidated Income	135,100	45,000								139,000
Noncontrolling Interest in Income									3,900	(3,900)*

Net Income to Retained Earnings	$135,100		$45,000		41,100			3,900		$135,100
Statement of Retained Earnings
1/1Retained Earnings
Palmer Company	$209,800									$209,800
Stevens Company		$210,000		(2) 210,000
Net Income from above	135,100	45,000			41,100			3,900		135,100
Dividends Declared
Palmer Company	(120,000)									(120,000)
Stevens Company			(35,000)			(1)	31,500		(3,500)
12/31Retained Earnings to Balance Sheet	$224,900		$220,000		251,100		31,500	$400		$224,900

5 – 93

	Problem 5-16 (continued)
		Palmer		Stevens		Eliminations						Noncontrolling			Consolidated
		Company		Company		Dr.				Cr.		Interest			Balance
	Balance Sheet
	Cash	$201,200	$151,000										$352,200
	Accounts Receivable	221,000	173,000										394,000
	Inventory	100,400	81,000										181,400
	Investment in Stevens Company	915,800			(3a) 95,000		(1)			3,600
					(3b) 10,800		(2) 1,018,000
	Difference between Implied & Book Value				(2) 421,111				(3a) 421,111
	Equipment	450,000	300,000		(3a) 90,000								840,000
	Accumulated Depreciation	(300,000)	(140,000)						(3a)	30,000			(488,000)
									(3b)	18,000
	Land	360,000	290,000		(3a)100,000								750,000
	Goodwill				(3a)155,555										155,555
	Total Assets	1,948,400		855,000											2,185,155
	Accounts Payable	$323,500	$135,000										$458,500
	Bonds Payable	400,000											400,000
	Capital Stock:

	Palmer Company	1,000,000											1,000,000
	Stevens Company		500,000		(2) 500,000
	Retained Earnings from above	224,900	220,000			251,100				31,500	400		224,900
	1/1 Nonconntrolling Interest in Net				(3a)	10,556	(2)			113,111	101,355
	Assets				(3b)	1,200
	12/31 Noncontrolling Interest In Net Assets											$101,755			$101,755
	Total 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 = $3,900
	Explanations of workpaper entries are on separate page.

5 – 94

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

5 – 95

Problem 5-17
Part A
												Yearly
											Amortization
(1) Price with a P/E ratio of 10: (10)($15,000)				$150,000
	Book Value of Equity Acquired
	($100,000 – $17,000 – $18,000)			65,000

	Excess of cost over book value			85,000
	Allocated to:
	In-process R&D		$30,000
	Assets to fair value ($105,000 – $65,000)		40,000						$4,000
				70,000

	Goodwill			$15,000					0

	Yearly amortization								$4,000

	Decrease in income	Year 1				Year 2-10					Year 11-20
	In-process R&D	$30,000
	Depreciation expense	4,000		$4,000
	Amortization expense		0					0	0

	Total decrease	$34,000		$4,000					0

												Yearly
											Amortization
(2) Price with a P/E ratio of 12: (12)($15,000)				$180,000
	Book value of equity acquired
($100,000 – $17,000 – $18,000)							65,000
	Excess of cost over book value			115,000
	Allocated to:
	In-process R&D		$30,000
	Assets to fair value ($105,000 – $65,000)		40,000						$ 4,000
				70,000

	Goodwill			$45,000					0

	Yearly amortization								$4,000

	Decrease in income	Year 1			Years 2-10					Years 11-20
	In-process R&D	$30,000
	Depreciation expense	4,000		4,000
	Amortization expense		0					0	0

	Total decrease	$34,000		$4,000					0

5 – 96

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)
(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.

5 – 97

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)				]

5 – 98

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
5 – 99

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

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