Exercise 5-3

Part A Investment in Saddler Corp. 525,000Cash 525,000

Part B Computation and Allocation of Difference ScheduleParent Non- EntireShare Controlling Value

SharePurchase price and implied value $525,000 131,250 656,250Less: Book value of equity acquired 480,000 120,000 600,000 Difference between implied and book value 45,000 11,250 56,250Inventory (16,000) (4,000) (20,000)Marketable Securities (20,000) (5,000) (25,000)Plant and Equipment (24,000) (6,000) (30,000) Balance (excess of FV over implied value) (15,000) (3,750) (18,750)Gain 15,000 3,750 18,750 Increase Noncontrolling interest to fair value of assetsTotal allocated bargain Balance -0- -0- -0-

Exercise 5-11

Part 1 – Cost Method

Computation and Allocation of Difference ScheduleParent Non- EntireShare Controlling Value

SharePurchase price and implied value 2,276,000 569,0002,845,000 Less: Book value of equity acquired (2,000,000) (500,000) (2,500,000) Difference between implied and book value 276,000 69,000 345,000Inventory (36,000) (9,000) (45,000)Equipment (40,000) (10,000) (50,000) Balance 200,000 50,000 250,000

5 - 1

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

20 10

(1) Dividend Income 16,000Dividends Declared 16,000(To eliminate intercompany dividends)

(2) Beginning retained Earnings – Sand 700,000Capital Stock – Sand 1,800,000Difference between Implied & Book value 345,000

Investment in Sand Company 2,276,000Noncontrolling Interest 569,000(To eliminate investment account and create

noncontrolling interest account)

(3) Cost of Goods Sold (beginning inventory) 45,000Depreciation Expense 6,250Equipment (net) 43,750Goodwill 250,000

Difference between Implied and Book value 345,000(To allocate and then depreciate the differencebetween implied and book value)

20 11

(1) Investment in Sand Company 64,000Beginning Retained Earnings P Company 64,000(To establish reciprocity /convert to equitymethods as of 1/1/2011)

(2) Dividend Income 24,000Dividend Declared 24,000(To eliminate intercompany dividends)

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(3) Beginning Retained Earnings – Sand 780,000Capital Stock – Sand 1,800,000Difference between Implied and Book value 345,000

Investment in Sand Company 2,340,000Noncontrolling Interest 585,000(To eliminate investment account and create noncontrolling interest account)

(4) Beginning Retained Earnings – Piper 45,000Noncontrolling Interest 10,250Depreciation Expense 6,250Equipment (net) 37,500Goodwill 250,000

Difference between Implied and Book value 345,000(To allocate and depreciate the differencebetween implied and book value)

20 12

(1) Investment in Sand Company 160,000Beginning Retained Earnings – Piper Company 160,000(To establish reciprocity/convert to equity method as of 1/1/2012)

(2) Dividend Income 12,000Dividend Declared 12,000(To eliminate intercompany dividends)

(3) Beginning Retained Earnings – Sand 900,000Common Stock – Sand 1,800,000Difference between Implied and Book value 345,000

Investment in Sand Company 2,436,000Noncontrolling Interest 609,000(To eliminate investment account and create noncontrolling interest account)

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(4) Beginning retained Earnings – Piper 46,000Noncontrolling Interest 11,500Depreciation Expense 6,250Equipment (net) 31,250Goodwill 250,000

Difference between implied and Book value 345,000(To allocate and depreciate the differencebetween implied and book value)

Part 2 – Partial Equity Method

Computation and Allocation of Difference ScheduleParent Non- EntireShare Controlling Value

SharePurchase price and implied value 2,276,000 569,000 2,845,000Less: Book value of equity acquired (2,000,000) (500,000) (2,500,000) Difference between implied and book value 276,000 69,000 345,000Inventory (36,000) (9,000) (45,000)Equipment (40,000) (10,000) (50,000) Balance 200,000 50,000 250,000Goodwill (200,000) (50,000) (250,000) Balance -0- -0- -0-

20 10

(1) Equity in Subsidiary Income 80,000Dividend Declared 16,000Investment in Sand Company 64,000(To eliminate intercompany dividends and income)

(2) Beginning Retained Earnings – Sand 700,000Capital Stock – Sand 1,800,000Difference between Implied and Book value 345,000

Investment in Sand Company 2,276,000

5 - 4

Noncontrolling Interest 569,000(To eliminate investment account and createnoncontrolling interest account)

(3) Cost of Goods Sold 45,000Depreciation Expense 6,250Equipment (net) 43,750Goodwill 250,000

Difference between Implied and Book value 345,000(To allocate and depreciate the differencebetween implied and book value)

Part 2 – Partial Equity Method

20 11

(1) Equity in Subsidiary Income 120,000Dividends Declared 24,000Investment in Sand Company 96,000(To eliminate intercompany dividends and income)

(2) Beginning Retained Earnings – Sand 780,000Capital Stock – Sand 1,800,000Difference between Implied and Book value 345,000

Investment in Sand Company 2,340,000Noncontrolling Interest 585,000(To eliminate investment account and create noncontrolling interest account)

(3) Beginning Retained Earnings – Piper 41,000Noncontrolling Interest 10,250Depreciation Expense 6,250Equipment (net) 37,500Goodwill 250,000

Difference between implied and Book value 345,000(To allocate and depreciate the difference between implied and book value)

5 - 5

20 12

(1) Equity in Subsidiary Income 64,000Dividend Declared 12,000Investment in Sand Company 52,000(To eliminate intercompany dividends and income)

Part 2 – Partial Equity Method

(2) Beginning Retained Earnings – Sand 900,000Common Stock – Sand 1,800,000Difference between Implied and Book value 345,000

Investment in Sand Company 2,436,000Noncontrolling Interest 609,000(To eliminate investment account and createnoncontrolling interest account)

(3) Beginning retained Earnings – Piper 46,000Noncontrolling Interest 11,500Depreciation Expense 6,250Equipment (net) 31,250Goodwill 250,000

Difference between Implied and Book value 345,000(To allocate and depreciate the differencebetween implied and book value)

Part 3 – Complete Equity Method

Computation and Allocation of Difference ScheduleParent Non- EntireShare Controlling Value

SharePurchase price and implied value 2,276,000 569,000 2,845,000Less: Book value of equity acquired (2,000,000) (500,000) (2,500,000) Difference between implied and book value 276,000 69,000 345,000Inventory (36,000) (9,000) (45,000)

5 - 6

Equipment (40,000) (10,000) (50,000) Balance 200,000 50,000 250,000Goodwill (200,000) (50,000) (250,000) Balance -0- -0- -0-

20 10

(1) Equity in Subsidiary Income 29,000Dividend Declared 16,000Investment in Sand Company 13,000(To eliminate intercompany dividends and income)

(2) Beginning Retained Earnings 700,000Capital Stock – Sand 1,800,000Difference between Implied and Book value 345,000

Investment in Sand Company 2,276,000Noncontrolling Interest 569,000(To eliminate investment account and create noncontrolling interest account)

(3) Cost of Goods Sold 45,000Depreciation Expense 6,250Equipment (net) 43,750Goodwill 250,000

Difference between Implied and Book value 345,000(To allocate and depreciate the differencebetween implied and book value)

Part 3 – Complete Equity Method

20 11

(1) Equity in Subsidiary Income 105,000Dividends Declared 24,000Investment in Sand Company 81,000(To eliminate intercompany dividends and income)

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(2) Beginning Retained Earnings – Sand 780,000Capital Stock – Sand 1,800,000Difference between Implied and Book value 345,000

Investment in Sand Company 2,340,000Noncontrolling Interest 585,000(To eliminate investment account and create noncontrolling interest account)

(3) Beginning Retained Earnings 41,000Noncontrolling Interest 10,250Depreciation Expense 6,250Equipment (net) 37,500Goodwill 250,000

Difference between Implied and Book value 345,000(To allocate and depreciate the differencebetween implied and book value)

Part 3 – Complete Equity Method

20 12

(1) Equity in Subsidiary Income 49,000Dividends Declared 12,000Investment in Sand Company 37,000(To eliminate intercompany dividends and income)

(2) Beginning retained Earnings – Sand 900,000Common Stock – Sand 1,800,000Difference between Implied and Book value 345,000

Investment in Sand Company 2,436,000Noncontrolling Interest 609,000(To eliminate investment account and create noncontrolling interest account)

(3) Beginning Retained Earnings – Piper 46,000Noncontrolling Interest 11,500

5 - 8

Depreciation Expense 6,250Equipment (net) 31,250Goodwill 250,000

Difference between Implied and Book value 345,000(To allocate and depreciate the differencebetween implied and book value)

Exercise 5-13 Net Assets

Imputed Value ($) $2,300,000 Recorded Value($) (1,800,000 ) Unrecorded Values $500,000Allocated to identifiable assets

Inventory ($) $125,000 Equipment ($) 175,000Goodwill $300,000

Inventory 125,000Equipment 175,000Goodwill 200,000

Revaluation Capital 500,000(To record the effects of pushed down valuesimplied by purchased of its stock by Pascal Co.)

Problem 5 - 4

Part AComputation and Allocation of Difference Schedule

Parent Non- EntireShare Controlling Value

SharePurchase price and implied value $850,000 212,500 1,062,500Less: Book value of equity acquired (504,000) (126,000) (630,000) Difference between implied and book value 346,000 86,500 432,500Equipment (104,000) (26,000) (130,000)

5 - 9

Land (52,000) (13,000) (65,000)Inventory (32,000) (8,000) (40,000) Balance 158,000 39,500 197,500Goodwill (158,000) (39,500) (197,500) Balance -0- -0- -0-

Part B and C – Worksheet Entries

Cost Method Workpaper entries – Year 20 10

(1) Dividend Income 20,000Dividends declared 20,000(To eliminate intercompany dividends)

(2) Beginning retained Earnings – Salem Company 80,000Common Stock – Salem 550,000Difference between Implied and Book value 432,500

Investment in Salem Company 850,000Noncontrolling Interest 212,500(To eliminate investment account and create noncontrolling interest account)

(3) Cost of Goods Sold 40,000Land 65,000Plant & Equipment 130,000Goodwill 197,500

Difference between Implied and Book value 432,500(To allocate the difference between implied and book value)

(4) Depreciation Expense 26,000Plant & Equipment 26,000(To record depreciation 5 year life)

5 - 10

Cost Method – Worksheet Entries – Year 20 11

(1) Investment in Salem Company 60,000Beginning retained Earnings – Porter Company 60,000(To establish reciprocity/convert to equity as of 1/1/2011)

(2) Dividend Income 28,000Dividends Declared 28,000(To eliminate intercompany dividends)

(3) Beginning retained Earnings – Salem Company 155,000Common Stock – Salem 550,000Difference between Implied and Book value 432,500

Investment in Salem Company 910,000Noncontrolling Interest 227,500 (To eliminate investment account and create noncontrolling interest account)

(4) 1/1 Retained Earnings – Porter Company 32,000Noncontrolling Interest 8,000Land 65,000Plant & Equipment 130,000Goodwill 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 20,800Noncontrolling Interest 5,200Depreciation Expense 26,000

Plant & Equipment 52,000(To record plant and equipment)

5 - 11

Partial Equity Method Workpaper entries – Year 20 10

(1) Equity in Subsidiary Income 80,000Dividends Declared 20,000Investment in Salem Company 60,000(To eliminate intercompany dividends)

(2) Beginning Retained Earnings – Salem Company 80,000Common Stock – Salem 550,000Difference between Implied and Book value 432,500

Investment in Salem Company 850,000Noncontrolling Interest 212,500(To eliminate investment account and create noncontrolling interest account)

(3) Cost of Goods Sold 40,000Land 65,000Plant & Equipment 130,000Goodwill 197,500

Difference between Implied and Book value 432,500(To allocate the difference between implied and book value)

(4) Depreciation Expense 26,000Plant & Equipment 26,000(To record depreciation 5 year life)

Partial Equity Method – Worksheet Entries – Year 20 11

(1) Equity in Subsidiary Income 88,000Dividends Declared 28,000Investment in Salem Company 60,000(To eliminate intercompany dividends and income)

(2) Beginning retained Earnings – Salem Company 155,000

5 - 12

Common Stock – Salem 550,000Difference between Implied and Book value 432,500

Investment in Salem Company 910,000Noncontrolling Interest 227,500(To eliminate investment account and create noncontrolling interest account)

(3) 1/1 Retained Earnings – Porter Company 32,000Noncontrolling Interest 8,000Land 65,000Plant & Equipment 130,000Goodwill 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 20,800Noncontrolling Interest 5,200Depreciation Expense 26,000

Plant & Equipment 52,000(To record the plant and equipment 5 years useful life)

Complete Equity Method Workpaper entries – Year 20 10

(1) Equity in Subsidiary Income 27,200Dividends Declared 20,000Investment in Salem Company 7,200(To eliminate intercompany dividends)

(2) Beginning Retained Earnings – Salem Company 80,000Common Stock – Salem Company 550,000Difference between Implied and Book value 432,500

Investment in Salem Company 850,000Noncontrolling Interest 212,500(To eliminate investment account and create noncontrolling interest account)

(3) Cost of Goods Sold 40,000

5 - 13

Land 65,000Plant & Equipment 130,000Goodwill 197,500

Difference between Implied and Book value 432,500(To allocate the difference between implied and book value)

(4) Depreciation Expense 26,000Plant & Equipment 26,000(To record depreciation 5 year useful life)

Complete Equity Method – Worksheet Entries – Year 20 11

(1) Equity in Subsidiary Income 27,200Dividends Declared 20,000Investment in Salem Company 7,200(To eliminate intercompany dividends and income)

(2) Beginning Retained Earnings – Salem Company 80,000Common Stock – Salem 550,000Difference between implied and Book value 432,500

Investment in Salem Company 850,000Noncontrolling Interest 212,500(To eliminate investment account and create noncontrolling interest account)

(3) Investment in Salem Company 32,000Noncontrolling Interest 8,000Land 65,000Plant & Equipment 130,000Goodwill 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

5 - 14

Depreciation Expense 26,000 Plant & Equipment 52,000 (To record plant & Equipment)

Part DPorter Salem Eliminations Noncontrolling Consolidated

Income Statement Company Company Debit Credit Interest Balances

Sales 1,100,000 450,000 1,550,000Dividend Income 48,000 48,000

Total Revenue 1,148,000 450,000 1,550,000 Cost of Goods Sold 900,000 200,000 1,100,000Depreciation Expense 40,000 30,000 26,000 96,000Impairment loss 47,500 47,500Other 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

1/1 Retained Earnings:Porter Company 500,000 32,000 120,000 546,400

41,600

Salem Company 230,000 230,000Net Income from Above 148,000 170,000 121,500 19,300 177,200Dividends Declared:

Porter Company (90,000) (90,000)Salem Company (60,000) 48,000 (12,000)

12/31 Retained Earnings to Balance Sheet 558,000 340,000 425,100 168,000 7,300 633,600

5 - 15

Problem 5-4 (continued) Porter Salem Eliminations Noncontrolling Consolidated

Balance Sheet Company Company Debit Credit Interest BalancesCash 70,000 65,000 135,000Accounts Receivable 260,000 190,000 450,000Inventory 240,000 175,000 415,000Investment in Salem Company 850,000 120,000 970,000Difference between Implied and Book Value 432,500 432,500Land 320,000 65,000 385,000Plant and Equipment 360,000 280,000 130,000 78,000 692,000Goodwill 197,500 47,500 150,000

Total Assets 1,780,000 1,030,000 2,227,000

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

Porter Company 1,000,000 1,000,000Salem Company 550,000 550,000

Retained Earnings from above 558,000 340,000 425,000 168,400 7,300 633,6001/1 Noncontrolling Interest in Net 8,000 242,500 224,100Assets 10,40012/31 Noncontrolling Interest in Net Assets

231,400 231,400

Total Liabilities and Equity $1,780,000 1,030,000 1,938,500 1,938,500 2,227,000

*Noncontrolling Interest in Income =.212,500 + (230,000 – 80,000) x 20Explanations of workpaper entries are on the following page.

5 - 16

Problem 5-4D explanation

Computation and Allocation of Difference ScheduleParent Non- EntireShare Controlling Value

SharePurchase price and implied value $850,000 212,500 1,062,500Less: Book value of equity acquired (504,000) (126,000) (630,000) Difference between implied and book value 346,000 86,500 432,500Equipment (104,000) (26,000) (130,000)Land (52,000) (13,000) (65,000)Inventory (32,000) (8,000) (40,000) Balance 158,000 39,500 197,500Goodwill (158,000) (39,500) (197,500) Balance -0- -0- -0-

Explanations of Workpaper entries:

(1) Investment in Salem Company 120,000Beginning retained Earnings – Porter Company

120,000(To establish reciprocity/convert to equity method as of 1/1/12)

(2) Dividend Income 48,000Dividends Declared

48,000(To eliminate intercompany dividends)

(3) Beginning Retained Earnings – Salem Company 230,000Common Stock 550,000Difference between Implied and Book value 432,500

Investment in Salem Company970,000Noncontrolling Interest242,500(To eliminate the investment account and create

noncontrolling interest account)

(4) 1/1 Retained Earnings Porter Company 32,000Noncontrolling Interest 8,000Land 65,000Plant & Equipment 130,000Goodwill 197,500

Difference between Implied and Book value432,500

(To allocate investment account and createnoncontrolling interest account)

5 - 17

(5) 1/1 Retained Earnings – Porter Company 41,600Noncontrolling Interest 10,400Depreciation Expense 26,000

Plant & Equipment78,000

(To record plant & equipment)

5 - 18

Problem 5-4D explanation

(6) Impairment Loss 47,500Goodwill

47,500(To record goodwill impairment)

Part E PORTER COMPANY AND SUBSIDIARYConsolidated Financial Statements

For the Year Ended December 31, 2012

Consolidated Income StatementSales $1,550,000Cost of Goods Sold 1,100,000 Gross Profit 450,000Expenses:

Depreciation Expense $96,000Impairment Loss 47,500Other Expenses 110,000 253,500

Consolidated Income 196,500Noncontrolling Interest in Consolidated Income 19,300 Net Income $177,200

Consolidated Statement of Retained EarningsRetained Earnings - Beginning of Year $546,400Add: Net Income 177,200

723,600Less Dividends 90,000Retained Earnings - End of Year $633,600

Part EPORTER COMPANY AND SUBSIDIARYConsolidated Statement of Financial Position

December 31, 2012AssetsCurrent Assets:

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

1,000,000 Noncurrent Assets:

Plant and Equipment (net) 692,000Land 385,000Goodwill 150,000 1,227,000

Total Assets

5 - 19

$2,227,000

Liabilities And Stockholders' EquityLiabilities:

Accounts Payable $242,000Notes Payable 120,000

Total Liabilities 362,000Stockholders' Equity

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

1,865,000 Total Liabilities and Stockholders' Equity $2,227,000

Part F

The effect on the consolidated balances if Salem Company uses the LIFO cost flow assumption in pricing out its inventory then the inventory would be higher by $40,000 because it would not have been sold. Also the noncontrolling inventory would be $8,000 higher and the beginning retained earnings would also be $32,000 higher and cost of goods that were sold during the year of acquisition would be lower.

Part G

Porter Company's Retained Earnings on 12/31/12 $558,000Porter Company's Share of the Increase in SalemCompany's Retained Earnings from January 1, 2010 to December 31, 2012 208,000

Cumulative Effect to December 31, 2012 of the Allocation and Depreciation ofthe Difference between Implied and Book value (Parent’s share)

Allocated to:20 10 20 11 20 12

Inventory $32,000 $0 $0Equipment 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

Problem 5-13

Part A

Equipment 61,467Land 40,978Patents 102,444

5 - 20

Revaluation Capital204,889

Implied fair value 888,889Book Value (684,000 ) Amount to push down $204,889

Adjustment to:Equipment $61,467Land $40,978Patents $102,444

Part B Worksheet entries

(1) Common Stock – Sensor 300,000Other Contributed Capital – Sensor 164,000Retained Earnings – Sensor 220,000Revaluation Capital 204,889

Investment in Sensor Company800,000

Noncontrolling Interest88,889

(To eliminate investment account and createnoncontrolling interest account)

PRESS COMPANY AND SUBSIDIARYConsolidated Balance Sheet Workpaper

January 1, 2011Press Sensor  Eliminations Noncontrolling Consolidated

Company Company Dr. Cr. Interest BalancesCash 265,000 38,000 $303,000Receivables 422,500 76,000 498,500Inventory 216,500 124,000 340,500Investment in Sensor Company 800,000 800,000Buildings 465,000 322,000 787,000Equipment 229,000 246,467 475,467Land 188,000 140,978 328,978Patents 167,500 190,444 357,944

Total Assets 2,753,500 1,137,889 $3,091,389

Liabilities: 667,000 249,000 $916,000Common Stock:

Press Company 700,000 700,000

5 - 21

Sensor Company 300,000 300,000Other Contributed Capital:

Press Company 846,000 846,000Sensor Company 164,000 164,000

Retained Earnings:Press Company 540,500 540,500Sensor Company 220,000 220,000

Revaluation Capital 204,889 204,889Noncontrolling Interest in Net Assets 88,889 88,889 88,889

Total Liabilities and Equity 2,753,500 1,137,889 888,889 888,889 $3,091,389

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