5 - 1

Exercise 5-3

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

Part B Computation and Allocation of Difference Schedule
Parent Non- Entire
Share Controlling Value
Share
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 3,750 18,750
Increase Noncontrolling interest to fair value of assets
Total allocated bargain
Balance -0- -0- -0-


Exercise 5-11

Part 1 – Cost 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
5 - 2
Goodwill (200,000) (50,000) (250,000)
Balance -0- -0- -0-


2010

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

(2) Beginning retained Earnings – Sand 700,000
Capital Stock – Sand 1,800,000
Difference between Implied & Book value 345,000
Investment in Sand Company 2,276,000
Noncontrolling Interest 569,000
(To eliminate investment account and create
noncontrolling interest account)

(3) Cost of Goods Sold (beginning inventory) 45,000
Depreciation Expense 6,250
Equipment (net) 43,750
Goodwill 250,000
Difference between Implied and Book value 345,000
(To allocate and then depreciate the difference
between implied and book value)

2011

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

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

5 - 3
(3) Beginning Retained Earnings – Sand 780,000
Capital Stock – Sand 1,800,000
Difference between Implied and Book value 345,000
Investment in Sand Company 2,340,000
Noncontrolling Interest 585,000
(To eliminate investment account and create
noncontrolling interest account)

(4) Beginning Retained Earnings – Piper 45,000
Noncontrolling Interest 10,250
Depreciation Expense 6,250
Equipment (net) 37,500
Goodwill 250,000
Difference between Implied and Book value 345,000
(To allocate and depreciate the difference
between implied and book value)

2012

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

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

(3) Beginning Retained Earnings – Sand 900,000
Common Stock – Sand 1,800,000
Difference between Implied and Book value 345,000
Investment in Sand Company 2,436,000
Noncontrolling Interest 609,000
(To eliminate investment account and create
noncontrolling interest account)

5 - 4
(4) Beginning retained Earnings – Piper 46,000
Noncontrolling Interest 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)

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-


2010

(1) Equity in Subsidiary Income 80,000
Dividend Declared 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
5 - 5
Noncontrolling Interest 569,000
(To eliminate investment account and create
noncontrolling interest account)

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

2011

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

(2) Beginning Retained Earnings – Sand 780,000
Capital Stock – Sand 1,800,000
Difference between Implied and Book value 345,000
Investment in Sand Company 2,340,000
Noncontrolling Interest 585,000
(To eliminate investment account and create
noncontrolling interest account)

(3) Beginning Retained Earnings – Piper 41,000
Noncontrolling Interest 10,250
Depreciation Expense 6,250
Equipment (net) 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 - 6
2012

(1) Equity in Subsidiary Income 64,000
Dividend Declared 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 1,800,000
Difference between Implied and Book value 345,000
Investment in Sand Company 2,436,000
Noncontrolling Interest 609,000
(To eliminate investment account and create
noncontrolling interest account)

(3) Beginning retained Earnings – Piper 46,000
Noncontrolling Interest 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)

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)
5 - 7
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-

2010

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

(2) Beginning Retained Earnings 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
(To eliminate investment account and create
noncontrolling interest account)

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

2011

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

5 - 8
(2) Beginning Retained Earnings – Sand 780,000
Capital Stock – Sand 1,800,000
Difference between Implied and Book value 345,000
Investment in Sand Company 2,340,000
Noncontrolling Interest 585,000
(To eliminate investment account and
create noncontrolling interest account)

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

2012

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

(2) Beginning retained Earnings – Sand 900,000
Common Stock – Sand 1,800,000
Difference between Implied and Book value 345,000
Investment in Sand Company 2,436,000
Noncontrolling Interest 609,000
(To eliminate investment account and create
noncontrolling interest account)

(3) Beginning Retained Earnings – Piper 46,000
Noncontrolling Interest 11,500
Depreciation Expense 6,250
5 - 9
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)

Exercise 5-13
Net Assets
Imputed Value ($) $2,300,000
Recorded Value($) (1,800,000)
Unrecorded Values $500,000
Allocated to identifiable assets
Inventory ($) $125,000
Equipment ($) 175,000
Goodwill $300,000

Inventory 125,000
Equipment 175,000
Goodwill 200,000
Revaluation Capital 500,000
(To record the effects of pushed down values
implied by purchased of its stock by Pascal Co.)


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)
5 - 10
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-


Part B and C – Worksheet Entries

Cost Method Workpaper entries – Year 2010

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

(2) Beginning retained Earnings – Salem Company 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 & 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 26,000
Plant & Equipment 26,000
(To record depreciation 5 year life)



5 - 11
Cost Method – Worksheet Entries – Year 2011

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

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

(3) Beginning retained Earnings – Salem Company 155,000
Common Stock – Salem 550,000
Difference between Implied and Book value 432,500
Investment in Salem Company 910,000
Noncontrolling Interest 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 & Equipment 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 20,800
Noncontrolling Interest 5,200
Depreciation Expense 26,000
Plant & Equipment 52,000
(To record plant and equipment)




5 - 12
Partial Equity Method Workpaper entries – Year 2010

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

(2) Beginning Retained Earnings – Salem Company 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 & 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 26,000
Plant & Equipment 26,000
(To record depreciation 5 year life)

Partial Equity Method – Worksheet Entries – Year 2011

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

(2) Beginning retained Earnings – Salem Company 155,000
Common Stock – Salem 550,000
5 - 13
Difference between Implied and Book value 432,500
Investment in Salem Company 910,000
Noncontrolling Interest 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 & Equipment 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 20,800
Noncontrolling Interest 5,200
Depreciation Expense 26,000
Plant & Equipment 52,000
(To record the plant and equipment 5 years useful life)

Complete Equity Method Workpaper entries – Year 2010

(1) Equity in Subsidiary Income 27,200
Dividends Declared 20,000
Investment in Salem Company 7,200
(To eliminate intercompany dividends)
(2) Beginning Retained Earnings – Salem Company 80,000
Common Stock – Salem Company 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
5 - 14
Plant & 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 26,000
Plant & Equipment 26,000
(To record depreciation 5 year useful life)

Complete Equity Method – Worksheet Entries – Year 2011

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

(2) Beginning Retained Earnings – Salem Company 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) Investment in Salem Company 32,000
Noncontrolling Interest 8,000
Land 65,000
Plant & 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 20,800
Noncontrolling Interest 5,200
Depreciation Expense 26,000
5 - 15
Plant & Equipment 52,000
(To record plant & Equipment)


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 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 26,000 96,000
Impairment loss 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

1/1 Retained Earnings:

Porter Company 500,000 32,000 120,000 546,400
41,600

Salem Company 230,000 230,000
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) 48,000 (12,000)
12/31 Retained Earnings to Balance Sheet 558,000 340,000 425,100 168,000 7,300 633,600



5 - 16
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 850,000 120,000 970,000
Difference between Implied and Book Value 432,500 432,500
Land 320,000 65,000 385,000
Plant and Equipment 360,000 280,000 130,000 78,000 692,000
Goodwill 197,500 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 550,000 550,000
Retained Earnings from above 558,000 340,000 425,000 168,400 7,300 633,600
1/1 Noncontrolling Interest in Net 8,000 242,500 224,100
Assets 10,400
12/31 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 20
Explanations of workpaper entries are on the following page.
5 - 17
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 120,000
Beginning retained Earnings – Porter Company 120,000
(To establish reciprocity/convert to equity method as of 1/1/12)

(2) Dividend Income 48,000
Dividends Declared 48,000
(To eliminate intercompany dividends)

(3) Beginning Retained Earnings – Salem Company 230,000
Common Stock 550,000
Difference between Implied and Book value 432,500
Investment in Salem Company 970,000 Noncontrolling Interest 242,500 (To eliminate the investment account and create
noncontrolling interest account)

(4) 1/1 Retained Earnings Porter Company 32,000
Noncontrolling Interest 8,000
Land 65,000
Plant & Equipment 130,000
Goodwill 197,500
Difference between Implied and Book value 432,500
(To allocate investment account and create
noncontrolling interest account)

(5) 1/1 Retained Earnings – Porter Company 41,600
Noncontrolling Interest 10,400
Depreciation Expense 26,000
Plant & Equipment 78,000
(To record plant & equipment)
5 - 18
Problem 5-4D explanation

(6) Impairment Loss 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

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:
Accounts Payable $242,000
5 - 19
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

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 $558,000
Porter Company's Share of the Increase in Salem
Company'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:
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


Problem 5-13

Part A

Equipment 61,467
Land 40,978
Patents 102,444
Revaluation Capital 204,889

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

5 - 20
Adjustment to:
Equipment $61,467
Land $40,978
Patents $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 Company 800,000
Noncontrolling Interest 88,889
(To eliminate investment account and create
noncontrolling interest account)


PRESS COMPANY AND SUBSIDIARY
Consolidated Balance Sheet Workpaper
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 800,000 800,000
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 300,000 300,000
Other Contributed Capital:
Press Company 846,000 846,000
Sensor Company 164,000 164,000
Retained Earnings:
Press Company 540,500 540,500
Sensor Company 220,000 220,000
Revaluation Capital 204,889 204,889
5 - 21



Noncontrolling 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