Book value ( net assets)

Inventory (undervalued) 5,000

Land (undervalued) 6,000
Equipment (undervalued) 80,000
Buildings (overvalued) - 20,000
Bonds payable (overvalued) 4,000
Fair value ( net assets)

Consideration transferred 387,500

Less:
Fair value ( net assets) - 375,000
Goodwill 12,500
300,000

75,000
375,000
Income statement of Perfect and Son for 2014
 Amortization of excess 11,000
Impairment loss 3000
14,000
EQUITY METHOD
First year after acquisition
Parent Company Equity Method Entry

Investment in Son Company balance as of December 31,2014

(E1) Common stock - Son Co. 200,000
Retained earnings- Son Co. 100,000
Investment in Son Co. 300,000
To eliminate the equity of the subsidiary

(E2) Inventory 5,000

Accumulated depreciation-equipment 80,000
Accumulated depreciation- buildings 160,000
Discount on bonds payable 4,000
Land 6,000
Buildings 180,000
Investment in Son Co. 75,000
To adjsust the book value of the subsidiary to its fair value

(E3) Goodwill 12500

Investment in Son Co. 12500
To recognize goodwill on acquisition

(E4)) Cost of goods sold 5,000

Depreciation expense 5,000
Accumulated depreciation -buildings 5,000
Interest expense 1,000
Goodwill impairment loss 3,000
Inventory 5,000
Accumulated depreciation-equipment 10,000
Discount on bonds payable 1,000
Goodwill 3,000
To provide for 2014 impairment loss and depreciation and
amortization on differences between acquisition date fair value and
book value of Son's identifiable assets and liabilities

(E5) Investment income 36000

Investment in Son. Co. 6000
Dividends paid-Son 30000
Worksheet 2014
Income Statement Perfect Co. Son Co.
Sales 400,000 200,000
Investment income 36,000
Total Revenue 436,000 200,000
Cost of goods sold 170,000 115,000
Depreciation expense 50,000 20,000
Interest expense - -
Other expenses 40,000 15,000
Goodwill impairment loss
Total Cost and Expenses 260,000 150,000
Net Income to Retained Earnings 176,000 50,000

Statement of Retained Earnings Perfect Co. Son Co.

Retained earnings,1/1
Perfect Company 300,000
Son Company 100,000
Net income, from above 176,000 50,000
Total 476,000 150,000
Dividends paid
Perfect Company 60,000
Son Company 30,000
Retained earnings,12/31 Balance 416,000 120,000

Balance Sheet Perfect Co. Son Co.

Cash 194000 75000
Acccounts receivable 75000 50000
Inventory 100000 75000
Land 175000 40000
Equipment 200000 150000
Buildings 600000 450000
Discount on bonds payable
Goodwill
Investment in Son Company 393,500

Total 1,737,500 840,000

Accumulated depreciation-equipment 112,500 80,000
Accumulated depreciation- buildings 337,500 240,000

Accounts payable 100000 100000

Bonds payable 200000 100000
Common stock, P10 par 500000
Common stock, P10 par 200,000
Retained earnings from above 416,000 120,000

Total 1,666,000 840,000

Dr. Cr. Consolidated
600,000
36,000 -
600,000
- 285,000
- 70,000
5,000 5,000
55,000
3,000 3,000
418,000
182,000

Dr. Cr. Consolidated

300,000
100,000
182,000
482,000

60,000
30,000
422,000

Dr. Cr. Consolidated

269,000
125,000
- - 175,000
4,000 219,000
350,000
- 1,050,000
160,000 5,000 155,000
- 10,000 - 10,000
240,000
75,000
12,500
6,000 60,000
2,393,000
5,000 - 187,500
80,000
5,000 492,500
200,000
300,000
 500,000
200,000
422,000

2,102,000
 Parent Company and Subsidiary
Consolidated Income Statement
For the year ended December 31, 2014

Sales 600,000
Less: Cost of goods sold 285,000
Gross Profit 315,000
Less: Expenses
Depreciation expense 70,000
Interest epense 5,000
Goodwill impairment loss 3,000
Other expenses 55,000 133,000
Consolidated net income 182,000
 Parent Company and Subsidiary
Consolidated Balance Sheet
As of December 31, 2014
Assets
Cash 269,000
Accounts Receivable 125,000
Inventory 175,000
Land 219,000
Buildings ###
Less: Accumulated depreciation 492500 557,500
Equipment 350000
Less: Accumulated depreciation 187500 162,500
Goodwill - 10,000
Total Assets 1,498,000
Liabilities and Shareholder's equity
Liabilities
Accoiunts payable 200,000
Bonds payable 300,000
Less: Discount on bonds payable 155,000 145,000
Total Liabilities 345,000
Shareholders Equity
Common stock, P10 par 500,000
Retained earnings 422,000
Total Stockholder's equity 922,000
Total Liabilities and Shareholder's equity 1,267,000
Income statement of Perfect and Son for 2015

Parent Company Equity Method Entry

Investment in Son Company balance as of December 31,2015

(E1) Common stock - Son Co. 200,000
Retained earnings- Son Co.-Jan 1, 2015 120,000
Investment in Son Co. 320,000
To eliminate the equity of the subsidiary

(E2) Inventory 5,000

Accumulated depreciation-equipment 80,000
Accumulated depreciation- buildings 160,000
Discount on bonds payable 4,000
Land 6,000
Buildings 180,000
Investment in Son Co. 75,000
To adjsust the book value of the subsidiary to its fair value

(E3) Goodwill 12500

Investment in Son Co. 12500
To recognize goodwill on acquisition

(E4) Investment in Son Co. 14,000

Depreciation expense 5,000
Accumulated depreciation -buildings 10,000
Interest expense 1,000
Inventory 5,000
Accumulated depreciation-equipment 20,000
Discount on bonds payable 2,000
Goodwill 3,000
To provide for 2014 and 2015 impairment loss and depreciation and
amortization on differences between acquisition date fair value and
book value of Son's identifiable assets and liabilities

(E6) Investment income 69000

Investment in Son. Co. 29000
Dividends paid-Son 40000
tion and
Income Statement Perfect Co. Son Co.
Sales 450,000 300,000
Investment income 69,000
519,000 300,000
Cost of goods sold 180,000 160,000
Depreciation expense 50,000 20,000
Interest expense - -
Other expenses 60,000 45,000
Goodwill impairment loss
Total Cost and Expenses 290,000 225,000
Net Income to Retained Earnings 229,000 75,000

Statement of Retained Earnings Perfect Co. Son Co.

Retained earnings,1/1
Perfect Company 416,000
Son Company 120,000
Net income, from above 229,000 75,000
Total 645,000 195,000
Dividends paid
Perfect Company 60,000
Son Company 40,000
Retained earnings,12/31 Balance 585,000 155,000

Balance Sheet Perfect Co. Son Co.

Cash 157,500 85,000
Acccounts receivable 150,000 80,000
Inventory 180,000 90,000
Land 175,000 40,000
Equipment 200,000 150,000
Buildings 600,000 450,000
Discount on bonds payable
Goodwill
Investment in Son Company 422,500

Total 1,885,000 895,000

Accumulated depreciation-equipment 125,000 85,000
Accumulated depreciation- buildings 375,000 255,000

Accounts payable 100,000 100,000

Bonds payable 200,000 100,000
Common stock, P10 par 500,000
Common stock, P10 par 200,000
Retained earnings from above 585,000 155,000

Total 1,885,000 895,000

Dr. Cr. Consolidated
750,000
69,000 -
750,000
340,000
5,000 75,000
1,000 1,000
105,000
-
521,000
229,000

Dr. Cr. Consolidated

416,000
120,000
229,000
645,000

60,000
40,000
585,000

Dr. Cr. Consolidated

242,500
230,000
5,000 5,000 270,000
6,000 221,000
350,000
180,000 870,000
4,000 2,000 2,000
12,500 3,000 9,500
14,000 320,000
75,000
12,500
29,000 -
2,195,000
80,000 20,000 150,000
160,000
10,000 460,000
200,000
300,000
 500,000
200,000
585,000

2,195,000
-
 Parent Company and Subsidiary
Consolidated Income Statement
For the year ended December 31, 2015

Sales 750,000
Less: Cost of goods sold 340,000
Gross Profit 410,000
Less: Expenses
Depreciation expense 75,000
Interest epense 1,000
Other expenses 105,000 181,000
Consolidated net income 229,000
 Parent Company and Subsidiary
Consolidated Balance Sheet
As of December 31, 2015
Assets
Cash 242,500
Accounts Receivable 230,000
Inventory 270,000
Land 221,000
Buildings 870,000
Less: Accumulated depreciation 460000 410,000
Equipment 350000
Less: Accumulated depreciation 150000 200,000
Goodwill 9,500
Total Assets 1,583,000
Liabilities and Shareholder's equity
Liabilities
Accoiunts payable 200,000
Bonds payable 300,000
Less: Discount on bonds payable 2,000 298,000
Total Liabilities 498,000
Shareholders Equity
Common stock, P10 par 500,000
Retained earnings 585,000
Total Stockholder's equity 1,085,000
Total Liabilities and Shareholder's equity 1,583,000