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Question:

On January 1, 2019, Paxton Company purchased a 70% interest in Sagon Company for $1,300,000, at which time Sagon Company had retained earnings of
$500,000 and capital stock of $1,000,000. On January 1, 2019, the fair value of the assets and liabilities of Sagon Company was equal to their book value
except for bonds payable. Sagon Company had outstanding a $1,000,000 issue of 6% bonds that were issued at par and that mature on January 1, 2024.
Interest on the bonds is payable annually, and the yield rate on similar bonds on January 1, 2019, is 10%. Paxton Company reported net income from
independent operations of $300,000 in 2019 and $250,000 in 2020. Sagon Company reported net income of $100,000 in 2019 and $120,000 in 2020.
Neither company paid or declared dividends in 2019 or 2020. Paxton uses the partial equity method to account for its investment in Santos.

Despite two profitable years, changes in the market during 2020 for Sagon’s product line have caused Paxton to be concerned about the future profitability of
the unit. The following data are collected to test for goodwill impairment at 12/31/20. (No goodwill impairment has been recorded on the parent’s books.)

Paxton chose to measure goodwill impairment using the present value of future cash flows to estimate the fair value of the reporting unit (Sagon).

Required:

A. Prepare in general journal form the entries necessary in the consolidated statements workpapers for the years ended December 31, 2019, and December
31, 2020. Hint: You may wish to refer back to the section entitled Goodwill Impairment Test in Chapter 2.

B. Prepare in good form a schedule or t-account showing the calculation of the controlling and noncontrolling interest in consolidated net income for the
years ended December 31, 2019, and December 31, 2020.

Answer:

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 1/1/2019of 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 impliedand 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)]

2019 $848,367 $84,837 $60,000 $24,837

2020 $873,204 $87,320 $60,000 $27,320

Part A 2019

(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 Impliedand Book Value 357,143

(3b) Interest Expense 24,837

Unamortized Discount on Bonds Payable 24,837

2020

(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 Impliedand 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 Impliedand Book Value 357,143

To allocate and amortize the differencebetween impliedand book value

*$24,837 x 70% = $17,386

Alternative to entry (3)

(3a) Unamortized Discount on Bonds Payable 151,633

Goodwill 205,510

Difference between Impliedand 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 2019 2020

Paxton Company's Net Income fromIndependent 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

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

..........xxxx❤️We are expecting just one like for our effort nothing more than that its save our accounts from block❤️xxx ...............

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