Eliminating Entries and Worksheets for Various Years (Note: This is the same problem as Problem 5-4 and Problem 5-11, but assuming the use of the complete equity method.)
On January 1, 2003, Porter Company purchased an 80% interest in the capital stock of Salem Company for $850,000. At that time, Salem Company had capital stock of $550,000 and retained earnings of $80,000. Porter Company uses the partial equity method to record its investment in Salem Company. Differences between the fair value and the book value of the identifiable assets of Salem Company were as follows: LO2 Fair Value in Excess of Book Value Equipment $ 130,000 Tana 65,000 Inventory 40,000 The book values of all other assets and liabilities of Salem Company were equal to their fair values on January 1, 2003. The equipment had a remaining life of five years on January 1, 2003; the inventory was sold in 2003.
Salem Company’s net income and dividends declared in 2003 and 2004 were as follows:
Year 2003 Net Income of $100,000; Dividends Declared of $25,000 Year 2004 Net Income of $110,000; Dividends Declared of $35,000 Required:
A. Present the eliminating/adjusting entries needed on the consolidated worksheet for the year ended December 31, 2003. (It is not necessary to prepare the worksheet.)
B. Present the eliminating/adjusting entries needed on the consolidated worksheet for the year ended December 31, 2004. (It is not necessary to prepare the worksheet.)
Use the following financial data for 2005 for requirements C through G.
Porter Company Salem Company Sales $ 1,100,000 $ 450,000 Equity in Subsidiary Income 115,200 —
Total Revenue 1,215,200 450,000 Cost of Goods Sold 900,000 200,000 Depreciation Expense 40,000 30,000 Other Expenses 60,000 50,000 Total Cost and Expense 1,000,000 280,000 Net Income $ 215,200 $ 170,000 1/1 Retained Earnings $ 546,400 $ 230,000 Net Income 215,200 170,000 Dividends Declared (90,000) (60,000)
12/31 Retained Earnings $ 671,600, $ 340,000 Cash $ 70,000 $ 65,000 Accounts Receivable 260,000 190,000 Inventory 240,000 175,000 Investment in Salem Company 963,600 Land —0— 320,000 Plant and Equipment 360,000 280,000 Total Assets $ 1,893,600 $1, 030,000 Accounts Payable $ 132,000 $ 110,000 Notes Payable 90,000 30,000 Capital Stock 1,000,000 550,000 Retained Earnings 671,600 340,000 Total Liabilities and Equity $ 1,893,600 $1, 030,000.
Required:
C. Prepare a t-account calculation of the controlling and noncontrolling interests in combined income for the year ended December 31, 2005.
D. Prepare a consolidated financial statements workpaper for the year ended December 31, 2005.
E. Prepare a consolidated statement of financial position and a consolidated income statement for the year ended December 31, 2005.

F. Describe the effect on the consolidated balances if Salem Company uses the LIFO cost flow assumption in pricing its inventory and there has been no decrease in ending inventory quantities since 2003.
G. Prepare an analytical calculation of consolidated retained earnings for the year ended December 31, 2005.
Note: If you completed Problem 5-4 and Problem 5-11, a comparison of the consolidated balances in this problem with those you obtained in Problem 5-4 and Problem 5-11 will demonstrate that the method (cost or partial equity) used by the parent company to record its investment in a consolidated subsidiary has no effect on the consolidated balances.