On January 1, 2018, 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:

? ? ? ? ? ? ? ? ?Fair Value in Excess of Book ValueEquipment.............................................$130,000Land............................................................65,000Inventory....................................................40,000

The book values of all other assets and liabilities of Salem Company were equal to their fair values on January 1, 2018. The equipment had a remaining life of five years on January 1, 2018. The inventory was sold in 2018.

Salem Company?s net income and dividends declared in 2018 and 2019 were as follows:

Year 2018 Net Income of $100,000; Dividends Declared of $25,000

Year 2019 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, 2018. (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, 2019. (It is not necessary to prepare the worksheet.) Use the following financial data for 2020 for requirements C through G.

C. Although no goodwill impairment was reflected at the end of 2018 or 2019, the goodwill impairment test conducted at December 31, 2020 revealed implied goodwill from Salem to be only $150,000. The impairment has not been recorded in the books of the parent. Prepare a t-account calculation of the controlling and noncontrolling interests in consolidated income for the year ended December 31, 2020.

D. Prepare a consolidated financial statements workpaper for the year ended December 31, 2020.

E. Prepare a consolidated statement of financial position and a consolidated income statement for the year ended December 31, 2020.

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 2019.

G. Prepare an analytical calculation of consolidated retained earnings for the year ended December 31, 2020.

Transcribed Image Text:

Salem Company Porter Company $ 450,000 $1,100,000 Sales Equity in subsidiary income 136,000 Total revenue 1,236,000 450,000 Cost of goods sold Depreciation expense 900,000 200,000 40,000 30,000 Other expenses Total cost and expense 60,000 50,000 1,000,000 $ 236,000 280,000 $ 170,000 Net income $ 230,000 1/1 Retained earnings $ 620,000 Net income 236,000 170,000 Dividends declared (90,000) (60,000) $ 340,000 $ 766,000 12/31 Retained earnings $ 70,000 $ 65,000 Cash Accounts receivable 260,000 190,000 Inventory Investment in Salem Company 240,000 175,000 1,058,000 Land 320,000 Plant and equipment 360,000 280,000 Total assets $1,988,000 $1,030,000 Accounts payable Notes payable Capital stock Retained earnings Total liabilities and equity $ 132,000 $ 110,000 90,000 30,000 1,000,000 550,000 340,000 766,000 $1,988,000 $1,030,000