Workpaper Entries and Consolidated Financial Statements (Note: This is the same problem as Problem 5-5 and Problem 5-12, but assuming the use of the complete equity method.)
On January 1, 2004, Palmer Company acquired a 90% interest in Stevens Company at a cost of $1,000,000. At the purchase date, Stevens Company’s stockholders’ equity consisted of the following: LO2 Common Stock $500,000 Retained Earnings 190,000 An examination of Stevens Company’s assets and liabilities revealed the following at the date of acquisition:
Book Value Fair Value Cash $ 90,726 $ 90,726 Accounts Receivable 200,000 200,000 Inventories 160,000 210,000 Equipment 300,000 390,000 Accumulated Depreciation — Equipment (100,000) (130,000)
Land 190,000 290,000 Bonds Payable (205,556) (150,000)
Other 54,830 54,830 Total $ 690,000 $ 955,556 Additional Information—Date of Acquisition:
Stevens Company’s equipment had an original life of 15 years and a remaining useful life of 10 years. All the inventory was sold in 2004. Stevens Company purchased its bonds payable on the open market on January 10, 2004, for $150,000 and recognized a gain of $55,556.
Palmer Company uses the complete equity method to record its investment in Stevens Company.
Financial statement data for 2006 are presented here:
Palmer Company Stevens Company Sales $ 620,000 $ 340,000 Cost of Sales 430,000 240,000 Gross Margin 190,000 100,000 Depreciation Expense 30,000 20,000 Other Expenses 60,000 35,000 Income from Operations 100,000 45,000 Equity in Subsidiary Income 35,100 0 Net Income 135,100 $ 45,000 Palmer Stevens Company Company 1/1 Retained Earnings $ 209,800 $210,000 Net Income 135,100 45,000 344,900 255,000 Dividends (120,000) (35,000)
12/31 Retained Earnings $ 224,900 $ 220,000 Cash $ 201,200 $ 151,000 Accounts Receivable 221,000 173,000 Inventories 100,400 81,000 Investment in Stevens Company 915,800 Equipment 450,000 300,000 Accumulated Depreciation — Equipment (300,000) (140,000)
Land 360,000 290,000 Total Assets $1,948,400 $ 855,000 Accounts Payable $ 323,500 $ 135,000 Bonds Payable 400,000 Common Stock 1,000,000 500,000 Retained Earnings 224,900 220,000 Total Liabilities and Equity $1,948,400 $ 855,000 Required:
A. Prepare in general Journal form the workpaper entry to allocate and depreciate the difference between cost and book value in the December 31, 2004, consolidated statements workpaper.
B. Prepare a consolidated financial statements workpaper for the year ended December 31, 2006.
C. Prepare in good form a schedule or t-account showing the calculation of the controlling interest in combined net income for the year ended December 31, 2006.
If you completed Problem 5-5 and Problem 5-12, a comparison of the consolidated balances in this problem with those you obtained in Problem 5-5 and Problem 5-12 will demonstrate that the method (cost, partial equity, or complete equity) used by the parent company to record its investment in a consolidated subsidiary has no effect on the consolidated balances.