256 Chapter 5 Allocation and Depreciation of Differences Between implied and Book Value, Use the following financial data for 2015 for requirements through G. Porter Company Salem Company $ 450.000 Sales Equity in subsidiary income Total revenue Cost of goods sold Depreciation expense Other expenses Total cost and expense Net income 1/1 Retained earnings Net income Dividends declared 12/31 Retained earnings $1,100,000 77,200 1.177.200 900.000 40.000 60.000 1,000,000 $ 177 200 450.000 200.000 30,000 50,000 280.000 $ 170.000 $ 230,000 170,000 $546,400 177.200 (90.000) $ 633,600 (60,000) $ 340,000 $ 65.000 190.000 175,000 Cash Accounts receivable Inventory Investment in Salem Company Land Piant and equipment Total assets S 70,000 260.000 240,000 925,600 -0 360,000 $1,855,600 320,000 280,000 $1,030,000 Accounts payable Notes payable Capital stock Retained earnings Total liabilities and equity $132.000 90,000 1,000,000 633,600 $1,855,600 $ 110,000 30,000 550,000 340,000 $1,030,000 Required: C. Although no goodwill impairment was reflected at the end of 2013 or 2014, the goodwill impairment les conducted at December 31, 2015 revealed implied, goodwill from Salem to be only $150,000. The impair ment was reflected in the books of the parent. Prepare a t-account calculation of the controlling and noncco trolling interests in consolidated income for the year ended December 31, 2015 D. Prepare a consolidated financial statements workpaper for the year ended December 31, 2015 E. Prepare a consolidated statement of financial position and a consolidated income statement for the yes ended December 31, 2015 F. Describe the effect on the consolidated balances if Salem Company uses the LIFO cost flow assumption in pricing its inventary and there has been no decrease in ending inventory quantities since 2013 G. Prepare an analytical calculation of consolidated retained earnings for the year ended December 31, 2015 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 (costot partial equity) used by the parent company to record its investment in a consolidated subsidiary has no effect on the consolidated balances PROBLEM 5-16 Workpaper Entries and Consolidated Financial Statements, Complete Equity Method L01 106 LO 7 LOG (Note that this is the same problem as Problem 5-S or Problem 5-12, but assuming the use of the complete equity method.) On January 1, 2014, Palmer Company acquired a 90% interest in Stevens Company at a cost of $1.000.000 Ar the purchase date, Stevens Company's stockholders' equity consisted of the following: Common stock Retained earnings $500,000 190,000 257 An examination of Stevens Company's assets and liabilities revealed the following at the date of acquisition Cash Accounts receivable Inventories Equipment Accumulated depreciation equipment Land Bonds payable Other Total Book Value $ 90,726 200.000 160,000 300.000 (100,000) 190,000 (205,556) 54.830 $690,000 Fair Value 590,726 20x, 210,000 390,000 (130,000) 290.000 (150.000) 54.830 $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 2014. Stevens Company purchased its bonds payable on the open market on January 10, 2014, 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 2016 are presented on the next page. 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 Other expenses 60,000 Income from operations 100.000 45.000 Equity in subsidiary income 35,100 0 Net income 135.100 $ 45,000 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 20,000 35.000 Stevens Company $151,000 173.000 81,000 Cash Accounts receivable Inventories Investment in Stevens Company Equipment Accumulated depreciation-equipment Land Total assets Accounts payable Bonds payable Common stock Retained earnings Total liabilities and equity Palmer Company $ 201,200 221,000 100,400 915,800 450,000 (300,000) 360,000 $1,948,400 $ 323,500 400,000 1,000,000 224,900 $1,948,400 300,000 (140,000) 290,000 $855,000 $135,000 500,000 220,000 $855,000 Required: A. Prepare in general journal form the workpaper entry to allocate and depreciate the difference between book value and the value implied by the purchase price in the December 31, 2014, consolidated statements work- paper B. Prepare a consolidated financial statements workpaper for the year ended December 31, 2016. C. Prepare in good form a schedule or t-account showing the calculation of the controlling interest in consoli- dated net income for the year ended December 31, 2016. 258 Chapter 5 Allocation and Depreciation of Differences between Implied and Book Vallie's If you completed Problem 5-5 and Problem 5-12, a comparison of the consolidated balances in this probleem with those you obtained in Problem 5-5 and Problem 5-12 will demonstrate that the method (cost, partial equity, complete equity) used by the parent company to record its investment in a consolidated subsidiary has no effect on the consolidated balances PROBLEM 5-17 Impact on Future Profits and In-process R&D LO 1 The Mequire Company is considering acquiring 100% of the Sosa Company. The management of Mequire fear that the acquisition price may be too high. Condensed financial statements for Sosa Company for the current year are as follows: Income Statement 2015 Revenues S100.000 Cost of Goods Sold 40.000 Gross Margin 60.000 Operating Expenses Pretax Income 25,000 Income Tax Expense 10,000 Net Income 35,000 15,000 Year Ended 12/31/14 Balance Sheet Cash Receivables Inventory Fixed Assets (net) Total Assets Current Liabilities Long-term Liabilities Common Stock Retained Earnings Total Liabilities and Equity $ 4,000 10,000 31.000 50,000 $95.000 Year Ended 12/31/15 $ 4.000 14,000 27.000 55,000 $100,000 $15.000 25,000 20,000 35,000 $95.000 de $ 17,000 18.000 20.000 45,000 $100,000 You believe that Sosa might be currently acquired at a price resulting in a price to earnings (P/E) ratio of 8 to 12 times. Also, the fair market value of Sosa's net assets is approximately $105,000, and the difference between book value and the value implied by the purchase price is due solely to depreciable assets with a remaining useful life of 10 years. Sosa Company is heavily involved in research and development of new base ball bats that enable the batter to hit the ball further. You estimate that $30,000 of the acquisition price might be classified as in-process R&D. Sosa's net income is expected to grow an average of 10% per year for the next 10 years and remain constant thereafter. Required: A. If the acquisition occurs on January 1, 2016, determine the amount of income from Sosa Company the would be included in consolidated income assuming the following P/E ratios are used to determine the a quisition price, based on earnings for the year 2015. Suppose that the FASB revoked its requirement that is process R&D be capitalized and amortized, as the result of extensive lobbying. Instead, in-process R& will be expensed in the year of acquisition 1. P/E ratio = 10 2. P/E ratio = 12 B. Now assume that FASB does require (as is currently the case at this writing) that in process R&D be capita ized (assume an amortization period of 20 years). How would your answer to part A change? PROBLEM 5-18 Deferred Tax Effects LO 6 LO7 On January 1, 2015, Pruit Company issued 25,500 shares of its common stock ($2 par) in exchange for 85 the outstanding common stock of Shah Company. Pruitt's common stock had a fair value of S28 per share at time. Pruin Company uses the cost method to account for its in 256 Chapter 5 Allocation and Depreciation of Differences Between implied and Book Value, Use the following financial data for 2015 for requirements through G. Porter Company Salem Company $ 450.000 Sales Equity in subsidiary income Total revenue Cost of goods sold Depreciation expense Other expenses Total cost and expense Net income 1/1 Retained earnings Net income Dividends declared 12/31 Retained earnings $1,100,000 77,200 1.177.200 900.000 40.000 60.000 1,000,000 $ 177 200 450.000 200.000 30,000 50,000 280.000 $ 170.000 $ 230,000 170,000 $546,400 177.200 (90.000) $ 633,600 (60,000) $ 340,000 $ 65.000 190.000 175,000 Cash Accounts receivable Inventory Investment in Salem Company Land Piant and equipment Total assets S 70,000 260.000 240,000 925,600 -0 360,000 $1,855,600 320,000 280,000 $1,030,000 Accounts payable Notes payable Capital stock Retained earnings Total liabilities and equity $132.000 90,000 1,000,000 633,600 $1,855,600 $ 110,000 30,000 550,000 340,000 $1,030,000 Required: C. Although no goodwill impairment was reflected at the end of 2013 or 2014, the goodwill impairment les conducted at December 31, 2015 revealed implied, goodwill from Salem to be only $150,000. The impair ment was reflected in the books of the parent. Prepare a t-account calculation of the controlling and noncco trolling interests in consolidated income for the year ended December 31, 2015 D. Prepare a consolidated financial statements workpaper for the year ended December 31, 2015 E. Prepare a consolidated statement of financial position and a consolidated income statement for the yes ended December 31, 2015 F. Describe the effect on the consolidated balances if Salem Company uses the LIFO cost flow assumption in pricing its inventary and there has been no decrease in ending inventory quantities since 2013 G. Prepare an analytical calculation of consolidated retained earnings for the year ended December 31, 2015 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 (costot partial equity) used by the parent company to record its investment in a consolidated subsidiary has no effect on the consolidated balances PROBLEM 5-16 Workpaper Entries and Consolidated Financial Statements, Complete Equity Method L01 106 LO 7 LOG (Note that this is the same problem as Problem 5-S or Problem 5-12, but assuming the use of the complete equity method.) On January 1, 2014, Palmer Company acquired a 90% interest in Stevens Company at a cost of $1.000.000 Ar the purchase date, Stevens Company's stockholders' equity consisted of the following: Common stock Retained earnings $500,000 190,000 257 An examination of Stevens Company's assets and liabilities revealed the following at the date of acquisition Cash Accounts receivable Inventories Equipment Accumulated depreciation equipment Land Bonds payable Other Total Book Value $ 90,726 200.000 160,000 300.000 (100,000) 190,000 (205,556) 54.830 $690,000 Fair Value 590,726 20x, 210,000 390,000 (130,000) 290.000 (150.000) 54.830 $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 2014. Stevens Company purchased its bonds payable on the open market on January 10, 2014, 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 2016 are presented on the next page. 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 Other expenses 60,000 Income from operations 100.000 45.000 Equity in subsidiary income 35,100 0 Net income 135.100 $ 45,000 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 20,000 35.000 Stevens Company $151,000 173.000 81,000 Cash Accounts receivable Inventories Investment in Stevens Company Equipment Accumulated depreciation-equipment Land Total assets Accounts payable Bonds payable Common stock Retained earnings Total liabilities and equity Palmer Company $ 201,200 221,000 100,400 915,800 450,000 (300,000) 360,000 $1,948,400 $ 323,500 400,000 1,000,000 224,900 $1,948,400 300,000 (140,000) 290,000 $855,000 $135,000 500,000 220,000 $855,000 Required: A. Prepare in general journal form the workpaper entry to allocate and depreciate the difference between book value and the value implied by the purchase price in the December 31, 2014, consolidated statements work- paper B. Prepare a consolidated financial statements workpaper for the year ended December 31, 2016. C. Prepare in good form a schedule or t-account showing the calculation of the controlling interest in consoli- dated net income for the year ended December 31, 2016. 258 Chapter 5 Allocation and Depreciation of Differences between Implied and Book Vallie's If you completed Problem 5-5 and Problem 5-12, a comparison of the consolidated balances in this probleem with those you obtained in Problem 5-5 and Problem 5-12 will demonstrate that the method (cost, partial equity, complete equity) used by the parent company to record its investment in a consolidated subsidiary has no effect on the consolidated balances PROBLEM 5-17 Impact on Future Profits and In-process R&D LO 1 The Mequire Company is considering acquiring 100% of the Sosa Company. The management of Mequire fear that the acquisition price may be too high. Condensed financial statements for Sosa Company for the current year are as follows: Income Statement 2015 Revenues S100.000 Cost of Goods Sold 40.000 Gross Margin 60.000 Operating Expenses Pretax Income 25,000 Income Tax Expense 10,000 Net Income 35,000 15,000 Year Ended 12/31/14 Balance Sheet Cash Receivables Inventory Fixed Assets (net) Total Assets Current Liabilities Long-term Liabilities Common Stock Retained Earnings Total Liabilities and Equity $ 4,000 10,000 31.000 50,000 $95.000 Year Ended 12/31/15 $ 4.000 14,000 27.000 55,000 $100,000 $15.000 25,000 20,000 35,000 $95.000 de $ 17,000 18.000 20.000 45,000 $100,000 You believe that Sosa might be currently acquired at a price resulting in a price to earnings (P/E) ratio of 8 to 12 times. Also, the fair market value of Sosa's net assets is approximately $105,000, and the difference between book value and the value implied by the purchase price is due solely to depreciable assets with a remaining useful life of 10 years. Sosa Company is heavily involved in research and development of new base ball bats that enable the batter to hit the ball further. You estimate that $30,000 of the acquisition price might be classified as in-process R&D. Sosa's net income is expected to grow an average of 10% per year for the next 10 years and remain constant thereafter. Required: A. If the acquisition occurs on January 1, 2016, determine the amount of income from Sosa Company the would be included in consolidated income assuming the following P/E ratios are used to determine the a quisition price, based on earnings for the year 2015. Suppose that the FASB revoked its requirement that is process R&D be capitalized and amortized, as the result of extensive lobbying. Instead, in-process R& will be expensed in the year of acquisition 1. P/E ratio = 10 2. P/E ratio = 12 B. Now assume that FASB does require (as is currently the case at this writing) that in process R&D be capita ized (assume an amortization period of 20 years). How would your answer to part A change? PROBLEM 5-18 Deferred Tax Effects LO 6 LO7 On January 1, 2015, Pruit Company issued 25,500 shares of its common stock ($2 par) in exchange for 85 the outstanding common stock of Shah Company. Pruitt's common stock had a fair value of S28 per share at time. Pruin Company uses the cost method to account for its in