35. Palm Company acquired 100 percent of Storm Company?s voting stock on January 1, 2011, by issuing 10,000 shares of its $10 par value common stock (having a fair value of $14 per share). As of that date, Storm had stockholders? equity totaling $105,000. Land shown on Storm?s accounting records was undervalued by $10,000. Equipment (with a 5-year remain- ing life) was undervalued by $5,000. A secret formula developed by Storm was appraised at $20,000 with an estimated life of 20 years. Following are the separate financial statements for the two companies for the year end- ing December 31, 2015. There were no intra-entity payables on that date. Credit balances are indicated by parentheses. Palm Company Storm Company Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (485,000) $(190,000) Cost of goods sold. . . . . . . . . . . . . . . . . . . . . 160,000 70,000 Depreciation expense. . . . . . . . . . . . . . . . . . . 130,000 52,000 Subsidiary earnings . . . . . . . . . . . . . . . . . . . . (66,000 ) ?0? Net income . . . . . . . . . . . . . . . . . . . . . . . . $ (261,000 ) $ (68,000 ) Retained earnings, 1/1/15 . . . . . . . . . . . . . . . $ (659,000) $ (98,000) Net income (above) . . . . . . . . . . . . . . . . . . . . (261,000) (68,000) Dividends declared. . . . . . . . . . . . . . . . . . . . . 175,500 40,000 Retained earnings, 12/31/15. . . . . . . . . . . . $ (744,500 ) $(126,000 ) Current assets . . . . . . . . . . . . . . . . . . . . . . . . $ 268,000 $ 75,000 Investment in Storm Company. . . . . . . . . . . . 216,000 ?0? Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 427,500 58,000 Buildings and equipment (net) . . . . . . . . . . . . 713,000 161,000 Total assets . . . . . . . . . . . . . . . . . . . . . . . . $ 1,624,500 $ 294,000 Current liabilities . . . . . . . . . . . . . . . . . . . . . . $ (110,000) $ (19,000) Long-term liabilities . . . . . . . . . . . . . . . . . . . . (80,000) (84,000) Common stock . . . . . . . . . . . . . . . . . . . . . . . (600,000) (60,000) Additional paid-in capital. . . . . . . . . . . . . . . . (90,000) (5,000) Retained earnings, 12/31/15 . . . . . . . . . . . . . (744,500 ) (126,000 ) Total liabilities and equity. . . . . . . . . . . . . . $(1,624,500 ) $(294,000 ) a. Explain how Palm derived the $66,000 balance in the Subsidiary Earnings account. b. Prepare a worksheet to consolidate the financial information for these two companies.

Computation of Goodwill (if any) Fair Value of Consideration transferred (10,000 x $14) Book value of S Co. Excess fair value over book Allocated to Land Allocated to equipment Allocated to secret formula Goodwill Analysis of Subsidiary earnings Storm Company net income Additional equipment depreciation ($5,000/5years) Additional formula depreciation ($20,000/20 years) Equity in subsidiary earnings on parent books Problem 35 Journal Entries Consolidation Entry S: Common Stock Paid in Capital Retained Earnings (Beginning) Investment in Storm Company Eliminate subsidiary equity (beginning retained earnings) Consolidation Entry A: Building Land Formula Investment in Storm Company Allocate subsidiary acquisition date fair value adjustments. The financial statement given is for 2015. Therefore four years depreciation and amortization (2011 thru 2014) have already been taken. That leaves a fair value excess of $1,000 for equipment and $16,000 for formula. As land is not depreciated it gets the full $10,00. Consolidation Entry I: Equity in Subsidiary Earnings Investment in Storm Company Eliminate equity income - The entire equity income recorded in the parent Palm Company must be eliminated. Consolidation Entry D: Investment in Storm Company Dividends Paid Eliminate intercompany dividend Consolidation Entry E: Depreciation Expense - Equipment Amortization Expense - Formula Formula Equipment Recognize current year excess fair value expenses.cess