Eliminating Entries (including Goodwill Impairment) and Worksheets

for Various Years

On January 1, 2013, 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.

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 Value

Equipment $130,000

Land 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, 2013. The equipment had a remaining life of five years on January 1, 2013. The inventory was sold in

2013.

Salem Company's net income and dividends declared in 2013 and 2014 were as follows:

Year 2013 Net Income of $100,000; Dividends Declared of $25,000

Year 2014 Net Income of $110,000; Dividends Declared of $35,000

Required:

A. Prepare a Computation and Allocation Schedule for the difference between book value of equity acquired and

the value implied by the purchase price.

B. Present the eliminating/adjusting entries needed on the consolidated worksheet for the year ended

December 31, 2013. (It is not necessary to prepare the worksheet.)

1. Assume the use of the cost method.

2. Assume the use of the partial equity method.

3. Assume the use of the complete equity method.

C. Present the eliminating/adjusting entries needed on the consolidated worksheet for the year ended December 31,

2014. (It is not necessary to prepare the worksheet.)

1. Assume the use of the cost method.

2. Assume the use of the partial equity method.

3. Assume the use of the complete equity method.

Use the following financial data for 2015 for requirements D through G.

Porter Company Salem Company

Sales $1,100,000 $ 450,000

Dividend income 48,000

Total revenue 1,148,000 450,000

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 $ 148,000 $ 170,000

1/1 Retained earnings $ 500,000 $ 230,000

Net income 148,000 170,000

Dividends declared (90,000) (60,000)

12/31 Retained earnings $ 558,000 $ 340,000

Cash $ 70,000 $ 65,000

Accounts receivable 260,000 190,000

Inventory 240,000 175,000

Investment in Salem Company 850,000

Land 0 320,000

Plant and equipment 360,000 280,000

Total assets $1,780,000 $1,030,000

Accounts payable $ 132,000 $ 110,000

Notes payable 90,000 30,000

Capital stock 1,000,000 550,000

Retained earnings 558,000 340,000

Total liabilities and equity $1,780,000 $1,030,000

Required:

D. Prepare a consolidated financial statements workpaper for the year ended December 31, 2015. Although no

goodwill impairment was reflected at the end of 2013 or 2014, the goodwill impairment test conducted at

December 31, 2015 revealed implied goodwill from Salem to be only $150,000. The impairment has not been

recorded in the books of the parent. (Hint: You can infer the method being used by the parent from the

information in its trial balance.)

E. Prepare a consolidated statement of financial position and a consolidated income statement for the year

ended December 31, 2015.

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 2013.

G. Prepare an analytical calculation of consolidated retained earnings for the year ended December 31, 2015.