Exercise 5-4 Allocation of Cost and Workpaper Entries at Date of Acquisition

On January 1, 2012, Porter Company purchased an 80% interest in Salem Company for $260,000. On this date, Salem Company had common stock of $207,000 and retained earnings of $130,500.

An examination of Salem Company's balance sheet revealed the following comparisons between book and fair values:

Book Value Fair Value

Inventory $ 30,000 $ 35,000

Other current assets 50,000 55,000

Equipment 300,000 350,000

Land 200,000 200,000

Required:

A. Determine the amounts that should be allocated to Salem Company's assets on the consolidated financial statements workpaper on January 1, 2012.

B. Prepare the January 1, 2012, consolidated financial statements workpaper entries to eliminate the investment account and to allocate the difference between book value and the value implied by the purchase price.