Problem 3-3 (LO 4) Sophisticated equity method adjustments, consolidated worksheet.

(This is the same as Problem 3-2, except that the sophisticated equity method is used.) On January 1, 2015, Paro Company purchases 80% of the common stock of Solar Company for $320,000. On this date, Solar has common stock, other paid-in capital in excess of par, and retained earnings of $50,000, $100,000, and $150,000, respectively. Net income and dividends for two years for Solar Company are as follows:

	2015	2016
Net income	$60,000	$90,000
Dividends	20,000	30,000

On January 1, 2015, the only undervalued tangible assets of Solar are inventory and the building. Inventory, for which FIFO is used, is worth $10,000 more than cost. The inventory is sold in 2015. The building, which is worth $30,000 more than book value, has a remaining life of10 years, and straight-line depreciation is used. The remaining excess of cost over book value is attributable to goodwill.

The trial balances for Paro and Solar are as follows:

	Paro Company	Solar Company
Inventory, December 31	100,000	50,000
Other Current Assets	136,000	180,000
Investment in Solar Company	Note 1
Land	50,000	50,000
Buildingsand Equipment	350,000	320,000
Accumulated Depreciation	(100,000)	(60,000)
Goodwill
Other Intangibles	20,000
Current Liabilities	(120,000)	(40,000)
Bonds Payable		(100,000)
Other Long-Term Liabilities	(200,000)
Common StockParo Company.	(200,000)
Other Paid-In Capital in Excess of ParParo Company	(100,000)
Retained EarningsParo Company	(203,600)
Common StockSolar Company		(50,000)
Other Paid-In Capital in Excess of ParSolar Company		(100,000)
Retained EarningsSolar Company		(190,000)
Net Sales	(520,000)	(450,000)
Cost of Goods Sold	300,000	260,000
Operating Expenses	120,000	100,000
Subsidiary Income	Note 1
Dividends DeclaredParo Company	50,000
Dividends DeclaredSolar Company		30,000
Note 1: To be calculated

Required

1. Prepare a value analysis and a determination and distribution of excess schedule.

2. Paro Company carries the investment in Solar Company under the sophisticated equity method. In general journal form, record the entries that would be made to apply the equity method in 2015 and 2016.

3. Compute the balance that should appear in Investment in Solar Company and in Subsidiary Income on December 31, 2016 (the second year). Fill in these amounts on Paro Companys trial balance for 2016.

4. Complete a worksheet for consolidated financial statements for 2016. Include columns for eliminations and adjustments, consolidated income, NCI, controlling retained earnings, and consolidated balance sheet.