Problem 5-15

Computation and Allocation of Difference Schedule

Parent
Share
Purchase price and implied value
Less: Book value of equity acquired
Difference between implied and book value
Equipment
Land
Inventory
Balance
Goodwill
Balance

$850,000
504,000
346,000
(104,000)
(52,000)
(32,000)
158,000
(158,000)
-0-

NonControlling
Share
212,500
126,000
86,500
(26,000)
(13,000)
(8,000)
39,500
(39,500)
-0-

Entire
Value
1,062,500 *
630,000
432,500
(130,000)
(65,000)
(40,000)
197,500
(197,500)
-0-

*$850,000/.80
Complete Equity Method Workpaper entries Year 2010
(1) Equity in Subsidiary Income (($100,000)(.80) $32,000 $20,800)
Dividends Declared ($25,000 .80)
Investment in Salem Company
To eliminate intercompany dividends

27,200
20,000
7,200

(2) Beginning Retained Earnings - Salem Co.

Common Stock - Salem
Difference between Implied and Book Value
Investment in Salem Company
Noncontrolling Interest
To eliminate investment account and create noncontrolling interest account

80,000
550,000
432,500
850,000
212,500

(3) Cost of Goods Sold

Land
Plant and Equipment (5 year life)
Goodwill
Difference between Implied and Book Value
To allocate the difference between implied and book value

40,000
65,000
130,000
197,500
432,500

(4) Depreciation Expense ($130,000/5)

Plant and Equipment

26,000
26,000

Problem 5-15 (continued)

Complete Equity Method Worksheet Entries Year 2011
(1) Equity in Subsidiary Income ($110,000)(.80) - $20,800
Dividends Declared ($35,000 .80)
Investment in Salem Company
To eliminate intercompany dividends and income

67,200
28,000
39,200

(2) Beginning Retained Earnings - Salem Co. ($80,000 + $75,000)

Common Stock - Salem
Difference between Implied and Book Value
Investment in Salem Company ($850,000 + $80,000 $20,000)
Noncontrolling Interest ($212,500 + ($155,000 - $80,000) .2)
To eliminate investment account and create noncontrolling interest account

155,000
550,000
432,500
910,000
227,500

(3) Investment in Salem Company

Noncontrolling Interest
Land
Plant and Equipment (5 year life)
Goodwill
Difference between Implied and Book Value
To allocate the difference between implied and book value

32,000
8,000
65,000
130,000
197,500
432,500

(4) Investment in Salem Company

Noncontrolling Interest
Depreciation Expense ($130,000/5)
Plant and Equipment

20,800
5,200
26,000
52,000

Problem 5-15 (continued)

Part C
T-account Calculation of Controlling and Noncontrolling Interest in Consolidated Income
For Year Ended December 31, 2012
Noncontrolling Interest in Consolidated Income
Additional depreciation
of the difference between implied and
Net income reported by Salem Company
book value related to:
Depreciation Expense ($130,000/5)
26,000
Goodwill Impairment ($197,500 - $150,000) 47,500
Adjusted income of Salem
Noncontrolling Ownership percentage interest
Noncontrolling Interest in Consolidated Income

170,000

96,500
20%
19,300

Controlling Interest in Consolidated Income

Porter Company's net income from its independent
operations ($177,200 reported net income
less $77,200 equity in subsidiary income
included therein)
$100,000
Porter Company's share of the adjusted income of
Salem Company (.8 X $96,500)

Controlling interest in Consolidated Net Income

77,200

$177,200

Problem 5-15 (continued)

Part D
Income Statement
Sales
Equity in Subsidiary Income
Total Revenue
Cost of Goods Sold
Depreciation Expense
Impairment Loss
Other Expenses
Total Cost and Expense
Net/Consolidated Income
Noncontrolling Interest in Consolid. Income
Net Income to Retained Earnings
Retained Earnings Statement
1/1 Retained Earnings:
Porter Company
Salem Company
Net Income from Above
Dividends Declared:
Porter Company
Salem Company
12/31/ Retained Earnings to Balance Sheet

Porter
Salem
Company Company

Eliminations
Debit
Credit

Noncontrolling Consolidated
Interest
Balances

$1,100,000 $450,000
77,200
(1) 77,200
1,177,200 450,000
900,000 200,000
40,000
30,000 (4) 26,000
(5) 47,500
60,000
50,000
1,000,000 280,000
177,200 170,000
$177,200 $170,000

$150,700

$1,550,000

$0

19,300*
$19,300

$546,400

$546,400

$230,000 (2) 230,000

177,200 170,000
150,700

19,300

(90,000)
(60,000)
$633,600 $340,000

1,550,000
1,100,000
96,000
47,500
110,000
1,353,500
196,500
(19,300)
$177,200

177,200
(90,000)

$380,700

(1) 48,000
$48,000

(12,000)
$7,300

$633,600

Problem 5-15 (continued)

Balance Sheet
Cash
Accounts Receivable
Inventory
Investment in Salem Comp.

Porter
Salem
Company Company
$70,000
$65,000
260,000
190,000
240,000
175,000
925,600
(3)
(4)

Difference between Implied and Book Value

Land
320,000
Plant and Equipment
360,000
280,000
Goodwill
Total Assets
$1,855,600 $1,030,000
Accounts Payable
Notes Payable
Common stock:
Porter Company
Salem Company
Retained earnings from above
1/1 Noncontrolling Interest in Net
Assets
12/31 Noncontrolling Interest in
Net Assets
Total Liabilities and Equity

$132,000
90,000

(2)
(3)
(3)
(3)

Eliminations
Debit
Credit

32,000 (1)
41,600 (2)

29,200
970,000

432,500 (3)
65,000
130,000 (4)
197,500 (5)

432,500

Noncontrolling Consolidated
Interest
Balances
$135,000
450,000
415,000

385,000
692,000
150,000
$2,227,000

78,000
47,500

$110,000
30,000

$242,000
120,000

1,000,000
633,600

1,000,000
550,000 (2)
340,000
(3)
(4)

$1,855,600 $1,030,000

550,000
380,700
8,000 (2)
10,400

$1,847,700

48,000
242,500 **

$1,847,700

* Noncontrolling Interest in Income =.2 $170,000 (.2 x $26,000) (.2 x $47,500) = $19,300
** $212,500 + ($230,000 $80,000) x .20 = $242,500
Explanations of workpaper entries are on the following page

7,300
224,100

633,600

$231,400

231,400
$2,227,000

Problem 5-15 (continued)

Computation and Allocation of Difference Schedule
Parent
Share
Purchase price and implied value
Less: Book value of equity acquired
Difference between implied and book value
Equipment
Land
Inventory
Balance
Goodwill
Balance

$850,000
504,000
346,000
(104,000)
(52,000)
(32,000)
158,000
(158,000)
-0-

NonControlling
Share
212,500
126,000
86,500
(26,000)
(13,000)
(8,000)
39,500
(39,500)
-0-

Entire
Value
1,062,500 *
630,000
432,500
(130,000)
(65,000)
(40,000)
197,500
(197,500)
-0-

*$850,000/.80
Explanations of workpaper entries:
(1) Equity in Subsidiary Income
Dividends Declared ($60,000 .8)
Investment in Salem Company
To reverse the effect of parent company entries during the year for subsidiary
dividends and income

77,200
48,000
29,200

(2) Beginning Retained Earnings - Salem Co.

Common Stock Salem
Difference between Implied and Book Value
Investment in Salem Company
Noncontrolling Interest
To eliminate investment account and create noncontrolling interest account

230,000
550,000
432,500
970,000
242,500

(3) Investment in Salem Company

Noncontrolling Interest
Land
Plant and Equipment
Goodwill
Difference between Implied and Book Value
To allocate the difference between implied and book value

32,000
8,000
65,000
130,000
197,500
432,500

(4) Investment in Salem Company (2)($20,800)

Noncontrolling Interest (2)($5,200)
Depreciation Expense ($130,000/5)
Plant and Equipment, net

41,600
10,400
26,000
78,000

(5) Impairment Loss ($197,500 - $150,000)

Goodwill
To record goodwill impairment

47,500
47,500

Problem 5-15 - Part E

PORTER COMPANY AND SUBSIDIARY
Consolidated Financial Statements
For the Year Ended December 31, 2012
Consolidated Income Statement
Sales
Cost of Goods Sold
Gross Profit
Expenses:
Depreciation Expense
Impairment Loss
Other Expenses
Consolidated Income
Noncontrolling Interest in Consolidated Income
Net Income

$1,550,000
1,100,000
450,000
$96,000
47,500
110,000

Consolidated Statement of Retained Earnings

Retained Earnings - Beginning of Year
Add: Net Income

253,500
196,500
19,300
$177,200
$546,400
177,200
723,600
90,000
$633,600

Less Dividends
Retained Earnings - End of Year
PORTER COMPANY AND SUBSIDIARY
Consolidated Statement of Financial Position
December 31, 2012
Assets
Current Assets:
Cash
Accounts Receivable
Inventory
$1,000,000
Noncurrent Assets:
Plant and Equipment (net)
Land
Goodwill
1,227,000
Total Assets
Liabilities And Stockholders' Equity
Liabilities:
Accounts Payable
Notes Payable
Total Liabilities
Stockholders' Equity
Noncontrolling Interest in Net Assets
Capital Stock
Retained Earnings

$135,000
450,000
415,000

692,000
385,000
150,000
$2,227,000

$242,000
120,000
362,000
231,400
1,000,000
633,600
1,865,000

Total Liabilities and Stockholders' Equity

$2,227,000

Part F If the subsidiary uses the LIFO assumption in pricing its inventory, a workpaper entry would
be made each year debiting Inventory and crediting the Difference between Implied and Book
Value, so long as there was no reduction in inventory quantities. The effect on the
consolidated balances would be an additional $40,000 in inventory, with a corresponding
additional $32,000 and $8,000 in the investment account and noncontrolling interest. The
increase in inventory results from the additional amount assigned to the inventory account at
acquisition, and will remain there because of the LIFO assumption. The investment account
and noncontrolling interest account are increased because under the LIFO assumption the
$40,000 additional inventory has not passed through cost of goods sold.
Part G Porter Company's retained earnings on 12/31/2012
Less Cumulative Effect to December 31, 2012 of the Assignment
and Depreciation of the Difference between Implied and Book Value
Assigned to:
2010
2011
2012
Inventory
$32,000
$0
$0
Equipment
20,800
20,800
20,800
$52,800
$20,800
$20,800
Goodwill Impairment (2012)
Controlling Retained Earnings on 12/31/2012

$766,000

(94,400)
(38,000)
$633,600