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Less: Book value of equity acquired:

Difference between implied and book value


Goodwill
Balance

405,000
45,000
(45,000)
-0-

45,000
5,000
(5,000)
-0-

450,000
50,000
(50,000)
-0-

*$450,000/.90

Problem 5-1
Calculations:
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 (net) ($1,500,000 - $600,000)
Balance
Goodwill
Balance

$2,800,000
1,200,000
1,600,000
(720,000)
880,000
(880,000)
-0-

NonEntire
Controlling Value
Share
700,000 3,500,000 *
300,000 1,500,000
400,000 2,000,000
(180,000) (900,000)
220,000 1,100,000
(220,000) (1,100,000)
-0-0-

*$2,800,000/.80
Depreciation of difference allocated to Palmero ($720,000/10)
Depreciation of difference allocated to Santos ($180,000/10)

$72,000
$18,000

Part A 2011
(1) Beginning Retained Earnings-Santos Co.
1,000,000
Capital Stock- Santos Co.
500,000
Difference between Implied and Book Value
2,000,000
Investment in Santos Co.
2,800,000
Noncontrolling Interest
700,000
To eliminate investment account and create noncontrolling interest account
(2) Depreciation Expense
90,000
Property and Equipment (net) ($900,000 - $90,000)
810,000
Goodwill
1,100,000
Difference between Implied and Book Value
2,000,000
To allocate and depreciate the difference between implied and book value
Alternative to entry (2)
(2a)
Property and Equipment (net)
Goodwill
Difference between Implied and Book Value
(2b) Depreciation Expense

41212

900,000
1,100,000
2,000,000
90,000

Property and Equipment (net)


2012
(1) Investment in Santos Company ($300,000 0.80)
Beginning Retained Earnings-Palmero Co.
To establish reciprocity/convert to equity as of 1/1/2012

0.20]

90,000

240,000
240,000

(2) Beginning Retained Earnings-Santos Company


1,300,000
Capital Stock-Santos Company
500,000
Difference between Implied and Book Value
2,000,000
Investment in Santos Company ($2,800,000 + $240,000)
3,040,000
Noncontrolling Interest $700,000 + [($1,300,000 $1,000,000) x
760,000
To eliminate investment account.
(3) Beginning Retained Earnings-Palmero Co.
72,000
Noncontrolling Interest
18,000
Depreciation Expense
90,000
Property and Equipment (net) ($900,000 - $90,000 - $90,000)
720,000
Goodwill
1,100,000
Difference between Implied and Book Value
2,000,000
To allocate and depreciate the difference between implied and book value

Alternative to entry (3)


(3a)
Property and Equipment (net)
Goodwill
Difference between Implied and Book Value
(3b) Beginning Retained Earnings-Palmero Co.
Noncontrolling Interest
Depreciation Expense
Property and Equipment (net)

900,000
1,100,000
2,000,000
72,000
18,000
90,000

2011
Part B Controlling Interest in Consolidated Net Income
Palmero Company's Net Income from Independent Operations
$400,000
Palmero Company's Share of Reported Income of Santos Company 240,000
Less: Depreciation of Difference between
Implied and Book Value
Allocated to:
Property and Equipment
(72,000)
Controlling Interest in Consolidated Net Income
$568,000

180,000
2012
$425,000
320,000

(72,000)
$673,000

Noncontrolling Interest in Consolidated Income (2011)


Amortization of the difference between
Net income reported by Santos
implied and book value related to
equipment ($900,000/10)
90,000
Adjusted net income of Santos
Noncontrolling Ownership percentage interest

41313

Noncontrolling Interest in Consolidated Net Inc

Controlling Interest in Consolidated Income (2011)


Palmero Company's net income from its independen
operations
Palmero Company's share of the adjusted income o
Santos Company (.8 X $210,000)

Controlling Interest in Consolidated Net Income

Noncontrolling Interest in Consolidated Income (2012)


Amortization of the difference between
Net income reported by Santos
implied and book value related to
equipment ($900,000/10)
90,000
Adjusted net income of Santos
Noncontrolling Ownership percentage interest
Noncontrolling Interest in Consolidated Net Inc

Controlling Interest in Consolidated Income (2012)


Palmero Company's net income from its independen
operations
Palmero Company's share of the adjusted income o
Santos Company (.8 X $310,000)

Controlling Interest in Consolidated Net Income

Problem 5-2
Computation and Allocation of Difference Schedule
Parent
Share
Purchase price and implied value

41414

$1,300,000

NonEntire
Controlling Value
Share
557,143 1,857,143 *

Less: Book value of equity acquired


Difference between implied and book value
Unamortized Discount on Bonds Payable
Balance
Goodwill
Balance

1,050,000
250,000
(106,143)
143,857
(143,857)
-0-

450,000 1,500,000
107,143
357,143
(45,490) (151,633)
61,653
205,510
(61,653) (205,510)
-0-0-

*$1,300,000/.70
Present Value on 1/1/2011 of 6% Bonds Payable
Discounted at 10%, 5 periods
Principal ($1,000,000 0.62092)
Interest ($60,000 3.79079)
Fair value of bonds
Face value of bonds
Total Discount

$620,920
227,447
$848,367
1,000,000
$151,633

Amortization of amount of difference between implied and book value allocated to


unamortized discount on bonds payable
(1)
Year
2011
2012

(2)
Carrying
Value (1/1)
$848,367
$873,204

(3)
Interest at 10%
of Carrying Value
$84,837
$87,320

(4)
Interest at 6%
of Par Value
$60,000
$60,000

(5)
Difference
[(3)-(4)]
$24,837
$27,320

Part A 2011
(1) Equity in Subsidiary Income (.70)($100,000)
Investment in Sagon Co.
To eliminate subsidiary income

70,000
70,000

(2) Beginning Retained Earnings-Sagon Co.


500,000
Capital Stock- Sagon Co.
1,000,000
Difference between Implied and Book Value
357,143
Investment in Sagon Co.
1,300,000
Noncontrolling Interest
557,143
To eliminate investment amount and create noncontrolling interest account
(3) Interest Expense
Unamortized Discount on Bonds Payable ($151,633 - $24,837)
Goodwill
Difference between Implied and Book Value
To allocate and amortize the difference between Implied and book value
Alternative to entry (3)
(3a) Unamortized Discount on Bonds Payable
Goodwill
Difference between Implied and Book Value

41515

24,837
126,796
205,510
357,143

151,633
205,510
357,143

(3b) Interest Expense


Unamortized Discount on Bonds Payable

24,837
24,837

2012
(1) Equity in Subsidiary Income (.70)($120,000)
Investment in Sagon Co.
To eliminate subsidiary income

84,000
84,000

(2) Beginning Retained Earnings-Sagon Company


600,000
Common Stock- Sagon Company
1,000,000
Difference between Implied and Book Value
357,143
Investment in Sagon Company ($1,300,000 + $70,000)
1,370,000
Noncontrolling Interest ($557,143 + ($600,000 $500,000) x 0.30)
587,143
To eliminate the investment account and create noncontrolling interest
account
(3) Beginning Retained Earnings-Paxton Company
Noncontrolling Interest
Interest Expense
Unamortized Discount on Bonds Payable ($151,633 - $24,837 - $27,320)
Goodwill
Difference between Implied and Book Value
To allocate and amortize the difference between implied and book value

17,386 *
7,451
27,320
99,476
205,510
357,143

*$24,837 x

70% = $17,386
Alternative to entry (3)
(3a) Unamortized Discount on Bonds Payable
Goodwill
Difference between Implied and Book Value

151,633
205,510
357,143

(3b) Beginning Retained Earnings-Paxton Company


Noncontrolling Interest
Interest Expense
Unamortized Discount on Bonds Payable

17,386
7,451
27,320
52,157

(4) Impairment Loss Goodwill**


Goodwill
**Step 1: Fair value of the reporting unit
$1,500,000
Carrying value of unit:
Carrying value of identifiable net assets
Carrying value of goodwill

25,510
25,510

$1,409,000
205,510

1,614,510
Excess of carrying value over fair value
114,510
The excess of carrying value over fair value means that step 2 is required.

41616

Step 2:Fair value of the reporting unit


$1,500,000
Fair value of identifiable net assets
1,320,000
Implied value of goodwill
180,000
Recorded value of goodwill
205,510
Impairment loss
25,510

Part B Controlling Interest in Consolidated Net Income


2011
Paxton Company's Net Income from Independent Operations
$300,000
Paxton Company's Share of Reported Income of Sagon Company
70,000
Less: Amortization of Difference between Implied and Book Value
Allocated to:
Bonds Payable
(17,386)
Controlling Interest in Consolidated Net Income
$352,614

2012
$250,000
84,000

(19,124)*
$314,876

* $27,320 x 70% = $19,124


Noncontrolling Interest in Consolidated Income (2011)
Amortization of the difference between
Net income reported by Sagon
implied and book value related to
bonds payable
24,837
Adjusted net income of Sagon
Noncontrolling Ownership percentage interest
Noncontrolling Interest in Consolidated Net Inc

Controlling Interest in Consolidated Income (2011)


Paxton Company's net income from its independen
operations
Paxton Company's share of the adjusted income of
Sagon Company (.7 X $75,163)

Controlling interest in Consolidated Net Income

Noncontrolling Interest in Consolidated Income (2012)

41717

Amortization of the difference between


Net income reported by S
implied and book value related to
bonds payable
27,320
Goodwill Impairment
25,510
Adjusted net income of S
Noncontrolling Ownership percentage interest
Noncontrolling Interest in Consolidated Net Inc

Controlling Interest in Consolidated Income (2012)


Paxton Company's net income from its independen
operations
Paxton Company's share of the adjusted income o
Sagon Company (.7 X $67,170)

Controlling interest in Consolidated Net Income

41818

Problem 5-3
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
Inventory ($725,000 - $600,000)
Equipment ($1,075,000 - $900,000)
Balance
Goodwill
Balance

$1,970,000
1,440,000
530,000
(100,000)
(140,000)
290,000
(290,000)
-0-

NonControlling
Share
492,500
360,000
132,500
(25,000)
(35,000)
72,500
(72,500)
-0-

Entire
Value
2,462,500 *
1,800,000
662,500
(125,000)
(175,000)
362,500
(362,500)
-0-

*$1,970,000/.80
2012 Amortization Schedule
Inventory (60% in 2012)
Equipment ($175,000/7)
Total

60,000
20,000
80,000

15,000
5,000
20,000

75,000
25,000
100,000

2013 Amortization Schedule


Inventory (40% in 2013)
Equipment ($175,000/7)
Total

40,000
20,000
60,000

10,000
5,000
15,000

50,000
25,000
75,000

Part A 2012
Investment in Superstition Company
Cash

1,970,000

Cash (0.8 $150,000)


Investment in Superstition Company

120,000

Investment in Superstition Company


Equity in Subsidiary Income (.80)($750,000)

600,000

Equity in Subsidiary Income


Investment in Superstition Company
2013
Cash (0.8 $225,000)
Investment in Superstition Company
Investment in Superstition Company
Equity in Subsidiary Income (.80)($900,000)
Equity in Subsidiary Income
Investment in Superstition Company

41919

1,970,000

120,000

600,000
80,000
80,000
180,000
180,000
720,000
720,000
60,000
60,000

Part B 2012
(1) Equity in Subsidiary Income ((.80)($750,000) - $80,000)
Dividends Declared (0.80 $150,000)
Investment in Superstition Company
To eliminate intercompany income and dividends
(2) Beginning Retained Earnings - Superstition Company
Common Stock- Superstition Company
Difference between Implied and Book Value
Investment in Superstition Company
Noncontrolling Interest
To eliminate the investment account and create noncontrolling interest
account

520,000
120,000
400,000
600,000
1,200,000
662,500
1,970,000
492,500

(3) Inventory ($125,000 - $75,000)


50,000
Cost of Goods Sold
75,000
Depreciation Expense
25,000
Equipment (net) ($175,000 - $25,000)
150,000
Goodwill
362,500
Difference between Implied and Book Value
662,500
To allocate and depreciate the difference between implied and book value
Alternative to entry (3)
(3a) Inventory
Cost of Good Sold
Equipment (net)
Goodwill
Difference between Implied and Book Value
(3b) Depreciation Expense
Equipment (net)

2013
(1) Equity in Subsidiary Income ((.80)($900,000) - $60,000)
Dividends Declared (0.80 $225,000)
Investment in Superstition Company
To eliminate intercompany income and dividends

.20)

(3)

42020

50,000
75,000
175,000
362,500
662,500
25,000
25,000

660,000
180,000
480,000

(2) Beginning Retained Earnings-Superstition Company


1,200,000
Common Stock - Superstition Company.
1,200,000
Difference between Implied and Book Value
662,500
Investment in Superstition Company ($1,970,000 + $480,000)
2,450,000
Noncontrolling Interest ($492,500 + ($1,200,000 $600,000) x
612,500
To eliminate investment account and create noncontrolling interest account

Investment in Superstition Company

($60,000 + $20,000)
80,000
Noncontrolling Interest ($15,000 + $5,000)
20,000
Cost of Good Sold
50,000
Depreciation Expense
25,000
Equipment (net) ($175,000 $25,000 $25,000)
125,000
Goodwill
362,500
Difference between Implied and Book Value
662,500
To allocate and depreciate the difference between implied and book value
Alternative to entry (3)
(3a) Investment in Superstition Company
Noncontrolling Interest
Cost of Good Sold
Equipment (net)
Goodwill
Difference between Implied and Book Value

60,000
15,000
50,000
175,000
362,500
662,500

(3b) Investment in Superstition Company


Noncontrolling Interest
Depreciation Expense
Equipment (net)

20,000
5,000
25,000
50,000

Part C Perke Corporation's Net Income from Independent Operations


($1,000,000 - $120,000)
Perke Corporation's Share of Superstition Company's net income
(0.8 $750,000) 600,000
Less: Assignment, amortization, and depreciation of:
Inventory
Equipment
Controlling Interest in Consolidated Net Income
$1,400,000

$880,000

(60,000)
(20,000)

Problem 5-7
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 (net)
Balance
Goodwill
Balance
*$900,000/.75

42121

$900,000
506,250
393,750
(135,000)
258,750
(258,750)
-0-

NonControlling
Share
300,000
168,750
131,250
(45,000)
86,250
(86,250)
-0-

Entire
Value
1,200,000 *
675,000
525,000
(180,000)
345,000
(345,000)
-0-

Amount of Difference Between Implied and Book Value Allocated to Equipment

Equipment
Accumulated Depreciation
Net

Fair
Value
$990,000 1
330,000 2
$660,000

Book
Value
$720,000
(240,000)
$480,000

Fair Value Minus


Book Value
$270,000 3
(90,000)4
$180,000

$660,000/($480/$720) = $990,000
$990,000 ($240/$720) = $330,000
3
$180,000/($480/$720) = $270,000
4
$270,000 ($240/$720) = $90,000
2

Annual Depreciation of Difference


Equipment ($180,000/10)) = $18,000
Part A Investment in Sanchez Company
Dividend Declared-Sanchez Co. ($120,000 0.75)

90,000
90,000

(1) Equity in Subsidiary Income (($123,000 0.75) $13,500)


Investment in Sanchez Company

78,750
78,750

(2) Beginning Retained Earnings-Sanchez Company


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

375,000
300,000
525,000

(3) Depreciation Expense


Equipment
Goodwill
Accumulated Depreciation-Equipment ($90,000 + $18,000)
Difference between Implied and Book Value
To allocate and depreciate the difference between implied and book value

18,000
270,000
345,000

Alternative to entry (3)


(3a) Equipment
Goodwill
Accumulated Depreciation-Equipment
Difference between Implied and Book Value

900,000
300,000

108,000
525,000

270,000
345,000
90,000
525,000

(3b) Depreciation Expense


Accumulated Depreciation-Equipment

18,000
18,000

Part B (1) & (2)


Equipment
Accumulated Depreciation
Carrying Value 1/1/2011

42222

Book Value
$720,000
(240,000)
$480,000

Difference
$270,000 3
(90,000)
$180,000

Consolidated
$990,000 1
(330,000)
$660,000

8/10
Carrying Value 1/1/2013
Proceeds from Sale
(Gain) Loss on Sale

384,000
(450,000)
$(66,000)

8/10
528,000
(450,000)
$78,000

(3) Investment in Sanchez Company


Gain on Disposal of Equipment - Sanchez
Loss on Disposal of Equipment
Difference between Implied and Book Value
(4) In all subsequent years, the $180,000 difference between implied and book value
that was allocated to the equipment that was disposed of will be debited to the
Investment in Sanchez Company in the consolidated statements workpaper for
the cumulative amount of additional depreciation expense ($18,000 + $18,000 =
$36,000) and for the amount of adjustment to the reported gain or loss on the
disposal of equipment ($66,000 + $78,000 = $144,000) recognized in the
consolidated financial statements in prior years.
Note: The $66,000 reduction of the gain plus the $78,000 loss equals $144,000
which is equal to the unamortized difference associated with the equipment on
the date it was sold to outsiders ($180,000 - $18,000 - $18,000 = $144,000)

42323

36,000
66,000
78,000
180,000