EXERCISE 4-2:

Park Company purchased 90% of the stock of Salt Company on

January 1, 2009, for $465,000, an amount equal to $15,000 in
excess of the book value of equity acquired. This excess payment
relates to an undervaluation of Salt Company’s land. On the date
of purchase, Salt Company’s retained earnings balance was
$50,000. The remainder of the stockholders’ equity consists of no-
par common stock. During 2013, Salt Company declared dividends
in the amount of $10,000, and reported net income of $40,000.
The retained earnings balance of Salt Company on December 31,
2012, was $160,000. Park Company uses the cost method to
record its investment.
Required:
Prepare in general journal form the workpaper entries that would
be made in the preparation of a consolidated statements
workpaper on December 31, 2013.
Computation and Allocation of Difference between Implied and Book Value Acquired
 

Parent Non- Entire

Share Controlling Value
Share
Purchase price and implied value 465,000 51,667 516,667 *
Less: Book value of equity acquired: 450,000 50,000 500,000
Difference (implied and book value) 15,000 1,667 16,667
Allocated to undervalued land (15,000) (1,667) (16,667)
Balance -0- -0- -0-

Equity acquired by the parent company 450,000

Equity acquired for the whole company 500,000
Common stock ?????? (450,000)
RE. 1/1 (Given) 50,000
1-Investment in Salt Company 99,000
Retained Earnings 1/1 - Park Company 99,000
To establish reciprocity (.90 ( ($160,000 – $50,000))
 
2-Dividend Income 9,000
Dividends Declared ($10000*.90) 9,000

3-Common Stock (465-15) 450,000

Retained Earnings 1/1/13 160,000
Land 16,667
Investment ($465,000 + $99,000) 564,000
NCI ($51,667 +11,000) 62,667
EXERCISE 4-3:
At the beginning of 2009, Presidio Company purchased 95% of the
common stock of Succo Company for $494,000. On that date, Succo
Company’s stockholders’ equity consisted of the following:
Common stock $300,000
Other contributed capital 100,000
Retained earnings 1/1/2009 120,000
Total $520,000
During 2017, Succo Company reported net income of $40,000 and
distributed dividends in the amount of $19,000. Succo Company’s
retained earnings balance at the end of 2016 amounted to
$160,000. Presidio Company uses the equity method.
Required:
Prepare in general journal form the workpaper entries necessary in
the compilation of consolidated financial statements on December
31, 2017. Explain why the partial and complete equity methods
would result in the same entries in this instance.
Equity Income ($40,000)(.95) 38,000
Investment in Succo Company 38,000
 
Investment in Succo Company 18050
Dividends Declared ($19,000)(.95) 18,050
The balance in the investment account at the beginning of the year
is $532,000, which is computed as:[$494,000 + (.95 x ($160,000 –
$120,000))] = $532,000
 
Common Stock 300,000
Other Contributed Capital 100,000
Retained Earnings 1/1/17 160,000
Investment (494,000 + 38,000) 532,000
Noncontrolling Interest* 28,000

* $520,000 x .05 + (.05 x ($160,000 - $120,000)) = 28,000

In this instance, the partial and complete equity
methods result in the same entries because the
amount paid for the acquisition of Succo is
exactly 95% of Succo’s book value.
Thus, there are no asset adjustments and no
excess amortization or depreciation to consider.
The equity income under the complete equity
method is the same as under the partial equity
method (95% of reported income of Succo).
EXERCISE 4-4: Poco Company purchased 85% of the outstanding common
stock of Serena Company on December 31, 2009, for $310,000 cash. On that
date, Serena Company’s stockholders’ equity consisted of the following:
Common stock $240,000
Other contributed capital 55,000
Retained earnings 1/1/2009 50,000
$345,000
During 2012, Serena Company distributed a dividend in the amount of
$12,000 and at year end reported a net loss of $10,000. During the time that
Poco Company has held its investment in Serena Company, Serena
Company’s retained earnings balance has decreased $29,500 to a net balance
of $20,500 after closing on December 31, 2012. Serena Company did not
declare or distribute any dividends in 2010 or 2011. The difference between
book value and the value implied by the purchase price relates to goodwill.
Required:
A. Assume that Poco Company uses the equity method. Prepare in general
journal form the entries needed in the preparation of a consolidated
statements workpaper on December 31, 2012. Explain why the partial
and complete equity methods would result in the same entries in this
instance.
Part A – Workpaper entries 12/31/12 - Equity
Method

  Investment in Serena Company (.85)*($12,000) 10200

Dividends declared
10200

Investment in Serena Company (.85)*($10,000 loss) 8500

Equity loss
8500
B. Assume that Poco Company uses the cost
method. Prepare in general journal form the
entries needed in the preparation of a
consolidated statements workpaper on
December 31, 2012.
Parent Non- Entire
Share Controlling Value
Share
Purchase price and implied value 310,000 54,706 364,706 *
Less: Book value of equity acquired: 293,250 51,750 345,000
Difference IV & BV 16,750 2,956 19,706
Goodwill (16,750) (2,956) (19,706)
Balance -0- -0- -0-
Common Stock 240,000
Other Contributed Capital 55,000
Retained Earnings 1/1/12 42,500 a
Difference (IV&BV) 19,706
Investment in S ($310,000 – $6,375*) 303,625
NCI (54706-1125) 53,581
 
a$42,500 = $20,500 at year-end plus 2012 loss of $10,000 plus 2012 dividends of
$12,000
• [($50,000 - $42,500) x .85] = 6,375
• [($50,000 - $42,500) x .15] = 1125
Goodwill 19,706
Difference (IV&BV) 19,706
 

• The partial equity and the complete equity methods result in

the same entries because the excess of the cost over fair
value of net assets is allocated to goodwill, a non-
amortizable asset. If any of this excess is allocated to
depreciable assets or intangible assets with limited lives
(subject to amortization), additional expenses will be
recorded under the complete equity method.
Part B – Workpaper entries 12/31/09 - Cost Method
Under Cost method, before elimination of the investment account, a
workpaper entry is made to the investment account and P Company’s
beginning retained earnings to recognize P’s share of the cumulative
undistributed income or loss of S Company from the date of acquisition to the
beginning of the current year as follows:

Retained Earnings 1/1 - Poco Company 6,375

Investment in Serena Company 6,375
To establish reciprocity (.85 ( ($50,000 – $42,500))

Investment in Serena Company (.85)*($12,000) 10,200

Dividends Declared - Serena Company 10,200

(In the normal position, the entry will be from cash to dividends income, but
because of the loss occurred in the year 2012. the entry will be from cash to
investment.)

 
Common Stock 240,000
Other Contributed Capital 55,000
Retained Earnings 1/1/12 42,500
Difference (IV&BV) 19,706
Investment ($310,000 – $6,375) 303,625
NCI (54706-1125) 53,581
 

Goodwill 19,706
Difference (IV&BV) 19,706
EXERCISE 4-5:
On January 1, 2009, Plate Company purchased a 90% interest in the common
stock of Set Company for $650,000, an amount $20,000 in excess of the book
value of equity acquired. The excess relates to the understatement of Set
Company’s land holdings.
Excerpts from the consolidated retained earnings section of the consolidated
statements workpaper for the year ended December 31, 2009, follow:
Set Company Consolidated
Balances
1/1/09 retained earnings 190,000 880,000
Net income from above 132,000 420,000
Dividends declared (50,000) (88,000)
12/31/09 retained earnings 272,000 1,212,000

Set Company’s stockholder’s equity is composed of common stock and retained

earnings only.
Required:
A. Prepare the eliminating entries required for the preparation of a
consolidated statements workpaper on December 31, 2009, assuming the use
of the cost method.
A. Workpaper Entries:
 
Cost of investment $ 650,000
Less: excess cost allocated to land 20,000
Book value acquired (90%) $ 630,000
 
Total stockholders’ equity ($630,000/.90) 700,000
Less: Retained earnings 1/1/09 190,000
Common stock 1/1/09 $ 510,000
Computation and Allocation of Difference between Implied and Book Value Acquired
 

Parent Non- Entire

Share Controlling Value
Share
Purchase price and implied value $650,000 72,222 722,222 *
Less: Book value of equity acquired: 630,000 70,000 700,000
Difference (IV&BV): 20,000 2,222 22,222
Goodwill (20,000) (2,222) (22,222)
Balance -0- -0- -0-
Part A: Eliminating entries – cost method

Dividend Income (.90)($50,000) 45,000

Dividends Declared - Set Company 45,000
 
Common Stock ($700,000 – $190,000) 510,000
Retained Earnings 1/1/09 190,000
Difference (IB&BV) 22,222
Investment in Salt Company 650,000
Noncontrolling Interest 72,222
 
Land 22,222
Difference (IV&BV) 22,222
B. Prepare the eliminating entries required for the preparation of a
consolidated statements workpaper on December 31, 2009, assuming the use
of the equity method.

Equity Income 118800

Investment (.90)($132,000) 118800

Investment 45,000
dividends declared (.90)($50,000) 45,000
 

Common Stock - Set Company 510,000

Retained Earnings 1/1/06 - Set Company 190,000
Difference (IV&BV) 22,222
Investment in Salt Company 650,000
Noncontrolling Interest 72,222
 
 Land 22,222
Difference (IV&BV) 22,222

  C. Determine the total noncontrolling interest that will be

reported on the consolidated balance sheet on December 31,
2009. How does the noncontrolling interest differ between the
cost method and the equity method?

1- $72,222 + (.1 ( $132,000) - (.1 ( $50,000) = 80,422

 
2- The noncontrolling interest will be the same regardless of the
method used to account for the investment on Plate Company’s
books.
EXERCISE 4-8 :
On May 1, 2010, Peters Company purchased 80% of the common stock of Smith Company
for $50,000. Additional data concerning these two companies for the years 2010 and 2011
are:
2010 2011
Peters Smith Peters Smith
Common stock $100,000 $25,000 $100,000 $25,000
Other contributed capital 40,000 10,000 40,000 10,000
Retained earnings, 1/1 80,000 10,000 129,000 53,000
Net income (loss) 64,000 45,000 37,500 (5,000)
Cash dividends (11/30) 15,000 2,000 5,000 —0—

Any difference between book value and the value implied by the purchase price relates to
Smith Company’s land. Peters Company uses the cost method to record its investment.
Required:
A. Prepare the workpaper entries that would be made on a consolidated statements
workpaper for the years ended December 31, 2010 and 2011 for Peters Company and its
subsidiary, assuming that Smith Company’s income is earned evenly throughout the year.
(Use the full-year reporting alternative.)
B. Calculate consolidated net income and consolidated retained earnings for 2010 and
2011.
Part A: Workpaper Entries
2010
Dividend Income (.80 ( $2,000) 1,600
Dividends Declared - Smith Company 1,600

Common Stock – Smith 25,000

Other Contributed Capital – Smith 10,000
Retained Earnings 1/1/10 - Smith 10,000
Difference between Implied and Book Value 2,500
Subsidiary Income Purchased * 15,000
Investment in Smith Company 50,000
Noncontrolling Interest 12,500
 
Land 2,500
Difference (IV&BV) 2,500
 Computation and Allocation of Difference between Implied and Book Value Acquired

Parent Non- Entire

Share Controlling Value
Share
Purchase price and implied value 50,000 12,500 62,500 *
Less: Book value of equity acquired:
Equity 36,000 9,000 45,000
Subsidiary Income purchased**12,000 3,000 15,000
Total book value 48,000 12,000 60,000
Difference (IV&BV) 2,000 500 2,500
Goodwill (2,000) (500) (2,500)
Balance -0- -0- -0-

*$50,000/.80
**Subsidiary Income Purchased (4/12* $45,000) = 15,000
2011
Estimated Retained Earnings of Smith on date of acquisition**
Retained earnings, 1/1/2010 $ 10,000
Smith earnings to 1/5/2010 = (4/12)($45,000 from net income) 15,000
Retained earnings, 1/5/2010 $ 25,000
 
Investment in Smith 22,400
Retained Earnings 1/1 Peters 22,400
To establish reciprocity (.80 ( ($53,000 – $25,000**)

Common Stock - Smith 25,000

Other Contributed Capital - Smith 10,000
Retained Earnings 1/1/11 – Smith 53,000
Land 2,500
Investment ($50,000 + $22,400) 72,400
Noncontrolling Interest (12500+5600) 18,100
EXERCISE 4-9:
Using the data presented in Exercise 4-8, prepare
workpaper elimination entries for 2010 assuming use of
the partial-year reporting alternative.
Exercise 4-9
Workpaper Entries - Cost Method
2010
Dividend Income (.80)($2,000) 1,600
Dividends Declared - Smith Company 1,600

Common Stock – Smith 25,000

Other Contributed Capital – Smith 10,000
Retained Earnings 5/1/07 – Smith * 25,000
Difference between Implied and Book Value 2,500
Investment in Smith Company 50,000
Noncontrolling Interest 12,500
 
Land 2,500
Difference (IV&BV) 2,500