Computation and Allocation of Difference Schedule — January 2014 Paxton Company purchased interest Sagon for 300 000 which time

On January 1, 2014, Paxton Company purchased a 70% interest in Sagon Company for $1,300,000, at which time Sagon Company had retained earnings of $500,000 and capital stock of $1,000,000. On January 1, 2014, the fair value of the assets and liabilities of Sagon Company was equal to their book value except for bonds payable. Sagon Company had outstanding a $1,000,000 issue of 6% bonds that were issued at par and that mature on January 1, 2019. Interest on the bonds is payable annually, and the yield rate on similar bonds on January 1, 2014, is 10%. Paxton Company reported net income from independent operations of $300,000 in 2014 and $250,000 in 2015. Sagon Company reported net income of $100,000 in 2014 and $120,000 in 2015. Neither company paid or declared dividends in 2014 or 2015. Paxton uses the partial equity method to account for its investment in Santos.

Despite two profitable years, changes in the market during 2015 for Sagon’s product line have caused Paxton to be concerned about the future profitability of the unit. The following data are collected to test for goodwill impairment at 12/31/15. (No goodwill impairment has been recorded on the parent’s books.)

Paxton chose to measure goodwill impairment using the present value of future cash flows to estimate the fair value of the reporting unit (Sagon).

Required:

A. Prepare in general journal form the entries necessary in the consolidated statements workpapers for the years ended December 31, 2014, and December 31, 2015. Hint: You may wish to refer back to the section entitled Goodwill Impairment Test in Chapter 2.

B. Prepare in good form a schedule or t-account showing the calculation of the controlling and non-controlling interest in consolidated net income for the years ended December 31, 2014, and December 31, 2015.

SOLUTION

Computation and Allocation of Difference Schedule

Parent Non- Entire

Share Controlling Value

Share

Purchase price and implied value $1,300,000 557,143 1,857,143 *

Less: Book value of equity acquired 1,050,000 450,000 1,500,000

Difference between implied and book value 250,000 107,143 357,143

Unamortized Discount on Bonds Payable (106,143) (45,490) (151,633)

Balance 143,857 61,653 205,510

Goodwill (143,857) (61,653) (205,510)

Balance -0- -0- -0-

*$1,300,000/.70

Present Value on 1/1/2014 of 6% Bonds Payable

Discounted at 10%, 5 periods

Principal ($1,000,000 × 0.62092) $620,920

Interest ($60,000 × 3.79079) 227,447

Fair value of bonds $848,367

Face value of bonds 1,000,000

Total Discount $151,633

Amortization of amount of difference between implied and book value allocated to unamortized discount on bonds payable

(1) (2) (3) (4) (5)

Carrying Interest at 10% Interest at 6% Difference

Year Value (1/1) of Carrying Value of Par Value [(3)-(4)]

2014 $848,367 $84,837 $60,000 $24,837

2015 $873,204 $87,320 $60,000 $27,320

Part A 2014

(1) Equity in Subsidiary Income (.70)($100,000) 70,000

Investment in Sagon Co. 70,000

To eliminate subsidiary income

(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 24,837

Unamortized Discount on Bonds Payable ($151,633 - $24,837) 126,796

Goodwill 205,510

Difference between Implied and Book Value 357,143

To allocate and amortize the difference between Implied and book value

Alternative to entry (3)

(3a) Unamortized Discount on Bonds Payable 151,633

Goodwill 205,510

Difference between Implied and Book Value 357,143

(3b) Interest Expense 24,837