Pig Corporation paid $1,274,000 cash for 70 percent of the common stock of Set Corporation on June 1, 2011. The assets and liabilities of Set were fairly valued, and any fair value/book value differential is goodwill. Data related to the stockholders’ equity of Set are as follows:
Stockholders’ Equity December 31, 2010
Common stock, $10 par $1,000,000
Retained earnings 480,000
Total stockholders’ equity $1,480,000
Income and Dividends—2011
Net income (earned evenly throughout the year) $ 240,000
Dividends (declared and paid in equal
amounts in January, April, July, and October) 120,000
REQUIRED
1. Determine the following:
a. Goodwill from the investment in Set
b. Pig’s income from Set for 2011
c. The Investment in Set account balance at December 31, 2011
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2. Prepare the workpaper entries needed to consolidate the financial statements for 2011. Add the preacquisition income to Retained Earnings—Set.
SOLUTION
(amounts in thousands)
1a Fair value — book value differential
Cost
$1,274
Implied fair value of Set ($1,274 / 70%)
$1,820
Book value ($1,480 January 1 balance
+ $100 income for 5 months - $60 dividends in
January and April)
(1,520)
Goodwill
$ 300
1b
Income from Set (Note: Only include earnings subsequent to the acquisition date).
Income from Set ($240,000 7/12 year 70%)
$ 98
1c
Investment in Set at December 31
Investment cost
$1,274
Add: Income from Set
98
Deduct: Dividends ($60,000 70%)
(42)
Investment in Set December 31, 2011
$1,330
2
Consolidation working paper entries:
a
Income from Set
98
Investment in Set
56
Dividends
42
To eliminate income and dividends from Set and adjust investment account to its cost on June 1.
b
Common stock, $10 par — Set
1,000
Retained earnings — Set
580
Goodwill
300
Investment in Set
1,274
Noncontrolling interest
564
Dividends
42
To eliminate reciprocal investment and equity balances, record preacquisition income and beginning noncontrolling interest, and eliminate preacquisition dividends.
c. Noncontrolling interest share 240,000 x 7/12 x 30% 42,000