On January 1, 2014, Palmer Company acquired a 90% interest in Stevens Company at a cost of $1,000,000 — the purchase date stockholders equity consisted following

On January 1, 2014, Palmer Company acquired a 90% interest in Stevens Company at a cost of $1,000,000.

At the purchase date, Stevens Company’s stockholders’ equity consisted of the following:

Common stock……………………………$500,000

Retained earnings………………………….190,000

An examination of Stevens Company’s assets and liabilities revealed the following at the date of acquisition:

Additional Information—Date of Acquisition

Stevens Company’s equipment had an original life of 15 years and a remaining useful life of 10 years. All the inventory was sold in 2014. Stevens Company purchased its bonds payable on the open market on January 10, 2014, for $150,000 and recognized a gain of $55,556. Palmer Company uses the partial equity method to record its investment in Stevens Company. Financial statement data for 2016 are presented here:

Required:

A. Prepare in general journal form the workpaper entry to allocate and depreciate the difference between book value and the value implied by the purchase price in the December 31, 2014, consolidated statements workpaper.

B. Prepare a consolidated financial statements workpaper for the year ended December 31, 2016.

C. Prepare in good form a schedule or t-account showing the calculation of the controlling interest in consolidated net income for the year ended December 31, 2016.

If you completed Problem 5-5, a comparison of the consolidated balances in this problem with those you obtained in Problem 5-5 will demonstrate that the method (cost or partial equity) used by the parent company to record its investment in a consolidated subsidiary has no effect on the consolidated balances.

SOLUTION

Computation and Allocation of Difference Schedule

Parent Non- Entire

Share Controlling Value

Share

Purchase price and implied value $1,000,000 111,111 1,111,111 *

Less: Book value of equity acquired 621,000 69,000 690,000

Difference between implied and book value 379,000 42,111 421,111

Equipment ($390,000 - $300,000) (81,000) (9,000) (90,000)

Less: Accumulated Depreciation ($130,000 – $100,000) 27,000 3,000 30,000

Inventory ($210,000 - $160,000) (45,000) (5,000) (50,000)

Land ($290,000 – $190,000) (90,000) (10,000) (100,000)

Bond Discount ($205,556 – $150,000) (50,000) (5,556) (55,556)

Balance 140,000 15,555 155,555

Goodwill (140,000) (15,555) (155,555)

Balance -0- -0- -0-

*$1,000,000/.90

2014 Amortization Schedule

Equipment (10 year life) 5,400 600 6,000

Inventory (sold in 2014) 45,000 5,000 50,000

Bond Discount 50,000 5,556 55,556

Total 100,400 11,156 111,556

2015 Amortization Schedule

Equipment (10 year life) 5,400 600 6,000

Inventory (sold in 2014) 0 0 0

Bond Discount 0 0 0

Total 5,400 600 6,000

*The Goodwill may also be calculated analytically as follows:

Cost of Investment ($1,000,000/0.9) $1,111,111

Fair value acquired (955,556)

Goodwill $155,555

Part A 2014

Cost of Goods Sold 50,000

Gain on Early Extinguishment of Debt 55,556

Land 100,000

Equipment 90,000

Goodwill 155,555

Accumulated Depreciation 30,000

Difference between Implied and Book Value 421,111

Depreciation Expense ($60,000/10) 6,000

Accumulated Depreciation 6,000

To allocate and depreciate the difference between implied and book value

Treatment of the Amount of the Difference Assigned to Bond Discount

Date of Acquisition

Unamortized Discount on Bonds Payable 55,556

Difference between Implied and Book Value 55,556

2014

Book entry to record retirement in 2014 on Stevens books