The trial balances for Paro and Solar are as follows — January 2015 Company purchases common stock 320 000 this date has other

On January 1, 2015, Paro Company purchases 80% of the common stock of Solar Company for $320,000. On this date, Solar has common stock, other paid-in capital in excess of par, and retained earnings of $50,000, $100,000, and $150,000, respectively. Net income and dividends for two years for Solar Company are as follows:

On January 1, 2015, the only undervalued tangible assets of Solar are inventory and the building. Inventory, for which FIFO is used, is worth $10,000 more than cost. The inventory is sold in 2015. The building, which is worth $30,000 more than book value, has a remaining life of 10 years, and straight-line depreciation is used. The remaining excess of cost over book value is attributable to goodwill.

The trial balances for Paro and Solar are as follows:

1. Prepare a value analysis and a determination and distribution of excess schedule.

2. Paro Company carries the investment in Solar Company under the sophisticated equity method. In general journal form, record the entries that would be made to apply the equity method in 2015 and 2016.

3. Compute the balance that should appear in Investment in Solar Company and in Subsidiary Income on December 31, 2016 (the second year). Fill in these amounts on Paro Company’s trial balance for 2016.

4. Complete a worksheet for consolidated financial statements for 2016. Include columns for eliminations and adjustments, consolidated income, NCI, controlling retained earnings, and consolidated balance sheet.

SOLUTION

(1) Use part (1), from Problem 3-2.

(2) Entries under the sophisticated equity method: 2015 2016

Debit Credit Debit Credit

Investment in Solar...................................... 37,600a 69,600b

Subsidiary Income ........................ 37,600 69,600

Cash ............................................................ 16,000 24,000

Investment in Solar......................... 16,000c 24,000d