# ACC 401 Week 5 – Homework

ACC 401 Week 5 – Homework

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Chapter 5: Exercises 5-3, 5-11, and 5-13; Problems 5-4 and 5-6

Pace Company purchased 20,000 of the 25,000 shares of Saddler Corporation for \$525,000.  On January 3, 2011, the acquisition date, Saddler Corporation’s capital stock and retained earnings account balances were \$500,000 and \$100,000, respectively.

The following values were determined for Saddler Corporation on the date of purchase:

Difference between Fair Value

Book Value     Fair Value       and Book Value____________

Inventory                    \$    50,000       \$    70,000                   \$(20,000)

Other current assets        200,000           200,000                           0

Marketable securities      100,000           125,000                     (25,000)

Plant and equipment       300,000           330,000                   (30,000)

\$  650,000       \$  725,000                   \$(75,000)

A.    Prepare the entry on the books of Pace Company to record its investment in Saddler Corporation.

B.    Prepare a Computation and Allocation Schedule for the difference between the cost and book value in the consolidated statements workpaper.

On January 1, 2010, Piper Company acquired an 80% interest in Sand Company for \$2,276,000.  At that time the capital stock and retained earnings of Sand Company were \$1,800,000 and \$700,000, respectively.  Differences between the fair value and the book value of the identifiable assets of Sand Company were as follows:

Fair Value

In Excess of

Book Value

Inventory                          \$    45,000

Equipment (net)                      50,000

The book values of all other assets and liabilities of Sand Company were equal to their fair values on January 1, 2010.  The equipment had a remaining useful life of eight years.  Inventory is accounted for on a FIFO basis.  Sand Company’s reported net income and declared dividends for 2010 through 2012 are shown here:

2010    2011    2012

Net Income                 \$  100,000       \$  150,000       \$  80,000

Dividends                         20,000             30,000           15,000

Required:

Prepare the eliminating/adjusting entries needed on the consolidated worksheet for the years ended 2010, 2011 and 2012. (It is not necessary to prepare the worksheet.)

1)      Assume the use of the cost method.

2)      Assume the use of the partial equity method.

3)      Assume the use of the complete equity method.

Pascal Corporation purchased 90% of the stock of Salzer Company for \$2,070,000 on January 1, 2005.  On this date, the fair value of the assets and liabilities of Salzer Company was equal to their book value except for the inventory and equipment accounts.  The inventory had a fair value of \$725,000 and a book value of \$600,000.  The equipment had a book value of \$900,000 and a fair value of \$1,075,000.

The balances in Salzer Company’s capital stock and retained earnings accounts on the date of acquisition were \$1,200,000 and \$600,000, respectively.

Required:

In general journal form, prepare the entries on Salzer Company’s books to record the effect of the pushed down values implied by the purchase of its stock by Pascal Company assuming that values are allocated on the basis of the fair value of Salzer Company as a whole imputed from the transaction.

Problem 5-4 Eliminating Entries and Worksheets for Various Years

On January 1, 2003, Porter Company purchased an 80% interest in the capital stock of Salem Company for \$850,000. At that time, Salem Company had capital stock of \$550,000 and retained earnings of \$80,000.

Differences between the fair value and the book value of the identifiable assets of Salem Company were as follows:

 Fair Value In Excess Of Book Value Equipment \$130,000 Land 65,000 Inventory 40,000

The book values of all other assets and liabilities of Salem Company were equal to their fair values on January 1, 2003. The equipment had a remaining life of five years on January 1, 2003, the inventory was sold in 2003.

Salem Company’s net income and dividends declared in 2003 and 2004 were as follows:

Year 2003 Net Income of \$100,000; Dividends Declared of \$25,000

Year 2004 Net Income of \$110,000; Dividends Declared of \$35,000

Required:

A. Prepare a Computation and Allocation Schedule for the difference between cost and book value of equity acquired.

B. Present the eliminating/adjusting entries needed on the consolidated worksheet for the year ended December 31, 2003. (It is not necessary to prepare the worksheet.)

1. Assume the use of the cost method.
2. Assume the use of the partial equity method.
3. Assume the use of the complete equity method.

C.  Present the eliminating/adjusting entries needed on the consolidated worksheet for the year ended December 31, 2004. (It is not necessary to prepare the worksheet.)

1)   Assume the use of the cost method.

2)      Assume the use of the partial equity method.

3)      Assume the use of the complete equity method.

Use the following financial data for 2005 for requirements D through G.

 Porter Company Salem Company Sales \$1,100,000 \$450,000 Dividend income 48,000 ——- Total revenue 1,148,000 450,000 Cost of goods sold 900,000 200,000 Depreciation expense 40,000 30,000 Other expenses 60,000 50,000 Total cost and expense 1,000,000 280,000 Net income \$ 148,000 \$170,000 1/1 Retained earnings \$ 500,000 \$230,000 Net income 148,000 170,000 Dividends declared (90,000) (60,000) 12/31 Retained earnings \$ 558,000 \$340,000 Cash \$ 70,000 \$ 65,000 Accounts receivable 260,000 190,000 Inventory 240,000 175,000 Investment in Salem Company 850,000 Land –0– 320,000 Plant and equipment 360,000 280,000 Total assets \$1,780,000 \$ 1,030,000 Accounts payable \$ 132,000 \$110,000 Notes payable 90,000 30,000 Capital stock 1,000,000 550,000 Retained earnings 558,000 340,000 Total liabilities and equity \$ 1,780,000 \$ 1,030,000

Required:

D. Prepare a consolidated financial statements workpaper for the year ended December 31, 2005.  (Hint: You can infer the method being used by the parent from the information in its trial balance.)

E. Prepare a consolidated statement of financial position and a consolidated income statement for the year ended December 31, 2005.

F. Describe the effect on the consolidated balances if Salem Company uses the LIFO cost flow assumption in pricing its inventory and there has been no decrease in ending inventory quantities since 2003.

G. Prepare an analytical calculation of consolidated retained earnings for the year ended December 31, 2005.

Problem 5-6 Work paper Entries for Two Years and Sale Equipment in Year Two LO6 On January 1, 2011, Perini Company purchased an 85% interest in Silvas Company for \$400,000. On this date, Silvas Company had common stock of \$90,000 and retained earnings of \$210,000. An examination of Silvas Company’s assets and liabilities revealed that there book value was equal to their fair value except for the equipment.                                                                                                                                                                                                                                                                                                    Book Value          Fair Value  Equipment                                                                                 \$360,000                Accumulated depreciation                                                           120,000)                                                                           \$240,000              \$340,000     The equipment had an expected remaining life of six years and no salvage value. Straightline depreciation is used.  During 2011 and 2012, Perini Company reported net income from its own operations of \$80,000 ND Paid dividends of \$50,000 in each year. Silvas Company had income of \$40,000 each year and paid dividends of \$30,000 on each December 31.  Accumulated depreciation is presented on a separate row in the workpaper and in the consolidated financial statements.    Prepare eliminating entries for consolidated financial statements workpaper for the year ended December 31, 2011, assuming:  1.      The cost method is used to account for the investment.  2.      The partial equity method is used to account for the investment.  b.      On January 1, 2012, Silvas Company sold all its equipment for \$220,000. Prepare the eliminating entries for the consolidated financial statements workpaper for the year ended December 31, 2012, assuming:  1.      The cost method is used to account for the investment.  2.      The partial equity method is used to account for the investment