On January 1, 2010, 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 an 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, 2010. The equipment had a remaining life of five years on January 1, 2010. The inventory was sold in 2010.

Salem Company’s net income and dividends declared in 2010 and 2011 were as follows:

Year 2010 Net Income of $100,000; Dividends Declared of $25,000

Year 2011 Net Income of $110,000; Dividends Declared of $35,000

Required:

A. Prepare a Computation and Allocation Schedule for the difference between book value of equity acquired and the value implied by the purchase price.

B. Present the eliminating/adjusting entries needed on the consolidated worksheet for the year ended December 31, 2010. (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, 2011. (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 2012 for requirements D through G.

Required:

D. Prepare a consolidated financial statements workpaper for the year ended December 31, 2012. Although no goodwill impairment was reflected at the end of 2010 or 2011, the goodwill impairment test conducted at December 31, 2012 revealed implied goodwill from Salem to be only $150,000. The impairment has not been recorded in the books of the parent.

E. Prepare a consolidated statement of financial position and a consolidated income statement for the year ended December 31, 2012.

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 2010.

G. Prepare an analytical calculation of consolidated retained earnings for the year ended December 31,2012.

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Porter Company Salem Company 450,000 $1,100,000 48,000 148,000 900,000 40,000 60,000 1,000,000 148,000 Sales Dividend income Total revenue Cost of goods sold Depreciation expense Other expenses 450.000O 200,000 30,000 50,000 280.000 170,000 Total cost and expense Net income 1/1 Retained earnings Netincome Dividends declared 12/31 Retained earnings 500,000 148,000 (90,000) 558,000 230,000 170,000 (60,000 340,000 70,000 260,000 240,000 850,000 $65,000 Accounts receivable Inventory Investment in Salem Company Land Plant and equipment 190,000 175,000 360,000 780,000 320,000 280,000 1030,000 Total assets Accounts pavable Notes payable Capital stock Retained earnings 132,000 90,000 1,000,000 558,000 1,780,000 110,000 30,000 550,000 840,000 030,00 Total liabilities and equity