Complete Equity Method and Eliminating Entries, Four Years After Acquisition

On January 1, 2015, Peerless Network acquired all of the stock of Sound Telecom for $400 million in cash. At the date of acquisition, Sound Telecoms stockholders equity was as follows (in millions):

Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . $10

Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . 50

Accumulated other comprehensive income. . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . 2

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $62

An evaluation of Sound Telecoms balance sheet at January 1, 2015, revealed that its plant assets (10-year remaining life) were overvalued by $40 million and it had previously unrecorded identi?able intangible assets (5-year remaining life) of $10 million. Goodwill from this acquisition was impaired by $5 million during 20152017, and by $1 million in 2018.

It is now December 31, 2018, four years after the acquisition. Sound Telecom reported total net income of $12 million during 20152017, and $5 million for 2018. It also reported total other comprehensive income of $1 million during 20152017, and $200,000 of other comprehensive loss in 2018. Sound Telecom declared and paid no dividends during this time period. Peerless Network reports its investment using the complete equity method. The following are the separate trial balances of Peerless and Sound Telecom at December 31, 2018

In your answers below, show all numbers in thousands.

Required

a. Show your calculation of Goodwill.

b. Show how the following balances, appearing in the 2018 trial balances above, were calculated:

(1) Equity in net income of Sound Telecom, appearing in Peerless Networks 2018 trial balance.

(2) Sound Telecoms retained earnings and AOCI balances at January 1, 2018.

(3) Investment in Sound Telecom at December 31, 2018, appearing in Peerless Networks trial

balance.

c. Prepare the consolidation journal entries.

d. Prepare the consolidation working paper to consolidate Peerless Networks trial balance accounts

with those of Sound Telecom at December 31, 2018.

e. Present the consolidated statement of comprehensive income for 2018, in good form

f. Present the consolidated balance sheet at December 31, 2018, in good form