Problem $3-3($LO $4)$ Sophisticated equity method adjustments, consolidated worksheet.

$($This is the same as Problem $3-2,$ except that the sophisticated equity method is used.$)$

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:

Year Net income Dividends

$2015$ $$60,000$ $$20,000$

$2016$ $$90,000$ $$30,000$

On January $1,2015,$ the only undervalued tangible assets of Solar are inventory and the building. Inventory, for which FIFO is used, is worth $$10,000$ more than book value. The inventory is sold in $2015.$ The building, which is worth $$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 attributed to goodwill.

The trial balances for Paro and Solar are as follows:

Account Paro Company Solar Company

Inventory, December $31100,00050,000$

Other Current Assets $136,000100,000$

Investment in Solar Company $360,000$

Land $150,000200,000$

Buildings and Equipment $350,000400,000$

Accumulated Depreciation $(100,000)(60,000)$

Goodwill $12,000$

Other Intangibles $$

Current Liabilities $(120,000)(40,000)$

Bonds Payable $(100,000)$

Other Long$-$Term Liabilities $(200,000)$

Account Paro Company Solar Company

Common Stock $$ Paro Company $(200,000)$

Other Paid$-$In Capital in Excess of Par $$ Paro Company $(100,000)$

Retained Earnings $$ Paro Company $(100,000)$

Common Stock $$ Solar Company $(50,000)$

Other Paid$-$In Capital in Excess of Par $$ Solar Company $(100,000)$

Retained Earnings $$ Solar Company $(150,000)$

Net Sales $(520,000)(400,000)$

Cost of Goods Sold $300,000250,000$

Operating Expenses $120,000100,000$

Subsidiary Income $$ Note $1$

Dividends Declared $$ Paro Company $50,000$

Dividends Declared $$ Solar Company $30,000$

Note $1$: To be calculated.

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Instructions:

$1.$ 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 trial balance for $2016,$ eliminations and adjustments, consolidated income, NCI, controlling retained earnings, and consolidated balance sheet.

PROB $3-3$

$1.$ Complete Parts $2$ & $3$ ONLY for this problem. Omit Parts $1$ & $4.$

$2.$ Note that Part $2$ is asking you to prepare all required G$/$L entries on the books of the Parent to account for its investment in the subsidiary using the SOPHISTICATED EQUITY METHOD for the following dates:

a$.$ Acquisition date $[1/1/15]$

b$.$ Entries for $2015[$beyond the acquisition date$]$

c$.$ Entries for $2016$

$3.$ You must do the following to complete Part $3$ of this problem:

a$.$ Prepare a T$-$account for the Parent$$s Investment in Subsidiary account. Include all relevant postings to enable you to solve for the balance in this account that would appear on the Parent ONLY $[$ not consolidated$]$ balance sheet at $12/31/16.$

b$.$ Identify $[$compute$]$ the balance in the Subsidiary Income account that would appear on the Parent ONLY $[$not consolidated$]$ balance sheet at $12/31/16.$