PROBLEM $5-4$

Eliminating Entries $($including Goodwill Impairment$)$ and Worksheets for Various Years LO $1$ LO $6$

On January $1,2023,$ 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 $1,2023.$ The equipment had a remaining life of five years on January $1,2023.$ The inventory was sold in $2023.$

Salem Company's net income and dividends declared in $2023$ and $2024$ were as follows:

Year $2023$ Net Income of $$100,000$; Dividends Declared of $$25,000$

Year $2024$ Net Income of $$110,000$; Dividends Declared of $$35,000$

Required:

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

Present the eliminating$/$adjusting entries needed on the consolidated worksheet for the year ended December $31,2023.($It is not necessary to prepare the worksheet.$)$

Assume the use of the cost method.

Assume the use of the partial equity method.

Assume the use of the complete equity method.

Present the eliminating$/$adjusting entries needed on the consolidated worksheet for the year ended December $31,2024.($It is not necessary to prepare the worksheet.$)$

Assume the use of the cost method.

Assume the use of the partial equity method.

Assume the use of the complete equity method.

Use the following financial data for $2025$ for requirements D through G$.$

Porter Company

Salem Company

Sales $$1,100,000$ $$450,000$

Dividend income $48,000$

$$Total revenue $1,148,000450,000$

Cost of goods sold $900,000200,000$

Depreciation expense $40,00030,000$

Other expenses $60,00050,000$

$$Total cost and expense $1,000,000280,000$

Net income $$148,000$ $$170,000$

$1/1$ Retained earnings $$500,000$ $$230,000$

Net income $148,000170,000$

Dividends declared $(90,000)(60,000)$

$12/31$ Retained earnings $$558,000$ $$340,000$

Cash $$70,000$ $$65,000$

Accounts receivable $260,000190,000$

Inventory $240,000175,000$

Investment in Salem Company $850,000$

Land $0320,000$

Plant and equipment $360,000280,000$

$$Total assets $$1,780,000$ $$1,030,000$

Accounts payable $$132,000$ $$110,000$

Notes payable $90,00030,000$

Capital stock $1,000,000550,000$

Retained earnings $558,000340,000$

$$Total liabilities and equity $$1,780,000$ $$1,030,000$

Required:

Prepare a consolidated financial statements workpaper for the year ended December $31,2025.$ Although no goodwill impairment was reflected at the end of $2023$ or $2024,$ the goodwill impairment test conducted at December $31,2025$ revealed implied goodwill from Salem to be only $$150,000.$ The impairment has not been recorded in the books of the parent. $($Hint: You can infer the method being used by the parent from the information in its trial balance.$)$

Prepare a consolidated statement of financial position and a consolidated income statement for the year ended December $31,2025.$

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 $2026.$

Prepare an analytical calculation of consolidated retained earnings for the year ended December $31,2025.$