Workpaper Entries $($including Goodwill Impairment$),$ Consolidated Net Income for Two Years, Partial Equity Method LO $6$ LO $3$ LO $4$ LO $7$

On January $1,2024,$ Paxton Company purchased a $70\%$ interest in Sagon Company for $$1,300,000,$ at which time Sagon Company had retained earnings of $$500,000$ and capital stock of $$1,000,000.$ On January $1,2024,$ the fair value of the assets and liabilities of Sagon Company was equal to their book value except for bonds payable. Sagon Company had outstanding a $$1,000,000$ issue of $6\%$ bonds that were issued at par and that mature on January $1,2029.$ Interest on the bonds is payable annually, and the yield rate on similar bonds on January $1,2024,$ is $10\%.$ Paxton Company reported net income from independent operations of $$300,000$ in $2024$ and $$250,000$ in $2025.$ Sagon Company reported net income of $$100,000$ in $2024$ and $$120,000$ in $2025.$ Neither company paid or declared dividends in $2024$ or $2025.$ Paxton uses the partial equity method to account for its investment in Santos.

Despite two profitable years, changes in the market during $2025$ for Sagon's product line have caused Paxton to be concerned about the future profitability of the unit. The following data are collected to test for goodwill impairment at $12/31/25.($No goodwill impairment has been recorded on the parent's books.$)$

Paxton chose to measure goodwill impairment using the present value of future cash flows to estimate the fair value of the reporting unit $($Sagon$).$

Year

Present Value of Future Cash Flows

Carrying Value of Sagon's Identifiable Net Assets$*$

Fair Value of Sagon's Identifiable Net Assets

$2025$

$$1,500,000$

$$1,409,000$

$$1,320,000$

$*$ Identifiable Net Assets do not include goodwill.

Required:

Prepare in general journal form the entries necessary in the consolidated statements workpapers for the years ended December $31,2024,$ and December $31,2025.$ Hint: You may wish to refer back to the section entitled Goodwill Impairment Test in Chapter $2.$

Prepare in good form a schedule or t$-$account showing the calculation of the controlling and noncontrolling interest in consolidated net income for the years ended December $31,2024,$ and December $31,2025.$