EXERCISE 4-1

Percy Company purchased 80% of the outstanding voting shares of Song Company at the
beginning of 2019 for $387,000. At the time of purchase, Song Company's total stockholders'
equity amounted to $475,000. Income and dividend distributions for Song Company from
2019 through 2021 are as follows:

2019 20220 2021

Net income (loss) $63.500 $52.500 ($55.000)
Dividen distribution 25.000 50.000 35.000

Required:
Prepare journal entries on the books of Percy Company front the date of purchase through
2021 to account for its investment in Song Company under each of the following
assumptions:
A. Percy Company uses the cost method to record its investment.
B. Percy Company uses the partial equity method to record its investment.
C. Percy Company uses the complete equity method to record its investment. The
difference between book value of equity acquired and the value implied by the
purchase price was attributed solely to an excess of market over hook values of
depreciable assets, with a remaining life of 10 years.
Answer :

Date Accounts Title Dr Cr

A. Cost Method

2019 Investment in Song 387000

Cash 387000

Cash 20000
Dividend Income ($25000*80%) 20000

2020 Cash 40000

Dividend Income ($50000*80%) 40000

2021 Cash 28000

Investment in Song (35000*80%) 28000
(Recording of liqidating dividend)

B. Partial Equity Method

2019 Investment in Song 387000
Cash 387000

Investment in Song 50800

Equity Income (63500*80%) 50800
 (Recoded income of subsidary)

Cash 20000
Investment in Song (25000*80%) 20000
(Recorded dividend as decrease in investment)

2020 Investment in Song 42000

Equity Income (52500*80%) 42000
(Recoded income of subsidary)

Cash 40000
Investment in Song (50000*80%) 40000
(Recorded dividend as decrease in investment)

2021 Equity Loss (55000*80%) 44000

Investment in Song 44000

Cash 28000
Investment in Song (35000*80%) 28000
(Recorded dividend as decrease in investment)

C. Complete Equity Method

2019 Investment in Song 387000
Cash 387000

Investment in Song 50800

Equity Income (63500*80%) 50800
(Recoded income of subsidary)

Cash 20000
Investment in Song (25000*80%) 20000
(Recorded dividend as decrease in investment)

Equity Income (7000/10) 700

Investment in Song 700

(Adjsutment of depreciation due to excess value of

the asset Investment cost=387000 less Acquired
book value 475000*80%=$380000 so difference is
$7000 so $700 for each of 10 years

2020 Investment in Song 42000

Equity Income (52500*80%) 42000
(Recoded income of subsidary)
 Cash 40000
Investment in Song (50000*80%) 40000
(Recorded dividend as decrease in investment)

Equity Income (7000/10) 700

Investment in Song 700

2021 Equity Loss (55000*80%) 44000

Investment in Song 44000

Cash 28000
Investment in Song (35000*80%) 28000
(Recorded dividend as decrease in investment)

Equity Income (7000/10) 700

Investment in Song 700

Exercise 4-2

Park Company purchased 90% of the stock of Salt Company on January 1, 2019, for
$465,000, an amount equal to $15,000 in excess of the book value of equity acquired. This
excess payment relates to an undervaluation of Salt Company's land. On the date of purchase,
Salt Company's retained earnings balance was $50,000. The remainder of the stockholders'
equity consists of no-par common stock. During 2023, Salt Company declared dividends in
the amount of $10,000, and reported net income of $40,000. The retained earnings balance of
Salt Company on December 31, 2022, was $160,000. Park Company uses the cost method to
record its investment.

Required:

Prepare in general journal form the workpaper entries that would be made in the preparation
of a consolidated statements workpaper on December 31, 2023.

Answer:

Computation and Allocation of difference between implied and book value Acquired
Particulars Parent Share NCI Share Entire Value
Purchase price and implied value 465000 51667 516667
Less: book value of equity acquired: 450000 50000 500000
Difference (implied and book value) 15000 1667 16667
Allocated to undervalued land -15000 -1667 -16667
Balance 0 0 0

Equity acquired for the parent company 450000

Equity acquired for the whole company 500000
Common stock -450000
Retained Earnings (Given) 50000

Jurnal :    
Account Titles Debit Credit
Investment in Salt company 99000  
Retained Earnings   99000
     
Dividend Income 9000  
Dividends Declared   9000
     
Common Stock 450000  
Retained Earnings 160000  
Land 16667  
Investment   564000
Non-controlling Interest   62667

Exercise 4-3

At the beginning of 2014, Presidio Company purchased 95% of the common stock of Succo
Company for $494,000. On that date, Succo Company’s stockholders’ equity consisted of the
following:

Common stock $300,000

Other contributed capital 100,000

Retained earnings 120,000

Total $520,000

During 2022, Succo Company reported net income of $40,000 and distributed dividends in
the amount of $19,000. Succo Company’s retained earnings balance at the end of 2021
amounted to $160,000. Presidio Company uses the equity method.

Required:

Prepare in general journal form the workpaper entries necessary in the compilation of
consolidated financial statements on December 31, 2022. Explain why the partial and
complete equity methods would result in the same entries in this instance.

Answer:

Journal Entry

Date Account titles and explanation Debit Credit

Dec 31, 2022 Equity Income (40,000*95%) $     38,000
 Investment in Succo Company $     38,000
(To record net income)

Dec 31, 2022 Investment in Succo Company $     18,050

Dividends Declared (19000*95%) $     18,050
(To record dividend declared )

Dec 31, 2022 Common Stock $ 3,00,000

Other Contributed Capital $ 1,00,000
Retained Earnings, 1/1/2017 $ 1,60,000
Investment (WN 1) $ 5,32,000
Noncontrolling Interest (WN 2) $     28,000

WN 1. Net Investment
Particulars Amount
Investment $ 4,94,000
Retained earning $ -1,20,000
Retained earning end of the year $ 1,60,000
Net Diff. $     40,000
Share of company $     38,000
Total Investment (494,000+38,000) $ 5,32,000

WN 2. Stock holder equity $ 5,20,000

Retained earning $ -1,20,000
Add retained earnings $ 1,60,000
Total $ 5,60,000
Stock holderby others (100%-95%) 5%
Non controlling Interest $     28,000

Exercise 4-4

Poco Company purchased 85% of the outstanding common stock of Serena Company on
December 31, 2019, for $310,000 cash. On that date, Serena Company’s stockholders’ equity
consisted of the following:
Common stock $240,000

Other contributed capital 55,000

Retained earnings 50,000

Total $345,000

During 2022, Serena Company distributed a dividend in the amount of $12,000 and atyear
end reported a net loss of $10,000. During the time that Poco Company has held its
investmentin Serena Company, Serena Company’s retained earnings balance has decreased
$29,500 to a nebalance of $20,500 after closing on December 31, 2022. Serena Company did
not declare or distribute any dividends in 2020 or 2021. The difference between book value
and the value implied bthe purchase price relates to goodwill.

Required:
A. Assume that Poco Company uses the equity method. Prepare in general journal form
the entries needed in the preparation of a consolidated statements workpaper on
December 31, 2022. Explain why the partial and complete equity methods would
result in the same entries in this instance.
B. Assume that Poco Company uses the cost method. Prepare in general journal form the
entries needed in the preparation of a consolidated statements workpaper on
December 31, 2022.

Answer:
A. Workpaper entries 31/12/22 - Equity Method

Investment in Serena Company (0.85)×($12,000) 10200

Dividends declared 10200

Investment in Serena Company (0.85)*($10,000 loss) 8500

Equity loss 8500

 The partial equity and the complete equity methods result in the same entries because
the excess of the cost over fair value of net assets is allocated to goodwill, a non-
amortizable asset. If any of this excess is allocated to depreciable assets or intangible
assets with limited lives (subject to amortization), additional expenses will be
recorded under the complete equity method.

B. Cost method
Parent Share NCI Share Entire
Purchase price and implied value 310,000 54,706 364,706
Less: Book value of equity acquired: 293,250 51,750 345,000

Difference IV & BV 16,750 2,956 19,706

Goodwill (16,750) (2,956) (19,706)
Balance 0 0 0

Common Stock 240,000

Other Contributed Capital 55,000
Retained Earnings 1/1/22 42,500
Difference (IV&BV) 19,706
Investment in S ($310,000 – $6,375*) 303 ,625
NCI (54706-1125 ) 53,581
$42,500 = $20,500 at year-end plus 2022 loss of $10,000 plus 2022 dividends of $12,000
 [($50,000 - $42,500) x .85] = 6,375
 [($50,000 - $42,500) x .15] = 1125

Goodwill 19,706
Difference (IV&BV) 19,706

Workpaper entries 31/12/19 - Cost Method

Under Cost method, before elimination of the investment account, a workpaper entry is made
to the investment account and P Company’s beginning retained earnings to recognize P’s
share of the cumulative undistributed income or loss of S Company from the date of
acquisition to the beginning of the current year as follows:

Retained Earnings 1/1 - Poco Company 6,375

Investment in Serena Company 6,375

To establish reciprocity (0.85 (($50,000 – $42,500))

Investment in Serena Company (0.85)*($12,000) 10,200

Dividends Declared - Serena Company 10,200

Common Stock 240,000

Other Contributed Capital 55,000

Retained Earnings 1/1/22 42,500

Difference (IV&BV) 19,706

Investment ($310,000 – $6,375) 303,625

NCI (54706-1125 ) 53,581

Goodwill 19,706

Difference (IV&BV) 19,706