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Potash Corporation acquired the voting stock of Safestyle Company on January 1, 2019 for $50 million....

Potash Corporation acquired the voting stock of Safestyle Company on January 1, 2019 for $50 million. Safestyle’s book value at the time was $10 million, consisting of $2 million of capital stock and $8 million of retained earnings. The $40 million difference between fair and book value was attributed to goodwill. It is now December 31, 2020, the end of the accounting year and two years after the acquisition. Safestyle’s January 1, 2020 retained earnings balance is $11 million. Safestyle reports net income of $1.8 million for 2020. Safestyle declares no dividends and has no other comprehensive income. Goodwill from the acquisition was impaired by $1 million in 2019 and $500,000 in 2020. Potash uses the complete equity method to report its investment in Safestyle on its own books.

6 a. What is 2020 equity in net income of Safestyle, reported on Potash’s books?

a. $1,800,000 b. $ 800,000 c. $1,300,000 d. $ 300,000

6 b. What is the December 31, 2020 balance for Investment in Safestyle, reported on Potash’s books?

a. $50,000,000 b. $52,000,000 c. $54,800,000 d. $53,300,000

6 c On the December 31, 2020 consolidation working paper, eliminating entry (E) credits the Investment in Safestyle account by:

a. $13,000,000 b. $11,000,000 c. $ 8,000,000 d. $ 9,300,000

6 d On the December 31, 2020 consolidation working paper, eliminating entry (R) credits the Investment in Safestyle account by:

a. $40,000,000 b. $39,000,000 c. $38,500,000 d. $39,500,000

6 e On the December 31, 2020 consolidation working paper, eliminating entry (O) debits goodwill impairment loss:

a. $ 500,000 b. $38,500,000 c. $ 1,500,000 d. $39,000,000

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Answer #1

6a. The 2020 equity in net income of safestyle Reported on potash books is $ 1,800,000 (Option A)

6b.

Details:
Equity investment in Safestyle: Amount $'m
Year 2019:
Cash 50
Add: Net Income 2019 3
Less: Impairment of Goodwill 2019 -1
Closing Balance 2019 52
Year 2020:
Opening Balance 2020 52
Add: Net Income 2020 1.8
Less: Impairment of Goodwill 2020 -0.5
Closing Balance 2020 53.3

Therefore option D is correct 53,300,000

6c. On december 31 2020 consolidation working paper eliminiating entry credits the investment in safestyle account by $ 8000000 (Option C)

6d.

Exess value alocated to goodwill as at 1st jan 2019 40,000,000
Less: Impaired goodwill in 2019 (1,000,000)
Goodwill as at 1st Jan 2020 39,000,000

Entry will be:-

Entry R

Particulars Dr Cr
Goodwill 39,000,000
Investment in safestyle 39,000,000

Therefore option B is correct $ 39,000,000

6e. On the December 31, 2020 consolidated  working paper eliminiating entry debits goodwill impairmrnt loss by $ 500,000 (Option A)

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