Question

Private Manufacturing Company acquired 90 percent of Secret Corporation’s outstanding common stock on December 31, 20X5, for $1,135,800. At that date, the fair value of the noncontrolling interest was $126,200, and Secret reported common stock outstanding of $494,000, premium on common stock of $274,000, and retained earnings of $414,000. The book values and fair values of Secret’s assets and liabilities were equal except for land, which was worth $30,000 more than its book value.

On April 1, 20X6, Private issued at par $200,000 of 10 percent bonds directly to Secret; interest on the bonds is payable March 31 and September 30. On January 2, 20X7, Private purchased all of Secret’s outstanding 10-year, 12 percent bonds from an unrelated institutional investor at 98. The bonds originally had been issued on January 2, 20X1, for 101. Interest on the bonds is payable December 31 and June 30.

Since the date it was acquired by Private Manufacturing, Secret has sold inventory to Private on a regular basis. The amount of such intercompany sales totaled $66,000 in 20X6 and $81,000 in 20X7, including a 30 percent gross profit. All inventory transferred in 20X6 had been resold by December 31, 20X6, except inventory for which Private had paid $17,000 and did not resell until January 20X7. All inventory transferred in 20X7 had been resold at December 31, 20X7, except merchandise for which Private had paid $21,000.

At December 31, 20X7, trial balances for Private and Secret appeared as follows:

	Private Manufacturing								Secret Corporation
Item	Debit				Credit				Debit				Credit
Cash	$	48,500							$	38,000
Current Receivables		123,500								85,100
Inventory		307,000								354,900
Investment in Secret Stock		1,258,200
Investment in Secret Bonds		985,000
Investment in Private Bonds										200,000
Land		1,351,000								524,000
Buildings & Equipment		2,940,000								1,995,000
Cost of Goods Sold		1,999,000								417,000
Depreciation & Amortization		184,000								84,000
Other Expenses		640,000								203,000
Dividends Declared		54,000								44,000
Accumulated Depreciation					$	1,110,000							$	593,000
Current Payables						898,660								273,000
Bonds Payable						200,000								1,000,000
Premium on Bonds Payable														3,000
Common Stock						870,000								494,000
Premium on Common Stock						570,000								274,000
Retained Earnings, January 1						2,978,950								464,000
Sales						3,000,000								808,000
Other Income						141,000								36,000
Income from Secret Corp.						121,590
Total	$	9,890,200			$	9,890,200			$	3,945,000			$	3,945,000

As of December 31, 20X7, Secret had declared but not yet paid its fourth-quarter dividend of $11,000. Both Private and Secret use straight-line depreciation and amortization, including the amortization of bond discount and premium. On December 31, 20X7, Private’s management reviewed the amount attributed to goodwill as a result of its purchase of Secret common stock and concluded that an impairment loss in the amount of $25,000 had occurred during 20X7 and should be shared proportionately between the controlling and noncontrolling interests. Private uses the fully adjusted equity method to account for its investment in Secret.

Required:
a. Compute the amount of the goodwill as of January 1, 20X7.

b. Compute the balance of Private’s Investment in Secret Stock account as of January 1, 20X7. (Do not round your intermediate calculations. Round your final answer to nearest whole dollar.)

c. Compute the gain or loss on the constructive retirement of Secret’s bonds that should appear in the 20X7 consolidated income statement. (Do not round your intermediate calculations. Round your final answer to nearest whole dollar.)

d. Compute the income that should be assigned to the noncontrolling interest in the 20X7 consolidated income statement. (Do not round your intermediate calculations. Round your final answer to nearest whole dollar.)

e. Compute the total noncontrolling interest as of December 31, 20X6. (Do not round your intermediate calculations. Round your final answer to nearest whole dollar.)

f. Present all consolidation entries that would appear in a three-part consolidation worksheet as of December 31, 20X7. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round your intermediate calculations. Round your final answers to nearest whole dollar.)

g. Prepare and complete a three-part worksheet for the preparation of consolidated financial statements for 20X7. (Values in the first two columns (the "parent" and "subsidiary" balances) that are to be deducted should be indicated with a minus sign, while all values in the "Consolidation Entries" columns should be entered as positive values. For accounts where multiple adjusting entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet.)

Answer 1

a) Calculation of goodwill as of January 1 , 2007:

Particulars	Amount ($)	Amount ($)
Value of Secret corporation (31/12/2005) [$1,135,800 + $126,200)		1,262,000
Less: Net worth of secret corporation(31/12/2005)
Common stock outstanding	494,000
Premium on common stock	414,000
upward revaluation of land	30,000
Networth		938,000
Goodwill of Secret Corporation		324,000
Goodwill attributed to Private manufacturing company = $324,000 * 90% = $291,600