Question

Ch. 4 MC
Can someone please explain the multiple choice answers?

stions 1-4 below Use the following information to answer que 1.2017, Portland Company acquired all of Salem Company's voting stock for $16,000,000 e of Salem's assets and liabilities at the date of purchase had fair values that differed from in cash. Som reported values, as follows: Fair value Book value $11,000,000 3,000,000 10,000,000 Buildings and equipment, net (20 years, straight-line) Identifiable intangibles (5 years, straight-line) Salem's total sharcholders'equity at January 1,2017, was $4.000.000. It is now December 31,2020 (four years later). Salem's retained earnings reflect the accumulation of net income less dividends; there have been no other changes in its retained earnings. Salem does not report any other comprehensive income. Cumulative goodwill impairment to the beginning of 2020 is $2.000,000. Goodwill impairment for 2020 is $500,000. Portland uses the complete equity method to account for its investment. The December 31, 2020, trial balance for Salem appears below. Salem Dr (Cr) $ 2,500,000 28,000,000 (10,000,000) (2,000,000) (16,000,000) (14,000,000) Current assets Plant assets, net. Liabilities Capital stock Retained earnings, January 1.. . 8,000,000 Cost of goods sold. 3,500,000 0

1) On the 2020 consolidation working paper, elimination entry (R) reduces Investment in Salem by:

a) $3,100,000

b) $5,200,000

c) $6,400,000

d) $8,000,000

2) On the 2020 consolidation working paper, elimination entry (O) increases consolidated operating expenses by:

a) $1,600,000

b) $2,100,000

c) $2,900,000

d) $3,200,000

3) What is 2020 equity in net income of Salem, reported on Portland's books using the complete equity method?

a) $400,000

b) $900,000

c) $1,200,000

d) $2,500,000

4) On Portland's December 31,2020, trial balance, what is the balance in its Investment in Salem account, using the complete equity method?

a) $22,800,000

b) $23,200,000

c) $23,600,000

d) $27,600,000

Answer 1

1) Entry R is to record the revaluation of the Acquired assets on the date of acquisition at the beginning of year Acquisition price paid by Portland 16,000,000 Less: Book value of Salem (4,000,000) Excess of Fair value over Book Value 12,000,000 Allocation of excess value Value Amortization per year Life [A/B] Buildings and equipment (3,000,000 11,000,000 (8,000,000) 20 400,000 Identifiables Intangibles 10,000,000 2,000,000 Goodwill (12,000,000+ 8,000,000 10,000,000 10,000,000 Unamortized Value of Excess Value at the beginning of vear 2020. Goodwill 10,000,000 Less: Cummulative Impairment (2,000,000) Goodwill as on 01/01/2020 8,000,000 Buildings and Equipment Less: Cumulative Amortization from 2017 2019 (400,000x 3) (8,000,000) 1,200,000 Value as on 01/01/2020 (6,800,000) Indentifiable Intangibles 10,000,000 Less: Cumulative Amortization from 2017 2019 (2,000,000 x 3) (6,000,000) Value as on 01/01/2020 4,000,000

Entry R Account Titles and Explanation Debit Credit Goodwill 8,000,000 Indentifiable Intangibles 4,000,000 Buildings and Equipment 6,800,000 Investment in Salem (8,000,000 +4,000,000 6,800,000 5,200,000 Answer b) $ 5,200,000 2) Entry o is to record the amortization of Excess Value of Acquired Assets Goodwill Amortization in 2020 500,000 Amortization of Indentifiables Intangibles 2,000,000 Amortization of Building and equipment (400,000) Increase in Operating Expense 2,100,000 Entry O Account Titles and Explanation Debit Credit Operating Expenses 2,100,000 Buildings and Equipment 400,000 Goodwill 500,000 Identifiables Intangibles 2,000,000 Answer b) $ 2,100,000

Sales 14,000,000 Less: Cost of goods sold (8,000,000) (3,500,000) Less: Operating Expenses (2,100,000) Less: Increase in operating expenses Equity in net income of Salem's 400,000 Answer a) 400,000 4 Stockholders' equity as on 01/01/17 4,000,000 (2,000,000) Less: Capital Stock Retained Earnings as on 01/01/17 2,000,000 Acquisition price paid Add: Change in Retained Earnings from 01/01/17 01/01/20 16,000,000 14,000,000 16,000,000 2,000,000 Add: 3 vears Amortization of Building and equipment 1,200,000 Less: 3 vears Amortization of ldentifiable intangibles (6,000,000) (2,000,000) Less: Cumulative Amortization of Goodwill Add: Equity Net Income in 2020 400,000 Investment in Salem Account 23,600,000 Answer C) $ 23,600,000