Question

Problem 1 On Jan. 1 2018, Pan Corporation acquired 60% of the outstanding common stock of Smith Company for $104,600. Fair Value of noncontrolling interest at the outstanding is $65,400. Smith is to continue its corporate existence as a subsidiary of Pan Company. Smith's stockholders' equity Jan 1, 2018, was as follows Common Stock-$20,000 Additional Paid in Capital- $30,000 Retained Earnings- $30,000 Total Stockholders' Equity- $80,000 At the time of the acquisition, all of Smith's assets and liabilities were reported at fair value, except for Inventories and plan assets. Inventories and plant assets were undervalued by $8,000 and $30,000 respectively, compared to their fair value. The entire beginning inventories were sold in 2018. The remaining useful life of plant assets was 6 years with no salvage value. Smith used straight-line depreciation. During 2018, Smith had a net income of $32.000. Impairment testing indicates that Goodwill was impaired by 2,000 during 2018. On Dec. 21, 2019 Smith declared and paid $7,000 cash dividends to its shareholders. Here is the computation of total goodwill and its allocation to the controlling interest and noncontrolling interest, so you can utilize the info to complete the requirements. Total Goodwill= (104,600+65,400) -(80,000+8,000+30,000) = 52,000 Goodwill to controlling interest= 104,600- 118,000 x 60%= 33,800 Goodwill to non-controlling interest= 52,000-33,800= 18,200 1. Calculate equity in net income of Smith and non-controlling interest in net income for 2018. 2. Prepare Pan's complete equity-method journal entries to record dividends and equity in net income of Smith in 2018. 3. Prepare the working paper entries for Pan Company and subsidiary for the year ended Dec 31, 2018

Answer 1

Net income of Smith Company Less: Depreciation on plant assets due to increase (30000/6) Impairment of goodwill Net income of Smith Company after necessary adjustments 32,000 -5,000 -2,000 25,000 Share of Pan Corporation in the above net income (60%) Share of non-controlling interest in the above net income (40%) 15,000 10,000 2) Equity-method journal entries for Pan Corporation For recording of dividend Cash (7000*60%) Equity method investment 4,200 4,200 For recording equity in net income of Smith Company Equity method investment Equity method income 15,000 15,000

Working paper entries Common stock Additional paid in capital Retained earnings Goodwill Fair value adjustments to balance sheet accounts (30000+8000) Investment in Smith Company Non-controlling interest (Elimination of investment in subsidiary and equity of subsidiary) 20,000 30,000 30,000 52,000 38,000 1,04,600 65,400 2,000 Impairment loss Goodwill (Impairment loss recognised for goodwill) 2,000 5,000 Depreciation expense Accumulated depreciation (Depreciation charged on plant assets) 5,000 4,200 Dividend income Dividend paid (Consolidation adjustment in respect of dividend paid by Smith Co.) 4,200