On January 1, 2017, Portland Company acquired all of Salem Company’s voting stoc

Question

On January 1, 2017, Portland Company acquired all of Salem Company’s voting stock for $16,000,000 in cash. Some of Salem’s assets and liabilities at the date of purchase had fair values that differed from reported values, as follows:
Book value Fair value
Buildings and equipment, net (20 years, straight-line) $11,000,000 $3,000,000
Identifiable intangibles (5 years, straight-line) 0 10,000,000
Salem’s total shareholders’ 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)
Current assets $2,500,000
Plant assets, net 28,000,000
Liabilities -10,000,000
Capital stock -2,000,000
Retained earnings, January 1 -16,000,000
Sales revenue -14,000,000
Cost of goods sold 8,000,000
Operating expense 3,500,000
$0

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

$3,100,000
$5,200,000
$6,400,000
$8,000,000
On the 2020 consolidation working paper, eliminating entry (O) increases consolidated operating expenses by$1,600,000
$2,100,000
$2,900,000
$3,200,000
What is 2020 equity in net income of Salem, reported on Portland’s books using the complete equity method?$400,000
$900,000
$1,200,000
$2,500,000
On Portland’s December 31, 2020, trial balance, what is the balance in its Investment in Salem account, using the complete equity method?$22,800,000
$23,200,000
$23,600,000
$27,600,000
A company reports the following intangibles at December 31, 2019, prior to impairment testing:

Book value
Customer lists $1,500,000
Brand names 5,200,000
Goodwill 8,000,000
The customer lists have a limited life, and amortization expense has already been properly recorded. The brand names have indefinite lives. The goodwill is allocated to Divisions 1 and 2 following U.S. GAAP.
Assume the company bypasses the qualitative assessment for both the brand names and the goodwill. On December 31, 2019, the following information is available:

Division 1 Division 2
Book value of goodwill $1,600,000 $6,400,000
Fair value of division 14,000,000 20,000,000
Book value of division 16,000,000 19,500,000
Intangible asset
Total expected Total expected
future cash inflows, future cash inflows,
undiscounted discounted
Customer lists $1,600,000 $1,200,000
Brand names 4,000,000 3,400,000
Impairment loss for 2019 for the customer lists and brand names, following U.S. GAAP, is $0
$300,000
$1,800,000
$2,100,000
A company reports the following intangibles at December 31, 2019, prior to impairment testing:

Book value
Customer lists $1,500,000
Brand names 5,200,000
Goodwill 8,000,000
The customer lists have a limited life, and amortization expense has already been properly recorded. The brand names have indefinite lives. The goodwill is allocated to Divisions 1 and 2 following U.S. GAAP.
Assume the company bypasses the qualitative assessment for both the brand names and the goodwill. On December 31, 2019, the following information is available:

Division 1 Division 2
Book value of goodwill $1,600,000 $6,400,000
Fair value of division 14,000,000 20,000,000
Book value of division 16,000,000 19,500,000
Intangible asset
Total expected Total expected
future cash inflows, future cash inflows,
undiscounted discounted
Customer lists $1,600,000 $1,200,000
Brand names 4,000,000 3,400,000
Goodwill impairment loss for 2019, following U.S. GAAP, is $1,100,000
$1,500,000
$1,600,000
$2,000,000
A company reports the following intangibles at December 31, 2019, prior to impairment testing:

Book value
Customer lists $1,500,000
Brand names 5,200,000
Goodwill 8,000,000
The customer lists have a limited life, and amortization expense has already been properly recorded. The brand names have indefinite lives. The goodwill is allocated to Divisions 1 and 2 following U.S. GAAP.
Assume the company bypasses the qualitative assessment for both the brand names and the goodwill. On December 31, 2019, the following information is available:

Division 1 Division 2
Book value of goodwill $1,600,000 $6,400,000
Fair value of division 14,000,000 20,000,000
Book value of division 16,000,000 19,500,000
Intangible asset
Total expected Total expected
future cash inflows, future cash inflows,
undiscounted discounted
Customer lists $1,600,000 $1,200,000
Brand names 4,000,000 3,400,000
Goodwill impairment loss for 2019, following IFRS, is$1,500,000
$2,000,000
$3,500,000
$4,000,000
A company reports the following intangibles at December 31, 2019, prior to impairment testing:

Book value
Customer lists $1,500,000
Brand names 5,200,000
Goodwill 8,000,000
The customer lists have a limited life, and amortization expense has already been properly recorded. The brand names have indefinite lives. The goodwill is allocated to Divisions 1 and 2 following U.S. GAAP.
Assume the company bypasses the qualitative assessment for both the brand names and the goodwill. On December 31, 2019, the following information is available:

Division 1 Division 2
Book value of goodwill $1,600,000 $6,400,000
Fair value of division 14,000,000 20,000,000
Book value of division 16,000,000 19,500,000
Intangible asset
Total expected Total expected
future cash inflows, future cash inflows,
undiscounted discounted
Customer lists $1,600,000 $1,200,000
Brand names 4,000,000 3,400,000
Impairment loss for 2019 for the customer lists and brand names, following IFRS, is $0
$300,000
$1,800,000
$2,100,000
A parent uses the cost method to report its investment in a wholly-owned subsidiary, acquired on January 1, 2019. If it had used the complete equity method, the parent would have reported 2019 equity in net income of $500,000 and 2020 equity in net income of $550,000. The subsidiary’s 2019 and 2020 dividends were $100,000 and $120,000, respectively. The subsidiary does not report any other comprehensive income. On the 2020 consolidation working paper, an adjusting entry is necessary to increase the parent’s beginning retained earnings balance by$400,000
$500,000
$830,000
$1,050,000

Explanation / Answer

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

$8,000,000

Initially in 2017, 4000000 shares are acquired for $16,000,000 in cash and in 2020 Trial balance shows only 2,000,000 shares i.e 50%.

2.On the 2020 consolidation working paper, eliminating entry (O) increases consolidated operating expenses by$1,600,000

$2,100,000
$2,900,000
$3,200,000

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