Question

On January 1, 2017, Portland Company acquired all of Salem Company’s voting stock for $16,000,000 in...

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

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

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

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

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

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