Advanced Accounting 10th Edition By Fischer -Test Bank

Chapter 3—Consolidated Statements: Subsequent to Acquisition MULTIPLE CHOICE Scenario 3-1 Pedro purchased 100% of the common stock of the Sanburn Company on January 1, 20X1, for $500,000. On that date, the stockholders' equity of Sanburn Company was $380,000. On the purchase date, inventory of Sanburn Company, which was sold during 20X1, was understated by $20,000. Any remaining excess of cost over book value is attributable to patent with a 20-year life. The reported income and dividends paid by Sanburn Company were as follows: 20X1 20X2 Net income $80,000 $90,000 Dividends paid 10,000 10,000 1. Refer to Scenario 3-1. Using the simple equity method, which of the following amounts are correct? Investment Income Investment Account Balance 20X1 December 31, 20X1 a. $80,000 $570,000 b. $70,000 $570,000 c. $70,000 $550,000 d. $80,000 $550,000 ANS: A DIF: M OBJ: 3-1 2. Refer to Scenario 3-1. Using the sophisticated (full) equity method, which of the following amounts are correct? Investment Income Investment Account Balance 20X1 December 31, 20X1 a. $55,000 $555,000 b. $55,000 $545,000 c. $75,000 $565,000 d. $80,000 $570,000 ANS: B DIF: M OBJ: 3-1 3. Refer to Scenario 3-1. Using the cost method, which of the following amounts are correct? Investment Income Investment Account Balance 20X1 December 31, 20X1 a. $10,000 $500,000 b. $10,000 $570,000 c. $0 $570,000 d. $80,000 $500,000 ANS: A DIF: M OBJ: 3-1 4. What is the effect if an unconsolidated subsidiary is accounted for by the equity method but consolidated statements are being prepared for the parent company and other subsidiaries? a. All of the unconsolidated subsidiary's accounts will be included individually in the consolidated statements. b. The consolidated retained earnings will not reflect the earnings of the unconsolidated subsidiary. c. The consolidated retained earnings will be the same as if the subsidiary had been included in the consolidation. d. Dividend revenue from the unconsolidated subsidiary will be reflected in consolidated net income. ANS: C DIF: M OBJ: 3-1 | 3-2 | 3-4 Scenario 3-2 On January 1, 20X1, Promo, Inc. purchased 70% of Set Corporation for $469,000. On that date the book value of the net assets of Set totaled $500,000. Based on the appraisal done at the time of the purchase, all assets and liabilities had book values equal to their fair values except as follows: Book Value Fair Value Inventory $100,000 $120,000 Land 75,000 85,000 Equipment (useful life 4 years) 125,000 165,000 The remaining excess of cost over book value was allocated to a patent with a 10-year useful life. During 20X1 Promo reported net income of $200,000 and Set had net income of $100,000. 5. Refer to Scenario 3-2. What is consolidated net income if Promo recognizes income from Set using the sophisticated equity method? a. $42,000 b. $70,000 c. $200,000 d. $270,000 ANS: D DIF: M OBJ: 3-1 | 3-4 | 3-6 6. Refer to Scenario 3-2. What income from subsidiary did Promo include in its net income if Promo uses the simple equity method? a. $33,000 b. $42,000 c. $70,000 d. $100,000 ANS: C DIF: D OBJ: 3-1 | 3-6 7. Refer to Scenario 3-2. What income from subsidiary did Promo include in its net income if Promo uses the sophisticated equity method? a. $33,000 b. $49,000 c. $70,000 d. $100,000 ANS: B DIF: D OBJ: 3-1 | 3-6 8. On January 1, 20X1, Rabb Corp. purchased 80% of Sunny Corp.'s $10 par common stock for $975,000. On this date, the carrying amount of Sunny's net assets was $1,000,000. The fair values of Sunny's identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net), which were $100,000 in excess of the carrying amount. In the January 1, 20X1, consolidated balance sheet, goodwill should be reported at ____. a. $0 b. $75,750 c. $95,000 d. $118,750 ANS: D DIF: E OBJ: 3-2 | 3-3 | 3-4 9. Which of the following statements applying to the use of the equity method versus the cost method is true? a. The equity method is required when one firm owns 20% or more of the common stock of another firm. b. If no dividends were paid by the subsidiary, the investment account would have the same balance under both methods. c. The method used has no significance to consolidated statements. d. An advantage of the equity method is that no amortization of excess adjustments needs to be made on the consolidated worksheet. ANS: C DIF: E OBJ: 3-2 | 3-3 10. In consolidated financial statements, it is expected that: a. Dividends declared equals the sum of the total parent company's declared dividends and the total subsidiary's declared dividends. b. Retained Earnings equals the sum of the controlling interest's separate retained earnings and the noncontrolling interest's separate retained earnings. c. Common Stock equals the sum of the parent company's outstanding shares and the subsidiary's outstanding shares. d. Net Income equals the sum of the income distributed to the controlling interest and the income distributed to the noncontrolling interest. ANS: D DIF: E OBJ: 3-2 | 3-3 | 3-4 11. How is the portion of consolidated earnings to be assigned to noncontrolling interest in consolidated financial statements determined? a. The net income of the parent is subtracted from the subsidiary's net income to determine the noncontrolling interest. b. The subsidiary's net income is extended to the noncontrolling interest. c. The amount of the subsidiary's earnings is multiplied by the noncontrolling's percentage ownership and is adjusted for the excess cost amortization applicable to the NCI. d. The amount of consolidated earnings determined on the consolidated working papers is multiplied by the noncontrolling interest percentage at the balance-sheet date. ANS: C DIF: M OBJ: 3-2 | 3-3 | 3-4 12. Patti Corp. has several subsidiaries (Aeta, Beta, and Gaeta) that are included in its consolidated financial statements. In its 12/31/X1 separate balance sheet, Patti had the following intercompany balances before eliminations: Debit Credit Current Receivable due from Aeta $ 40,000 Noncurrent Receivable due from Beta 100,000 Cash Advance to Beta 26,000 Cash Advance from Gaeta $75,000 Intercompany Payable to Gaeta 40,000 In its 12/31/X1 consolidated balance sheet, what amount should Patti report as intercompany receivables? a. $166,000 b. $51,000 c. $26,000 d. $0 ANS: D DIF: E OBJ: 3-2 | 3-3 | 3-4 Scenario 3-3 Balance sheet information for Pawnee Company and its 90%-owned subsidiary, Sioux Corporation, at December 31, 20X1, is summarized as follows: Pawnee Sioux Current assets-net $ 200,000 $ 50,000 Property, plant, and equipment-net 1,000,000 600,000 Investment in Sioux 558,000 $1,758,000 $650,000 Current liabilities $ 100,000 $ 30,000 Capital stock 800,000 400,000 Retained earnings 858,000 220,000 $1,758,000 $650,000 Pawnee acquired its interest in Sioux for cash at book value several years ago when Sioux's assets and liabilities were equal to their fair values. 13. Refer to Scenario 3-3. Consolidated total assets of Pawnee and Sioux, at December 31, 20X1, will be ____. a. $1,785,000 b. $1,850,000 c. $2,343,000 d. $2,408,000 ANS: B DIF: E OBJ: 3-2 | 3-3 | 3-4 | 3-7 14. Refer to Scenario 3-3. The consolidated balance sheet of Pawnee and Sioux at December 31, 20X1 will show a. Investment in Sioux, $558,000. b. Capital stock, $800,000. c. Retained earnings, $1,078,000. d. Noncontrolling interest, $65,000. ANS: B DIF: E OBJ: 3-2 | 3-3 | 3-4 | 3-7 15. Pahl Corporation owns a 60% interest in Sauer Corporation, acquired at book value equal to fair value at the beginning of 20X1. On December 20, 20X1 Sauer declares dividends of $80,000, and the dividends remain unpaid at year end. Pahl has not recorded the dividends receivable at December 31. A consolidated working paper entry is necessary to a. Enter the $80,000 dividends receivable in the consolidated balance sheet. b. Enter $48,000 dividends receivable in the consolidated balance sheet. c. Reduce the dividend payable account to $32,000 in the consolidated balance sheet. d. Eliminate the dividend payable account in the consolidated balance sheet. ANS: C DIF: M OBJ: 3-3 16. If the investment in subsidiary account is increased or decreased by the amount determined by the following calculation: the investment account is being converted from a. cost to simple equity. b. cost to sophisticated equity. c. simple equity to sophisticated equity. d. simple equity to cost. ANS: A DIF: M OBJ: 3-3 17. On January 1, 20X1, Payne Corp. purchased 70% of Shayne Corp.'s $10 par common stock for $900,000. On this date, the carrying amount of Shayne's net assets was $1,000,000. The fair values of Shayne's identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net), which were $200,000 in excess of the carrying amount. For the year ended December 31, 20X1, Shayne had net income of $150,000 and paid cash dividends totaling $90,000. Excess attributable to plant assets is amortized over 10 years. In the December 31, 20X1, consolidated balance sheet, noncontrolling interest should be reported at ____. a. $282,714 b. $300,500 c. $397,714 d. $345,500 ANS: C DIF: M OBJ: 3-5 18. Alpha purchased an 80% interest in Beta on June 30, 20X1. Both Alpha's and Beta's reporting periods end December 31. Which of the following represents the controlling interest in consolidated net income for 20X1? a. 100% of Alpha's July 1-December 31 income plus 80% of Beta's July 1-December 31 income b. 100% of Alpha's July 1-December 31 income plus 100% of Beta's July 1-December 31 income c. 100% of Alpha's January 1-December 31 income plus 80% of Beta's July 1-December 31 income d. 100% of Alpha's January 1-December 31 income plus 80% of Beta's January 1-December 31 income ANS: C DIF: D OBJ: 3-6 19. In a mid-year purchase when the subsidiary's books are not closed until the end of the year, the purchased income account contains the parent's share of the a. subsidiary's income earned for the entire year. b. subsidiary's income earned from the beginning of the year to the date of acquisition. c. subsidiary's income earned from the date of acquisition to the end of the year. d. Consolidated Net Income. ANS: B DIF: E OBJ: 3-6 20. On January 1, 20X1, Piston, Inc. acquired Spur Corp. While recording the acquisition, Piston established a deferred tax liability. It is most likely that this account was created because a. the transaction was a tax-free exchange to Piston. b. Piston had not paid all of the income taxes due the government when acquiring Spur. c. the transaction was a tax-free exchange to Spur. d. Spur had not paid all of the income taxes due the government prior to the acquisition by Piston. ANS: A DIF: E OBJ: 3-8 PROBLEM Scenario 3-4 On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for $316,000. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $40,000, $120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as follows: 20X1 20X2 Net income $50,000 $90,000 Dividends 10,000 20,000 On January 1, 20X1, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used, was worth $5,000 more than cost. The inventory was sold in 20X1. Building, which was worth $15,000 more than book value, has a remaining life of 8 years, and straight-line depreciation is used. Any remaining excess is goodwill. 1. Refer to Scenario 3-4. Required: a. Prepare a value analysis schedule b. Prepare a determination and distribution of excess schedule ANS: a: Value analysis schedule Company Implied Fair Value Parent Price NCI Value Implied entity fair value 395,000 316,000 79,000 Fair value of entity net identifiable assets 370,000 296,000 74,000 Goodwill 25,000 20,000 5,000 b. Determination and distribution schedule Company Implied Fair Value Parent Price NCI Value Fair value of subsidiary 395,000 316,000 79,000 Less book value: C Stk 40,000 APIC 120,000 R/E 190,000 Total S/E 350,000 350,000 350,000 Interest Acquired 80% 20% Book value 280,000 70,000 Excess of fair over book 45,000 36,000 9,000 Adjust identifiable accounts: Life Amort/Year Inventory 5,000 [ FIFO; sold in Yr 1] Building 15,000 8 1,875 Goodwill 25,000 Total 45,000 DIF: M OBJ: 3-1 | 3-2 | 3-5 2. Refer to Scenario 3-4. Prepare Parent’s 20X1 and 20X2 journal entries (after the purchase has been recorded) to record the transactions related to its investment in Subsidiary under the a. cost method b. simple equity method ANS: a. cost method journal entries: 20X1 20X2 Debit Credit Debit Credit Cash 8,000 (1) 16,000 (2) Dividend Income 8,000 16,000 (1) 80% of $10,000 dividends (2) 80% of $20,000 dividends b. simple equity method: 20X1 20X2 Debit Credit Debit Credit Investment in Subsidiary 40,000 (1) 72,000 (2) Subsidiary Income 40,000 72,000 Cash 8,000 (3) 16,000 (4) Investment in Subsidiary 8,000 16,000 (1) 80% of $50,000 net income (2) 80% of $90,000 net income (3) 80% of $10,000 dividends (4) 80% of $20,000 dividends DIF: M OBJ: 3-1 3. Refer to Scenario 3-4. Prepare Parent’s 20X1 and 20X2 journal entries (after the purchase has been recorded) to record the transactions related to its investment in Subsidiary under the sophisticated equity method. ANS: 20X1 20X2 Debit Credit Debit Credit Investment in Subsidiary 34,500 (1) 70,500 (2) Subsidiary Income 34,500 70,500 Cash 8,000 (3) 16,000 (4) Investment in Subsidiary 8,000 16,000 (1) 80% of $50,000 net income less amortization of $5,500 (2) 80% of $90,000 net income less amortization of $1,500 (3) 80% of $10,000 dividends (4) 80% of $20,000 dividends Amortization: 20X1 20X2 Inventory: $5,000 × 80% 4,000 Building: $15,000 × 80% ÷ 8 years 1,500 1,500 $5,500 $1,500 DIF: M OBJ: 3-1 4. Refer to Scenario 3-4. Prepare the necessary date alignment entries for the consolidating worksheet for December 31, 20X1 and December 31, 20X2 assuming that Parent records its investment in Subsidiary using a. the cost method b. the simple equity method If date alignment entries are not required, give rationale. ANS: a. elimination entries for cost method 12/31/X1 12/31/X2 CV Investment in Subsidiary n/a 32,000 [1] R/E-Parent n/a 32,000 CY2 Dividend Income 8,000 16,000 Dividends Declared-Sub 8,000 16,000 n/a for first year: date alignment is automatic; the investment in subsidiary and the subsidiary retained earnings are both as of January 1, 20X1. [1] (Sub RE 1/1/X2 – Sub RE 1/1/X1 = $40,000) × 80% b. elimination entries for simple equity method 12/31/X1 12/31/X2 CY1 Subsidiary Income 40,000 72,000 Investment in Subsidiary 40,000 72,000 CY2 Investment in Subsidiary 8,000 16,000 Dividends Declared-Sub 8,000 16,000 DIF: M OBJ: 3-3 | 3-2 5. Refer to Scenario 3-4. Prepare all necessary elimination entries for the consolidating worksheet of December 31, 20X1. Assume Parent uses the simple equity method of accounting for its investment in Subsidiary. ANS: CY1 Subsidiary Income 40,000 Investment in Subsidiary 40,000 CY2 Investment in Subsidiary 8,000 Dividends Declared-Sub 8,000 EL C Stk-Sub 32,000 APIC-Sub 96,000 R/E-Sub 152,000 Investment in Sub 280,000 D Cost of Goods Sold 5,000 Building 15,000 Goodwill 25,000 Investment in Sub 36,000 R/E-Sub (NCI) 9,000 A Dep Exp 1,875 A/D-Building 1,875 DIF: M OBJ: 3-2 | 3-5 6. Refer to Scenario 3-4. Prepare all necessary elimination entries for the consolidating worksheet of December 31, 20X2. Assume Parent uses the simple equity method of accounting for its investment in Subsidiary. ANS: CY1 Subsidiary Income 72,000 Investment in Subsidiary 72,000 CY2 Investment in Subsidiary 16,000 Dividends Declared-Sub 16,000 EL C Stk-Sub 32,000 APIC-Sub 96,000 R/E-Sub 184,000 Investment in Sub 312,000 D R/E-Sub (20% inventory) 1,000 R/E-Par (80% inventory) 4,000 Building 15,000 Goodwill 25,000 Investment in Sub 36,000 R/E-Sub (NCI) 9,000 A Dep Exp 1,875 R/E-Sub 375 R/E-Par 1,500 A/D-Building (2 yrs) 3,750 DIF: M OBJ: 3-2 | 3-5 7. Refer to Scenario 3-4 and Worksheet 3-1. Required: a. Complete the consolidating worksheet for December 31, 20X2. b. Prepare supportive Income Distribution Schedules for Subsidiary and Parent. ANS: a. Consolidating worksheet December 31, 20X2 b. Income distribution schedules: Subsidiary Income Distribution Internally generated net income $90,000 Building amortization (1,875) Adjusted income 88,125 Distribution to NCI × 20% Noncontrolling share $17,625 Parent Income Distribution Internally generated net income $100,000 Controlling share of subsidiary 70,500 Total $170,500 DIF: M OBJ: 3-2 | 3-5 8. The Paris Company purchased an 80% interest in Seine, Inc. for $600,000 on July 1, 20X1, when Seine had the following balance sheet: Assets Accounts receivable $ 50,000 Inventory 120,000 Land 80,000 Building 270,000 Equipment 80,000 Total $600,000 Liabilities and Equity Current liabilities $100,000 Common stock, $5 par 50,000 Paid-in capital in excess of par 150,000 Retained earnings (July 1) 300,000 Total $600,000 The inventory is understated by $20,000 and is sold in the third quarter of 20X1. The building has a fair value of $320,000 and a 10-year remaining life. The equipment has a fair value of $120,000 and a remaining life of 5 years. Any remaining excess is attributed to goodwill. From July 1 through December 31, 20X1, Seine had net income of $100,000 and paid $10,000 in dividends. Assume that Paris uses the cost method to record its investment in Seine. Required: a. Prepare a determination and distribution of excess schedule as of July 1, 20X1. b. Prepare the eliminations and adjustments that would be made on the December 31, 20X1, consolidated worksheet to eliminate the investment in Seine. Distribute and amortize any excess. ANS: a. Determination and distribution of excess schedule as of July 1, 20X1: Company Implied Fair Value Parent Price NCI Value Fair value of subsidiary 750,000 600,000 150,000 Less book value: C Stk 50,000 APIC 150,000 R/E 300,000 Total S/E 500,000 500,000 500,000 Interest Acquired 80% 20% Book value 400,000 100,000 Excess of fair over book 250,000 200,000 50,000 Adjust identifiable accounts: Life Amort/Year Inven 20,000 [sold in third quarter] Building 50,000 10 5,000 Equipment 40,000 5 8,000 Goodwill 140,000 Total 250,000 b. Eliminations and adjustments for the December 31, 20X1, consolidating worksheet Debit Credit CV Investment in Subsidiary* n/a R/E-Par n/a CY2 Investment in Subsidiary 8,000 Dividends Declared-Sub 8,000 EL C Stk-Sub 40,000 APIC-Sub 120,000 R/E-Sub 240,000 Investment in Sub 400,000 D Cost of Goods Sold 20,000 Building 50,000 Equipment 40,000 Goodwill 140,000 Investment in Sub 200,000 R/E-Sub (NCI) 50,000 A Dep Exp 5,000 A/D-Building 5,000 Dep Exp 8,000 A/D-Equipment 8,000 *conversion from cost to simple equity not required at end of first year DIF: M OBJ: 3-3 | 3-5 9. Dickinson Corporation is considering the acquisition of Williston Company through the acquisition of Williston’s common stock. Dickinson Corporation will issue 15,000 shares of its $5 par common stock, with a fair value of $30 per share, in exchange for all 10,000 outstanding shares of Williston Company’s voting common stock. The acquisition meets the criteria for a tax-free exchange as to the seller. Because of this, Dickinson Corporation will be limited for future tax returns to the book value of the depreciable assets. Dickinson Corporation falls into the 30% tax bracket. The appraisal of the assets of Williston Company shows that the inventory has a fair value of $120,000, and the depreciable fixed assets have a fair value of $250,000 and a 10-year life. Any remaining excess is attributed to goodwill. Williston Company has the following balance sheet just before the acquisition: Williston Company Balance Sheet December 31, 20X1 Assets Liabilities & Equities Cash $ 40,000 Current Liabilities $ 50,000 Accts Rec 150,000 Bonds Payable 100,000 Inventory 100,000 C Stk ($10 par) 100,000 Depreciable Assets 210,000 Retained Earnings 250,000 $500,000 $500,000 Required: a. Prepare a value analysis and a determination and distribution of excess schedule. b. Prepare the elimination entries that would be made on the consolidated worksheet on the date of acquisition. ANS: a. Value analysis and determination and distribution of excess schedule: Company Implied Fair Value Parent Price Implied entity fair value 450,000 450,000 Fair value of entity net identifiable assets [1] 392,000 392,000 Goodwill 58,000 58,000 [1] $350,000 + [($20,000 + $40,000) × 70%] Company Implied Fair Value Parent Price Fair value of subsidiary 450,000 450,000 Less book value: C Stk 100,000 APIC - R/E 250,000 Total S/E 350,000 350,000 Interest Acquired 100% Book value 350,000 Excess of fair over book 100,000 100,000 Adjust identifiable accounts: Life Annual Amort Inventory 20,000 1 DTL (6,000) 1 Building 40,000 10 4,000 DTL (12,000) 10 (1,200) Goodwill 58,000 Total 100,000 b. Elimination entries on the date of acquisition. EL C Stk-Sub 100,000 R/E-Sub 250,000 Investment in Sub 350,000 D Inventory 20,000 Building 40,000 Goodwill 58,000 DTL 18,000 Investment in Sub 100,000 DIF: M OBJ: 3-9 10. The determination and distribution schedule for the consolidation of Petoskey (80% interest) and Sable reads in part: Adjust identifiable accounts: Life Amort/Year Inventory 20,000 [sold in third quarter] Building 50,000 10 5,000 Equipment 40,000 5 8,000 Goodwill 140,000 Total 250,000 Prepare the elimination entries to distribute and amortize the excess purchase cost on a. 1/1/X1, the date of acquisition b. 12/31/X1, the end of the first year following the acquisition c. 12/31/X3, the end of the third year following the acquisition. ANS: a. On date of acquisition D Inventory 20,000 Building 50,000 Equipment 40,000 Goodwill 140,000 Investment in Sub 200,000 R/E-Sub (NCI) 50,000 b. At the end of the first year following the acquisition D Cost of Goods Sold 20,000 Building 50,000 Equipment 40,000 Goodwill 140,000 Investment in Sub 200,000 R/E-Sub (NCI) 50,000 A Dep Exp 5,000 A/D-Building 5,000 Dep Exp 8,000 A/D-Equipment 8,000 c. at the end of the third year following the acquisition. D R/E-Par (80% inven) 16,000 R/E-Sub (20% inven) 4,000 Building 50,000 Equipment 40,000 Goodwill 140,000 Investment in Sub 200,000 R/E-Sub (NCI) 50,000 A Dep Exp 5,000 Dep Exp 8,000 R/E-Par 20,800 R/E-Sub 5,200 A/D-Building 15,000 A/D-Equipment 24,000 DIF: M OBJ: 3-5 Chapter 7—Special Issues in Accounting for an Investment in a Subsidiary MULTIPLE CHOICE 1. A new subsidiary is being formed. The parent company purchased 70% of the shares for $20 per share. The remaining shares were sold to a variety of outside interests for an average of $22 per share. The consolidated statements will show a. a gain. b. a loss. c. only cash and related equity. d. goodwill. ANS: A DIF: E OBJ: 7-1 2. A new subsidiary is being formed. The parent company purchased 70% of the shares for $20 per share. The remaining shares were sold to a variety of outside interests for an average of $18 per share. The consolidated statements will show a. a gain. b. a loss. c. only cash and related equity. d. goodwill. ANS: D DIF: E OBJ: 7-1 3. Control of a subsidiary was achieved with the initial investment in subsidiary stock. When a subsequent block of subsidiary's stock is purchased a. the parent must change from the cost method to the equity method. b. the parent must change from the equity method to the cost method. c. no change in accounting methods is required. d. none of the above. ANS: C DIF: E OBJ: 7-2 Pine & Scent scenario: Pine Company purchased a 60% interest in the Scent Company on January 1, 20X1 for $360,000. On that date, the stockholders' equity of Scent Company was $450,000. Any excess cost on 1/1/X1 was attributable to goodwill. Pine purchased another 20% interest on January 1, 20X4 for $200,000. On January 1, 20X4, Scent Company's stockholders' equity was $700,000, the entire increase due to retained earnings. 4. Refer to the Pine and Scent scenario. The goodwill balance on the December 31, 20X4, balance sheet is ____. a. $100,000 b. $60,000 c. $0 d. $150,000 ANS: D DIF: M OBJ: 7-2 5. Refer to the Pine and Scent scenario. The excess of cost over book on the new block of stock is ____. a. $60,000 b. $50,000 c. $48,000 d. $20,000 ANS: A DIF: M OBJ: 7-2 6. Refer to the Pine and Scent scenario. As part of the consolidation process, the excess of cost over book on the new block of shares is treated as a. additional goodwill b. a loss on acquisition of additional subsidiary shares c. an increase to Pine’s Investment in Scent account d. a reduction in parent’s paid-in capital in excess of par ANS: D DIF: M OBJ: 7-2 7. Which of the following statements is incorrect regarding a parent’s purchase of additional subsidiary shares? a. There can never be an income statement gain or loss. b. Due to the constraints of conservatism, there can never be an income statement gain but a loss should be recognized if so indicated. c. If the price paid to reacquire the shares exceeds their book value, the debit first is used to reduce existing paid-in capital in excess of par from retirement and the balance is a debit to Retained Earnings. d. If the price paid to reacquire the shares is less than their book value, there is a credit to paid-in capital in excess of par from retirement. ANS: B DIF: M OBJ: 7-2 8. When a subsequent block of an existing subsidiary's stock is purchased, a. the determination and distribution of excess schedule incorporates the identifiable net asset values from previous acquisitions. b. the determination and distribution of excess schedule is completely independent of the identifiable net asset values from previous acquisitions. c. additional goodwill is recognized for any excess of cost over book value d. none of the above. ANS: A DIF: E OBJ: 7-2 9. Parent has purchased additional shares of subsidiary stock. If the original investment blocks are carried at cost, the conversion to simple equity is based upon a. the difference in subsidiary retained earnings at the beginning of the current fiscal year and the retained earnings when the first block was acquired. b. the difference in subsidiary retained earnings at the beginning of the current fiscal year and the retained earnings when the block giving a controlling interest was acquired. c. the difference in subsidiary retained earnings at the beginning of the current fiscal year and the retained earnings of each block at its acquisition. d. the difference in subsidiary retained earnings at the beginning of the current fiscal year and the retained earnings when the last block was acquired. ANS: C DIF: E OBJ: 7-2 10. When a parent sells its subsidiary interest, a gain (loss) is recognized if the parent sells its sells part but sells part and entire investment retains control loses control a. Yes Yes No b. Yes No Yes c. No No No d. No No Yes ANS: B DIF: E OBJ: 7-3 Partridge & Sparrow scenario: Partridge purchased a 60% interest in Sparrow on January 1, 20X1, for $240,000. At the time of the purchase, Sparrow had the following stockholders' equity: Common stock ($10 par) $ 80,000 Retained earnings 120,000 Total stockholders' equity $200,000 Any excess is attributable to equipment with a 10-year life. On January 1, 20X6, the retained earnings of Sparrow was $175,000. 11. Refer to Partridge and Sparrow. During the first 6 months of 20X6, $25,000 was earned by Company S. The entire investment was sold for $300,000 on July 1, 20X6. The gain (loss) was ____. a. $87,000 b. $78,000 c. $12,000 d. $60,000 ANS: B DIF: M OBJ: 7-3 12. Refer to Partridge and Sparrow. The entire investment was sold for $300,000 on January 1, 20X6. The gain was ____. a. $87,000 b. $90,000 c. $27,000 d. $78,000 ANS: A DIF: M OBJ: 7-3 13. A parent company owns a 90% interest in a subsidiary at the start of the year and during the year sells a 10% interest to reduce its ownership percentage to 80%. The most popular view of the transaction under current consolidations theory is that a. it is a sale of an investment at a gain or a loss. b. it is likened to a treasury stock transaction that may not result in a gain or a loss. c. it is a transaction between the controlling and noncontrolling ownership interests and has no effect on consolidated income. The transaction would impact only paid-in capital. d. the increase or decrease in equity as a result of the sale is an adjustment to donated capital. ANS: C DIF: E OBJ: 7-3 14. In the year a parent sells its subsidiary investment, the results of subsidiary operations prior to the sale date are a. consolidated to the point of sale. b. shown on the balance sheet in the stockholders' equity section as an adjustment to retained earnings. c. not reflected on any of the parent's statements. d. not consolidated. ANS: D DIF: E OBJ: 7-3 Patten and Salty scenario: Patten Company purchased an 80% interest in Salty Inc. on January 1, 20X1, for $500,000 when the stockholders' equity of Salty was $500,000. Any excess of cost was attributed to a building with a 20-year life. On July 1, 20X4, Patten sold part of its investment and reduced its ownership interest to 60%. Salty earned $62,000, evenly, during 20X4. 15. Refer to the Patten and Salty scenario. The NCI share of 20X4 consolidated income is a. $10,000 b. $12,400 c. $16,725 d. $43,400 ANS: C DIF: M OBJ: 7-3 Page & Seed scenario: Page Company purchased an 80% interest in the common stock of the Seed Company for $600,000 on January 1, 20X4, when Seed Company had the following stockholders' equity: Common stock, $10 par $300,000 Cumulative preferred stock, 10%, $10 par 100,000 Paid-in excess of par, common 50,000 Retained earnings 200,000 Any excess of cost over book value on the common stock purchase was attributed to goodwill. Page does not hold any of Seed’s preferred stock. Seed had net income of $40,000 during 20X4 and paid no dividends. 16. Refer to Page and Seed. The preferred stock is 1 year in arrears on January 1, 20X4. The goodwill that will appear on the consolidated balance sheet prepared on January 1, 20X4, is ____. a. $80,000 b. $88,000 c. $210,000 d. $168,000 ANS: C DIF: E OBJ: 7-4 17. Refer to Page and Seed. The preferred stock is 2 years in arrears on January 1, 20X4. The noncontrolling interest share of 20X4 net income was ____. a. $3,200 b. $6,000 c. $8,000 d. $16,000 ANS: D DIF: M OBJ: 7-4 18. Refer to Page and Seed. The preferred stock is 2 years in arrears on January 1, 20X4. The controlling interest's share of Seed's 20X4 net income is ____. a. $24,000 b. $23,360 c. $25,600 d. $32,000 ANS: A DIF: M OBJ: 7-4 19. Plant company owns 80% of the common stock of Surf Company. Surf Company also has outstanding preferred stock. Plant Company owned none of the preferred stock prior to January 1, 20X5. Plant Company purchased 100% of the outstanding preferred stock on January 1, 20X5, at a price in excess of book value. The result of this transaction with regard to the consolidated statements is that a. there will be added goodwill. b. there will be a loss recorded in the year of the purchase. c. the preferred stock will not appear on the balance sheet and there will be a decrease in retained earnings as a result of the purchase. d. the investment in preferred stock will appear on the balance sheet. ANS: C DIF: E OBJ: 7-4 20. Company P has consistently sold merchandise for resale to its subsidiary at a gross profit of 20%. There were intercompany goods in both the subsidiary's beginning and ending inventory. As a result of these sales, which of the following amounts must be adjusted for when preparing only a consolidated balance sheet? Sales Profit Beginning Ending by Co. P during Inventory Inventory the Year Profit Profit a. Yes Yes Yes b. Yes No Yes c. No No Yes d. No No No ANS: C DIF: E OBJ: A1 21. Company P owns an 90% interest in Company S. Company S has outstanding $100,000 of 10% bonds that were sold at face value and have 6 years to maturity as of the balance sheet date. Company P owns $70,000 of the bonds and has a remaining unamortized book value of $66,000. Company S bonds will be presented on the consolidated balance sheet as a. bonds payable, $30,000. b. bonds payable, $34,000. c. bonds payable, $100,000. d. bonds payable will not appear. ANS: A DIF: E OBJ: A1 22. Saddle Corporation is an 80%-owned subsidiary of Paso Company. On January 1, 20X1, Saddle sold Paso a machine for $50,000. Saddle's cost was $60,000 and the book value was $40,000. The machine had a 5-year remaining life at the time of the sale. A consolidated balance sheet only is being prepared on December 31, 20X3. The retained earnings of the controlling interest requires which of the following adjustments? a. Debit $4,000 b. Debit $6,000 c. Debit $3,200 d. Debit $4,800 ANS: C DIF: M OBJ: A1 PROBLEM 1. Pilatte Company acquired a 90% interest in the common stock of Sweet Company for $630,000 on January 1, 20X3, when Sweet Company had the following stockholders' equity: Preferred stock (5% cumulative, $100 par) $ 80,000 Common stock ($10 par) 350,000 Paid-in capital in excess of par, common stock 75,000 Retained earnings 150,000 Total $655,000 The preferred stock dividends are 2 years in arrears. Any excess is attributable to equipment with a 6-year life, which is undervalued by $40,000, and to goodwill. Required: Prepare a determination and distribution of excess schedule for the investment in Sweet Company. ANS: D&D Schedule Entity Parent NCI Entity FV $ 700,000 $ 630,000 $ 70,000 Book value: Pd-In Capt C Stk 425,000 RE 150,000 Preferred Div arrears* (8,000) Book value: 567,000 510,300 56,700 Excess 133,000 $119,700 $ 13,300 Equipment 40,000 5 year life Goodwill $ 93,000 *$80,000 × 5% × 2 years = $8,000 DIF: M OBJ: 7-4 2. On January 1, 20X1, Company P purchased a 90% interest in Company S for $360,000. Company P prepared the following determination and distribution of excess schedule at that time: D&D Schedule Entity Parent NCI Entity FV $ 400,000 360,000 40,000 Book value: Pd-In Capt C Stk 200,000 RE 100,000 Book value: 300,000 270,000 30,000 Excess 100,000 90,000 10,000 Building 60,000 20 years 3,000 Goodwill 40,000 Total 100,000 Company S had income of $30,000 for 20X1 and $40,000 for 20X2. No dividends were paid. Company P sold its entire investment in Company S on January 1, 20X3, for $340,000. Required: Prepare Company P’s entries to record the sale assuming that Company P used the a. simple equity method to reflect its investment in Company S. b. cost method to reflect its investment in Company S. ANS: a. Parent journal entries assuming simple equity Retained Earnings--Company P 5,400 Investment in Company S 5,400 To adjust investment account and Company P Retained Earnings for the additional depreciation made on consolidated statement for 20X1 and 20X2 ($3,000 × 2 year × 90%). Cash 340,000 Loss on Disposal of Subsidiary 77,600 Investment in Company S 417,600 Calculation of Investment in Company S: Original Cost $360,000 Controlling Share of Subsidiary Income (90% × $70,000) 63,000 Less: Additional building depreciation (5,400) Investment in Company S $417,600 b. Parent journal entries assuming cost method Investment in Company S 57,600 Retained Earnings-- Company P 57,600 To record parent share of subsidiary income as shown on prior years' consolidated statements, less additional building depreciation ($63,000 $5,400). Cash 340,000 Loss on Disposal of Subsidiary 77,600 Investment in Company S 417,600 To record the sale of the 80% interest in Company S. DIF: E OBJ: 7-3 3. Company P Industries purchased a 70% interest in Company S on January 1, 20X1, and prepared the following determination and distribution of excess schedule: D&D Schedule Entity Parent NCI Entity FV $ 300,000 210,000 90,000 Book value: Pd-In Capt C Stk 200,000 RE 80,000 Book value: 280,000 196,000 84,000 Excess $ 20,000 14,000 6,000 Patent $ 20,000 20 years 1,000 Since the purchase, there have been the following intercompany transactions: (1) On January 1, 20X2, Company P sold a piece of equipment with a net book value of $40,000 to Company S for $50,000. The equipment had a five-year remaining life. (2) Each year, starting in 20X3, Company S has sold merchandise for resale to Company P at a gross profit of 20%. A summary of transactions shows the following: Ending Dollar Sales Inventory Year with Mark-up with Mark-up 20X3 $110,000 $30,000 20X4 $120,000 $40,000 20X5 $140,000 $60,000 (3) On January 1, 20X5, Company P purchased Company S's 8%, $100,000 face value bonds for $98,000, which were issued at par value. The bonds have five years to maturity. Required: Complete the following schedule to adjust the retained earnings of the noncontrolling and controlling interest on the December 31, 20X5, worksheet for a consolidated balance sheet only. Company P uses the simple equity method to account for its investment. Adjustment to RE of: Item Calculation NCI Controlling Patent Equipment Merchandise Bonds Total ANS: (DR) CR Adjustment to RE of: Item Calculation NCI Controlling Patent Distribute NCI’s share of excess 6,000 Patent $1,000 × 5 years to-date amortization (1,500) ( 3,500) Equipment $2,000 × 1 year (unearned gain) ( 2,000) Merchandise $60,000 × 20% split 30:70 (3,600) ( 8,400) Bonds $2,000 gain $400 amortization split 30:70 ( 480) ( 1,120) Total 3,984 (15,020) DIF: E OBJ: A1 Patrick & Solomon scenario: On January 1, 20X1, Patrick Company purchased 60% of the common stock of Solomon Company for $180,000. On this date, Solomon had common stock, other paid-in capital, and retained earnings of $20,000, $60,000, and $120,000 respectively. On January 1, 20X1, the only tangible asset of Solomon that was undervalued was land, which was worth $15,000 more than book value. On January 1, 20X2, Patrick Company purchased an additional 30% of the common stock of Solomon Company for $140,000. Net income and dividends for 2 years for Solomon Company were: 20X1 20X2 Net income for year $50,000 $80,000 Dividends, paid-in December 0 50,000 In the last quarter of 20X2, Solomon sold $80,000 of goods to Patrick, at a gross profit rate of 30%. On December 31, 20X2, $20,000 of these goods are in Patrick's ending inventory. 4. Refer to Patrick and Solomon. In both 20X1 and 20X2, Patrick has accounted for its investment in Solomon using the cost method. Required: a. Using the information above or on the separate worksheet, prepare necessary determination and distribution of excess schedules for the two purchases. b. Complete the Figure 7-2 worksheet for consolidated financial statements for 20X2. Figure 7-2 Trial Balance Eliminations and Patrick Solomon Adjustments Account Titles Company Company Debit Credit Inventory, December 31 80,000 50,000 Other Current Assets 135,000 0 Invest in Solomon Co. 320,000 Other Long-Term Investments 100,000 Land 70,000 50,000 Buildings and Equipment 300,000 220,000 Accumulated Depreciation (100,000) (60,000) Goodwill Current Liabilities (70,000) (30,000) Long-Term Liabilities (80,000) (50,000) Common Stock – P Co. (100,000) Other Pd-in Capt – P Co. (200,000) Retained Earnings – P Co. (250,000) Common Stock – S Co. (20,000) Other Pd-in Capt – S Co. (60,000) Retained Earnings – S Co. (170,000) Net Sales (520,000) (450,000) Cost of Goods Sold 300,000 270,000 Operating Expenses 120,000 100,000 Dividend Income (45,000) Div Declared – P Co 40,000 Div Declared – S Co 50,000 Consolidated Net Income To NCI To Controlling Interest Total NCI Controlling RE 12/31 0 0 (continued) Consol. Control. Consol. Income Retained Balance Account Titles Statement NCI Earnings Sheet Inventory, December 31 Other Current Assets Invest in Solomon Co. Other Long-Term Investments Land Buildings and Equipment Accumulated Depreciation Goodwill Current Liabilities Long-Term Liabilities Common Stock – P Co. Other Pd-in Capt – P Co. Retained Earnings – P Co. Common Stock – S Co. Other Pd-in Capt – S Co. Retained Earnings – S Co. Net Sales Cost of Goods Sold Operating Expenses Dividend Income Div Declared – P Co Div Declared – S Co Consolidated Net Income To NCI To Controlling Interest Total NCI Controlling RE 12/31 ANS: D&D schedule for first acquisition: Entity Parent NCI Entity FV 300,000 180,000 120,000 Book value: Pd-In Capt C Stk 80,000 RE 120,000 Book value: 200,000 120,000 80,000 Excess 100,000 60,000 40,000 Adjustments: Land 15,000 Goodwill 85,000 Total 100,000 Analysis of second acquisition: Price paid for additional block $ 140,000 Book value of NCI purchased: Pd-In Capt $ 80,000 R/E on 1/1/X2 170,000 $ 250,000 × 30% 75,000 Excess of cost over book 65,000 Excess attrib to NCI change: Original excess* 100,000 × 30% 30,000 Balance, adjust to Par addn’l pd-in capital $ 35,000 *excess is attributable to assets that are not subject to amortization b. For the worksheet solution, please refer to Answer 7-2. Answer 7-2 Trial Balance Eliminations and Patrick Solomon Adjustments Account Titles Company Company Debit Credit Inventory, December 31 80,000 50,000 EI 6,000 Other Current Assets 135,000 0 Invest in Solomon Co. 320,000 CV 30,000 EL 225,000 D1 60,000 D2 65,000 Other Long-Term Investments 100,000 Land 70,000 50,000 D1 15,000 Buildings and Equipment 300,000 220,000 Accumulated Depreciation (100,000) (60,000) Goodwill D1 85,000 Current Liabilities (70,000) (30,000) Long-Term Liabilities (80,000) (50,000) Common Stock – P Co. (100,000) Other Pd-in Capt – P Co. (200,000) Retained Earnings – P Co. (250,000) D2 35,000 CV 30,000 Common Stock – S Co. (20,000) EL 18,000 Other Pd-in Capt – S Co. (60,000) EL 54,000 Retained Earnings – S Co. (170,000) EL 153,000 D1 40,000 D2 30,000 Net Sales (520,000) (450,000) IS 80,000 Cost of Goods Sold 300,000 270,000 EI 6,000 IS 80,000 Operating Expenses 120,000 100,000 Dividend Income (45,000) CY 45,000 Div Declared – P Co 40,000 Div Declared – S Co 50,000 CY 45,000 Consolidated Net Income To NCI To Controlling Interest Total NCI Controlling RE 12/31 0 0 551,000 551,000 (continued) Consol. Control. Consol. Income Retained Balance Account Titles Statement NCI Earnings Sheet Inventory, December 31 124,000 Other Current Assets 135,000 Invest in Solomon Co. 0 Other Long-Term Investments 100,000 Land 135,000 Buildings and Equipment 520,000 Accumulated Depreciation (160,000) Goodwill 85,000 Current Liabilities (100,000) Long-Term Liabilities (130,000) Common Stock – P Co. (100,000) Other Pd-in Capt – P Co. (200,000) Retained Earnings – P Co. (245,000) Common Stock – S Co. (2,000) Other Pd-in Capt – S Co. (6,000) Retained Earnings – S Co. (27,000) Net Sales (890,000) Cost of Goods Sold 496,000 Operating Expenses 220,000 Dividend Income 0 Div Declared – P Co 40,000 Div Declared – S Co 5,000 Consolidated Net Income (174,000) To NCI 7,400 (7,400) To Controlling Interest 166,600 (166,600) Total NCI (37,400) (37,400) Controlling RE 12/31 (371,600) (371,600) 0 Eliminations and Adjustments: CV Convert to simple equity method as of January 1, 20X2 (60% of $50,000 increase in retained earnings from January 1, 20X1 to January 1, 20X2). CY Eliminate the current-year dividend income of Patrick against dividends declared by Solomon. EL Eliminate 90% of Solomon Company equity balances at the beginning of the year against the investment account. D1 Distribute the $100,000 excess cost as required by the determination and distribution of excess schedule. D2 Distribute the excess of cost over book value on the 1/1/X2 investment IS Eliminate the intercompany sale and purchase. EI Eliminate the $6,000 of gross profit in the ending inventory. Subsidiary Company Income Distribution Schedule Deferred profit in ending inventory 6,000 Internally generated net income 80,000 Adjusted income 74,000 NCI Share 10% NCI 7,400 Parent Company Income Distribution Schedule Internally generated net income 100,000 90% × Sub's adjusted income 66,600 Controlling interest 166,600 DIF: D OBJ: 7-2 5. Refer to Patrick and Solomon. In both 20X1 and 20X2, Patrick has accounted for its investment in Solomon using the simple equity method. Required: a. Using the information from the scenario or on the separate worksheet, prepare necessary determination and distribution of excess schedules for the two purchases. b. Complete the Figure 7-3 worksheet for consolidated financial statements for 20X2. Figure 7-3 Trial Balance Eliminations and Patrick Solomon Adjustments Account Titles Company Company Debit Credit Inventory, December 31 80,000 50,000 Other Current Assets 135,000 Invest in Solomon. Co 377,000 Other Long-Term Investments 100,000 Land 70,000 50,000 Buildings and Equipment 300,000 220,000 Accumulated Depreciation (100,000) (60,000) Goodwill Current Liabilities (70,000) (30,000) Long-Term Liabilities (80,000) (50,000) Common Stock – P Co. (100,000) Other Pd-in Capt – P Co. (200,000) Retained Earnings – P Co. (280,000) Common Stock – S Co. (20,000) Other Pd-in Capt – S C (60,000) Retained Earnings – S Co. (170,000) Net Sales (520,000) (450,000) Cost of Goods Sold 300,000 270,000 Operating Expenses 120,000 100,000 Subsidiary Income (72,000) Div Declared – P Co. 40,000 Div Declared – S Co. 50,000 Consolidated Net Income To NCI To Controlling Interest Total NCI Controlling RE 12/31 0 0 (continued) Consol. Control. Consol. Income Retained Balance Account Titles Statement NCI Earnings Sheet Inventory, December 31 Other Current Assets Invest in Solomon. Co Other Long-Term Investments Land Buildings and Equipment Accumulated Depreciation Goodwill Current Liabilities Long-Term Liabilities Common Stock – P Co. Other Pd-in Capt – P Co. Retained Earnings – P Co. Common Stock – S Co. Other Pd-in Capt – S C Retained Earnings – S Co. Net Sales Cost of Goods Sold Operating Expenses Subsidiary Income Div Declared – P Co. Div Declared – S Co. Consolidated Net Income To NCI To Controlling Interest Total NCI Controlling RE 12/31 ANS: D&D schedule for first acquisition: Entity Parent NCI Entity FV 300,000 180,000 120,000 Book value: Pd-In Capt C Stk 80,000 RE 120,000 Book value: 200,000 120,000 80,000 Excess 100,000 60,000 40,000 Adjustments: Land 15,000 Goodwill 85,000 Total 100,000 Analysis of second acquisition: Price paid for additional block $ 140,000 Book value of NCI purchased: Pd-In Capt $ 80,000 R/E on 1/1/X2 170,000 $ 250,000 × 30% 75,000 Excess of cost over book 65,000 Excess attrib to NCI change: Original excess* 100,000 × 30% 30,000 Balance, adjust to Par addn’l pd-in capital $ 35,000 *excess is attributable to assets that are not subject to amortization b. For the worksheet solution, please refer to Answer 7-3. Answer 7-3 Trial Balance Eliminations and Patrick Solomon Adjustments Account Titles Company Company Debit Credit Inventory, December 31 80,000 50,000 EI 6,000 Other Current Assets 135,000 Invest in Solomon. Co 377,000 CY 27,000 EL 225,000 D1 60,000 D2 65,000 Other Long-Term Investments 100,000 Land 70,000 50,000 D1 15,000 Buildings and Equipment 300,000 220,000 Accumulated Depreciation (100,000) (60,000) Goodwill D1 85,000 Current Liabilities (70,000) (30,000) Long-Term Liabilities (80,000) (50,000) Common Stock – P Co. (100,000) Other Pd-in Capt – P Co. (200,000) Retained Earnings – P Co. (280,000) D2 35,000 Common Stock – S Co. (20,000) EL 18,000 Other Pd-in Capt – S C (60,000) EL 54,000 Retained Earnings – S Co. (170,000) EL 153,000 D1 40,000 D2 30,000 Net Sales (520,000) (450,000) IS 80,000 Cost of Goods Sold 300,000 270,000 EI 6,000 IS 80,000 Operating Expenses 120,000 100,000 Subsidiary Income (72,000) CY 72,000 Div Declared – P Co. 40,000 Div Declared – S Co. 50,000 CY 45,000 Consolidated Net Income To NCI To Controlling Interest Total NCI Controlling RE 12/31 0 0 548,000 548,000 (continued) Consol. Control. Consol. Income Retained Balance Account Titles Statement NCI Earnings Sheet Inventory, December 31 124,000 Other Current Assets 135,000 Invest in Solomon. Co 0 Other Long-Term Investments 100,000 Land 135,000 Buildings and Equipment 520,000 Accumulated Depreciation (160,000) Goodwill 85,000 Current Liabilities (100,000) Long-Term Liabilities (130,000) Common Stock – P Co. (100,000) Other Pd-in Capt – P Co. (200,000) Retained Earnings – P Co. (245,000) Common Stock – S Co. (2,000) Other Pd-in Capt – S C (6,000) Retained Earnings – S Co. (27,000) Net Sales (890,000) Cost of Goods Sold 496,000 Operating Expenses 220,000 Subsidiary Income 0 Div Declared – P Co. 40,000 Div Declared – S Co. 5,000 Consolidated Net Income (174,000) To NCI 7,400 (7,400) To Controlling Interest 166,600 (166,600) Total NCI (37,400) (37,400) Controlling RE 12/31 (371,600) (371,600) 0 Eliminations and Adjustments: CY Eliminate the current-year entries made for investment income and dividends EL Eliminate 90% of Solomon Company equity balances at the beginning of the year against the investment account. D1 Distribute the $100,000 excess cost as required by the determination and distribution of excess schedule. D2 Distribute the excess of cost over book value on the 1/1/X2 investment IS Eliminate the intercompany sale and purchase. EI Eliminate the $6,000 of gross profit in the ending inventory. Subsidiary Company Income Distribution Schedule Deferred profit in ending inventory 6,000 Internally generated net income 80,000 Adjusted income 74,000 NCI Share 10% NCI 7,400 Parent Company Income Distribution Schedule Internally generated net income 100,000 90% × Sub's adjusted income 66,600 Controlling interest 166,600 DIF: D OBJ: 7-2 Poplar & Sequoia scenario: On January 1, 20X1, Poplar Company acquired 80% of the common stock of Sequoia Company for $400,000. On this date, Sequoia had total owners' equity of $400,000. The excess of cost over book value was due to a patent with remaining life of 10 years. Poplar adopted the simple equity method to account for its investment in Sequoia. Sequoia’s income for the three years 20X1 through 20X3 is $80,000, $60,000, and $100,000 respectively. All income is earned evenly throughout the year; Sub has paid no dividends. On July 1, 20X3, Poplar Company sold 10% of the total stock of Sequoia for $70,000, reducing its investment percentage to 70%. 6. Refer to Poplar and Sequoia. Prepare Poplar’s general journal entries for 20X3. ANS: 7/1/X3: Retained Earnings-Poplar 2,000 Investment in Sequoia 2,000 record 10% of the $10,000 amortization for X1 and X2 2 years @ $10,000 × 10% = $2,000 Investment in Sequoia 4,500 Investment Revenue (or Sub Income) 4,500 recognize sophisticated equity income on 10% ($100,000 - $10,000) × 1/2 year × 10% = $4,500 Cash 70,000 Investment in Sequoia 66,500 Paid-in Capital in Excess of Par-Poplar 3,500 record sale of 10% interest in subsidiary ($512,000 × 1/8) - 2,000 + 4,500 = $66,500 12/31/X3: Investment in Sequoia 70,000 Investment Revenue (or Sub Income) 70,000 recognize simple equity method income for the year $100,000 × 70% interest of parent at year-end DIF: M OBJ: 7-3 7. On January 1, 20X1, Pepper Company purchased 90% of the common stock of Salt Company for $360,000 when Salt had total shareholders' equity as follows: 8% Preferred Stock, $100 par $100,000 Common Stock, $10 par 50,000 Other Paid-in Capital 120,000 Retained Earnings 180,000 Total $450,000 Any excess of cost over book value on this date is attributed to a patent, to be amortized over 10 years. The 8% preferred stock is cumulative, non-participating, and has a liquidating value of par plus dividends in arrears. There were no preferred dividends in arrears on January 1, 20X1. Pepper elected to account for its investment in Salt using the simple equity method. During 20X1, Salt had a net loss of $10,000 and paid no dividends. In 20X2, Salt had net income of $100,000 and paid dividends totaling $36,000. During 20X2, Salt sold merchandise to Pepper for $40,000, of which $20,000 is still held by Pepper on December 31, 20X2. Salt's usual gross profit is 40%. Required: Complete the Figure 7-8 worksheet for consolidated financial statements for the year ended December 31, 20X2. Figure 7-8 Trial Balance Eliminations and Pepper Salt Adjustments Account Titles Company Company Debit Credit Inventory 60,000 40,000 Other Current Assets 154,200 174,000 Invest in Salt Company 408,600 Land 120,000 80,000 Buildings and Equipment 450,000 370,000 Accumulated Depreciation (200,000) (80,000) Current Liabilities (80,000) (60,000) Long-Term Liabilities (100,000) (20,000) Common Stock – P Co. (200,000) Other Pd-in Capt – P Co. (100,000) Retained Earnings – P Co. (400,000) Preferred Stk, 8% – S Co. (100,000) RE to Pref Stk – S Co. Common Stock – S Co. (50,000) Other Pd-In Capt – S Co. (120,000) Retained Earnings – S Co. (170,000) Net Sales (500,000) (450,000) Cost of Goods Sold 300,000 270,000 Operating Expenses 120,000 80,000 Investment Income (82,800) Div. Declared – P Co. 50,000 Div. on Pref Stk – S Co 16,000 Div. on Comm Stk – S Co. 20,000 Consolidated Net Income Allocated to: NCI-Preferred NCI-Common Controlling Interest Total NCI Controlling RE 12/31 0 0 (continued) Consol. Control. Consol. Income Retained Balance Account Titles Statement NCI Earnings Sheet Inventory Other Current Assets Invest in Salt Company Land Buildings and Equipment Accumulated Depreciation Current Liabilities Long-Term Liabilities Common Stock – P Co. Other Pd-in Capt – P Co. Retained Earnings – P Co. Preferred Stk, 8% – S Co. RE to Pref Stk – S Co. Common Stock – S Co. Other Pd-In Capt – S Co. Retained Earnings – S Co. Net Sales Cost of Goods Sold Operating Expenses Investment Income Div. Declared – P Co. Div. on Pref Stk – S Co Div. on Comm Stk – S Co. Consolidated Net Income Allocated to: NCI-Preferred NCI-Common Controlling Interest Total NCI Controlling RE 12/31 ANS: For the worksheet solution, please refer to Answer 7-8. Answer 7-8 Trial Balance Eliminations and Pepper Salt Adjustments Account Titles Company Company Debit Credit Inventory 60,000 40,000 EI 8,000 Other Current Assets 154,200 174,000 Invest in Salt Company 408,600 CY 64,800 EL 298,800 D 45,000 Land 120,000 80,000 Buildings and Equipment 450,000 370,000 Accumulated Depreciation (200,000) (80,000) Patent D 50,000 A 10,000 Current Liabilities (80,000) (60,000) Long-Term Liabilities (100,000) (20,000) Common Stock – P Co. (200,000) Other Pd-in Capt – P Co. (100,000) Retained Earnings – P Co. (400,000) A 4,500 Preferred Stk, 8% – S Co. (100,000) RE to Pref Stk – S Co. PS 8,000 Common Stock – S Co. (50,000) EL 45,000 Other Pd-In Capt – S Co.