1314F – Merger & Acquisition: Accounting & Auditing Impact
1. On January 1, 2011, Panel Company acquired 90% of the common stock of Singapore Company
for $650,000. At that time, Singapore had common stock ($5 par) of $500,000 and retained
earnings of $200,000.
On January 1, 2013, Singapore issued 20,000 shares of its unissued common stock, with a market
value of $7 per share, to noncontrolling stockholders. Singapore’s retained earnings balance on
this date was $300,000. Any difference between cost and book value relates to Singapore’s land.
No dividends were declared in 2013.
Required:
A. Prepare the entry on Panel’s books to record the effect of the issuance assuming the cost
method.
B. Prepare the elimination entries for the preparation of a consolidated statements workpaper on
December 31, 2013 assuming the cost method.
Jawab :
A. Loss from Subsidiary Issuance of Shares 15,000*
Investment in Singapore Company 15,000*
Patel Company’s share of Singapore Company’s
Equity before the new issue
(0.90 × 800,000) $720,000
Patel Company’s share of Singapore Company’s
equityafter the new issue
0.75 × (800,000 + 140,000) 705,000
Decrease in Patel Company’s interest $ 15,000
B. Investment in Singapore Company
(300,000 – 200,000) × 0.90 90,000
1/1 Retained Eanings—Patel 90,000
Common Stock 600,000
Other Contributed Capital 40,000
Retained Earnings 300,000
Difference Between Implied and Book Value 20,000
Investment in Singapore Company
(650,000 – 15,000 + 90,000) 725,000
Noncontrolling Interest in Equity 235,000
Land 20,000
Difference Between Implied and Book Value 20,000
2. Pratt Company purchased 40,000 shares of Silas Company’s common stock for $860,000 on
January 1, 2013. At that time Silas Company had $500,000 of $10 par value common stock and
$300,000 of retained earnings. Silas Company’s income earned and increase in retained earnings
during 2013 and 2014 were:
2013 2014
Income earned $260,000 $360,000
Increase in Retained Earnings 200,000 300,000
Silas Company income is earned evenly throughout the year.
On September 1, 2014, Pratt Company sold on the open market, 12,000 shares of its Silas
Company stock for $460,000. Any difference between cost and book value relates to Silas
Company land. Pratt Company uses the cost method to account for its investment in Silas
Company.
Required:
A. Compute Pratt Company’s reported gain (loss) on the sale.
B. Prepare all consolidated statements workpaper eliminating entries for a workpaper on
December 31, 2014.
Jawab :
A. Selling Price $460,000
Carrying value sold ($860,000 x 12,000/40,000) $258,000
Gain on sale of investment $202,000
B. Dr) Investment in Silas Company ($200,000 x 0.56) $112,000
Cr) 1/1 Retained Earnings – Pratt Company $112,000
Dr) Gain on Sale of investment $48,000
Cr) 1/1 Retained Earnings – Pratt Company $48,000
($200,000 x 0.8 x 12/40)
