28. 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.
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.
Investment in Subsidiary
n/a
(1) 32,000
R/E-Parent
n/a
32,000
Dividend Income
(2) 8,000
(3) 16,000
Dividends Declared-Sub
8,000
16,000
12/31/X1
12/31/X2
Subsidiary Income
(4) 40,000
(5) 72,000
Investment in Subsidiary
40,000
72,000
Investment in Subsidiary
(2) 8,000
(3) 16,000
Dividends Declared-Sub
8,000
16,000
29. 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.
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.
CY1
Subsidiary Income ($50,000 x 80%)
40,000
Investment in Subsidiary
40,000
CY2
Investment in Subsidiary ($10,000 x 80%)
8,000
Dividends Declared-Subsidiary
8,000
Common stock-Sub ($40,000 x 80%)
32,000
Paid in capital in excess of par-Sub ($120,000 x 80%)
96,000
Retained earnings-Sub ($190,000 x 80%)
152,000
Investment in Subsidiary
280,000
D
Cost of Goods Sold
5,000
Building
15,000
Goodwill
25,000
Investment in Subsidiary ($45,000 x 80%)
36,000
Retained earnings-Sub (NCI) ($45,000 x 20%)
9,000
A
Depreciation expense ($15,000 / 8 years)
1,875
Accumulated depreciation-building
1,875
30. 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.
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.
CY1
Subsidiary Income ($90,000 x 80%)
72,000
Investment in Subsidiary
72,000
CY2
Investment in Subsidiary ($20,000 x 80%)
16,000
Dividends Declared-Sub
16,000
Common stock-Sub ($40,000 x 80%)
32,000
Paid in capital in excess of par-Sub ($120,000 x 80%)
96,000
Investment in Subsidiary
312,000
D
Retained earnings-Sub (20% inventory)
1,000
Retained earnings-Parent (80% inventory)
4,000
Building
15,000
Goodwill
25,000
Investment in Subsidiary
36,000
Retained earnings-Sub (NCI)
9,000
A
Depreciation Exp ($15,000 / 8 years)
1,875
Retained earnings-Sub
375
Retained earnings-Parent
1,500
Accumulated depreciation-building (2 yrs)
3,750
31. Refer to the information below and Worksheet 3-1.
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.
Required:
a. Complete the consolidating worksheet for December 31, 20X2.
b. Prepare supportive Income Distribution Schedules for Subsidiary and Parent.
32. 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.
Company Implied Fair Value
Parent Price
NCI Value
Fair value of subsidiary
$750,000
$600,000
$150,000
Less book value:
Common stock
50,000
Paid in capital in excess of par
150,000
Retained earnings
300,000
Total equity
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
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
33. 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.
D
Inventory
20,000
Building
50,000
Equipment
40,000
Goodwill
140,000
Investment in Subsidiary (80%)
200,000
Retained earnings-Sub (NCI) (20%)
50,000
D
Cost of Goods Sold
20,000
Building
50,000
Equipment
40,000
Goodwill
140,000
Investment in Subsidiary (80%)
200,000
Retained earnings-Sub (NCI) (20%)
50,000
A
Depreciation expense
5,000
Accumulated depreciation-Building
5,000
Depreciation expense
8,000
Accumulated depreciation-Equipment
8,000
D
Retained earnings-Parent (80% inventory)
16,000
Retained earnings-Sub (20% inventory)
4,000
Building
50,000
Equipment
40,000
Goodwill
140,000
Investment in Subsidiary (80%)
200,000
Retained earnings-Sub (NCI) (20%)
50,000
A
Depreciation expense
5,000
Depreciation expense
8,000
Retained earnings-Parent
20,800
Retained earnings-Sub (NCI)
5,200
Accumulated depreciation-Building (3 years)
15,000
Accumulated depreciation-Equipment (3 years)
24,000
34. 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
Accounts Receivable
150,000
Bonds Payable
100,000
Inventory
100,000
Common Stock ($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.
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) ´ (1 – 30%)]
Company Implied Fair Value
Parent Price
Fair value of subsidiary
$450,000
$450,000
Less book value:
Common Stock
100,000
Paid in capital in excess of par
–
Retained earnings
250,000
Total equity
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
Deferred tax liability (20,000 x 30%)
(6,000)
1
Depreciable assets
40,000
10
4,000
Deferred tax liability (40,000 x 30%)
(12,000)
10
(1,200)
Goodwill
58,000
Total
$100,000
35. Discuss the merits of accounting for subsidiaries using the:
1) Simple equity method
2) Sophisticated equity method
3) Cost method.