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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.
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.
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.
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.
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.
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.
35. Discuss the merits of accounting for subsidiaries using the:
1) Simple equity method
2) Sophisticated equity method
3) Cost method.
