36. On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for
$300,000. Any excess of cost over book value on this date is attributed to a patent, to be amortized over 10
years.
On this date, Subsidiary 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
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.
During 20X1, Subsidiary had a net loss of $10,000 and paid no dividends. In 20X2, Subsidiary had net income of $20,000, but paid no dividends. In
20X3, Subsidiary had net income of $100,000 and paid dividends, on preferred and common, totaling $50,000.
On January 1, 20X2, Parent purchased $50,000 par value of Subsidiary’s preferred stock for $52,000. At year end, the preferred is still held as an
investment.
Required:
a.) Prepare Parent’s journal entries for its investment in the subsidiary’s preferred stock for 20X2 and 20X3.
b.) Calculate the increase in equity resulting from the retirement of preferred stock.
c.) Prepare the entries needed to eliminate the parent’s investment in the subsidiary’s preferred stock for the 20X3 consolidated worksheet.
Investment in Subsidiary Preferred Stock
52,000
Cash
Investment in Subsidiary Preferred Stock
4,000
Subsidiary Income
Investment in Subsidiary Preferred Stock
4,000
Subsidiary Income
Price paid
$52,000
Preferred stock at par
$100,000
108,000
x 50%
54,000
Increase in equity
$ 2,000
37. 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 Fair Value
$ 300,000
210,000
90,000
Book value:
Paid-In Capital – Common
200,000
Retained Earnings
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
Patent
Equipment
Merchandise
Bonds
Total
38. On January 1, 20X1, Parent Company acquired 90% of the common stock of Subsidiary Company for
$360,000. On this date, Subsidiary had total owners’ equity of $270,000, including retained earnings of
$100,000.
On January 1, 20X1, any excess of cost over book value is attributable to the undervaluation of land, building,
and goodwill. Land is worth $20,000 more than cost. Building is worth $60,000 more than book value. It has a
remaining useful life of 6 years and is depreciated using the straight-line method.
During 20X1, Parent has accounted for its investment in Subsidiary using the cost method.
During 20X1, Subsidiary sold merchandise to Parent for $70,000, of which $20,000 is held by Parent on
December 31, 20X1. Subsidiary’s usual gross profit on affiliated sales is 50%.
On December 31, 20X1, Parent still owes Subsidiary $5,000 for merchandise acquired in December.
On July 1, 20X1, Parent sold to Subsidiary some equipment with a cost of $40,000 and a book value of
$18,000. The sales price was $30,000. Subsidiary is depreciating the equipment over a 4-year life, assuming no
salvage value and using the straight-line method.
Required:
Prepare a determination and distribution of excess schedule. Next, complete the Figure 7-11 worksheet for a
consolidated balance sheet as of December 31, 20X1.
Figure 7-11
Balance Sheet
Eliminations and
Parent
Sub.
Adjustme
nts
Account Titles
Company
Company
Debit
Credit
Assets:
Accounts Receivable
60,000
50,000
Inventory
110,000
90,000
Other Current Assets
87,000
160,000
Invest in Sub. Company
360,000
Land
100,000
30,000
Buildings and Equipment
400,000
280,000
Accumulated Depreciation
(200,000)
(100,000)
Total
917,000
510,000
Liabilities and Equity:
Accounts Payable
91,000
50,000
Other Current Liabilities
86,000
100,000
Long-Term Liabilities
150,000
50,000
Common Stock – P Co.
100,000
Other Pd-In Capt – P Co.
150,000
Retained Earnings – P Co.
340,000
Common Stock – S Co.
50,000
Other Pd-In Capt – S Co.
120,000
Retained Earnings – S Co.
140,000
NCI to Consol Bal Sheet
Total
917,000
510,000
(continued)
Consolidated
Balance Sheet
Account Titles
NCI
Debit
Credit
Assets:
Accounts Receivable
Inventory
Other Current Assets
Invest in Sub. Company
Land
Buildings and Equipment
Accumulated Depreciation
Total
Liabilities and Equity:
Accounts Payable
Other 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.
NCI to Consol Bal Sheet
Total
Determination and Distribution of Excess Schedule:
90%
10%
Entity
Parent
NCI
Entity Fair Value
$ 400,000
$ 360,000
$ 40,000
Book value:
170,000
100,000
Book value:
$ 270,000
243,000
27,000
Excess
$ 130,000
$ 117,000
$ 13,000
Adjustments:
Land
$ 20,000
Building
60,000
6 yrs
10,000
Goodwill
50,000
Total
$ 130,000
39. It is common for a parent firm to record its investment in a subsidiary under either the cost or simple equity
method to expedite the elimination process. This does create some complications, however, when all or a
portion of the investment is sold. Assume that in each of the following cases, the parent sells its investment
midway through its fiscal year.
(1)
The parent owned an 80% interest and sold all of its holdings.
(2)
The parent owned an 80% interest and sold a 20% interest to reduce its ownership percentage to 60%.
(3)
The parent owned an 80% interest and sold a 60% interest to reduce its ownership percentage to 20%.
Required:
a.
For each of the above cases, comment on the procedures necessary to record the sale, where the investment is carried under simple equity,
and the impact on consolidated income of the sale.
b.
For each of the above cases, state the added procedures that would be necessary if the investment was recorded under the cost method.
adjust retained earnings for prior years’ amortization, which, in the past, were made on the consolidated worksheet. The gain or loss on
for as it would under the simple equity method.
the simple equity method for both the prior periods and the current partial period.
will be shown in the “other gains and losses” section of the income statement. There will no longer be a consolidation, and the 20%
40. A subsidiary company may have preferred stock as part of its equity structure. Further, suppose that the
preferred stock is cumulative and in arrears on dividends.
Required:
a.
What is the impact of the preferred stock on the excess of cost over book value on the original controlling investment in common stock?
b.
What is the impact of the preferred stock on the annual distribution of income?
c.
What is the theory followed in consolidated reporting when the parent purchases a portion of the subsidiary’s preferred stock?
below book value or as a reduction of previous paid-in from retirement or retained earnings if the price paid exceeds book value.