Chapter 7—Special Issues in Accounting for an Investment in a
Subsidiary Key
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
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
3. Control of a subsidiary was achieved with the initial investment in subsidiary stock. When a subsequent
block of subsidiary’s stock is purchased
4. Which of the following statements is incorrect regarding a parent’s purchase of additional subsidiary
shares?
5. 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. As part of the
consolidation process, the excess of the price paid over book on the new block of shares is treated as
6. 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. The excess of cost
over book on the new block of stock is ____.
7. 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. The goodwill
balance on the December 31, 20X4, balance sheet is ____.
8. 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
9. In the year a parent sells its entire subsidiary investment, the results of subsidiary operations prior to the sale
date are
10. If the sale of an investment in a subsidiary is deemed to be a disposal of a component of the entity, the
appropriate accounting treatments for the results its operations for the period and the gain or loss on the sale are:
Results of Operations for the Period Gain or Loss on the Sale
11. 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. The entire
investment was sold for $300,000 on January 1, 20X6. The gain was ____.
12. When selling an investment in a subsidiary, in order to record the appropriate gain or loss:
13. 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. During the first 6
months of 20X6, $25,000 was earned by Sparrow. The entire investment was sold for $300,000 on July 1, 20X6. The gain (loss) was ____.
14. 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 goodwill. On January 1, 20X6, the retained earnings of Sparrow was $175,000. The entire investment was sold for
$300,000 on January 1, 20X6. At that date, Partridge had on hand inventory it had purchased from Sparrow for $50,000. Sparrow has a gross profit
percentage of 40%. The gain (loss) was ____.
15. 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.The NCI share of 20X4 consolidated income is
16. 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
17. 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
18. 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 capital 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.
The preferred stock is one year in arrears on January 1, 20X4. The goodwill that will appear on the consolidated balance sheet prepared on January 1,
20X4, is ____.
19. 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.
The preferred stock is two years in arrears on January 1, 20X4. The noncontrolling interest share of 20X4 net income was ____.
20. 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.
The preferred stock is two years in arrears on January 1, 20X4. The controlling interest’s share of Seed’s 20X4 net income is ____.
21. Pepin Company owns 75% of Savin Corp. Savin;s net income in the current year was $60,000. Savin also
has 10,000 shares of 4% cumulative preferred $10 par value stock outstanding. When Pepin purchased Savin,
the excess purchase price of $50,000 was attributable to a patent having a life of 10 years. How much income
is attributable to the controlling interest?
22. Which of the following is not true of an investor’s investment in the preferred stock of an investee?
23. 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
24. When preparing a consolidated balance sheet worksheet when the investment account is maintained under
the simple equity method:
25. 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
26. 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
27. 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?
28. 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. 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.
Entity
Parent
NCI
Entity Fair Value
300,000
180,000
120,000
Book value:
Paid-In Capital – Common
80,000
Retained Earnings
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
Price paid for additional block
$ 140,000
Book value of NCI purchased:
Paid-In Capital
$ 80,000
Retained Earnings on 1/1/X2
170,000
$ 250,000
´ 30%
75,000
Excess of cost over book
65,000
Excess attributable to NCI change:
Original excess*
100,000
´ 30%
30,000
Balance, adjust to Parent paid-in capital in
excess of par
$ 35,000
29. 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. 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 7-2 worksheet for consolidated financial statements for 20X2.
Figure 7-2
Trial Balance
Eliminations and
Patrick
Solomon
Adjustment
s
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)
Pd-in Cap in Exc – 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.
Pd-in Cap in Exc – 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
Entity
Parent
NCI
Entity Fair Value
300,000
180,000
120,000
Book value:
Paid-In Capital – Common
80,000
Retained Earnings
120,000
Book value:
200,000
120,000
80,000
Excess
100,000
60,000
40,000
Adjustments:
Land
15,000
Goodwill
85,000
30. 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 Fair Value
$ 400,000
360,000
40,000
Book value:
Paid-In Capital – Common
200,000
Retained Earnings
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.
Investment in Company S
5,400
Investment in Company S
417,600
Calculation of Investment in Company S:
Controlling Share of Subsidiary Income
Less: Additional building depreciation
(5,400)
Retained Earnings— Company P
57,600
Loss on Disposal of Subsidiary
77,600
31. 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 5-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.
Entity
Parent
NCI
Entity Fair Value
$ 700,000
$ 630,000
$ 70,000
Book value:
Paid-In Capital – Common
425,000
Retained Earnings
150,000
Preferred Dividend 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
32. 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%. Prepare Poplar’s general journal entries for 20X3.
33. 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 50% of the total stock of Sequoia for $400,000, reducing its investment
percentage to 30%. Prepare Poplar’s general journal entries for 20X3.