Chapter 8—Subsidiary Equity Transactions, Indirect Subsidiary
Ownership, and Subsidiary Ownership of Parent Shares Key
1. A parent company owns a 100% interest in a subsidiary. Recently, the subsidiary paid a 10% stock dividend.
The dividend should be recorded on the books of the parent
2. Company P purchased a 80% interest in the Company S on January 1, 20X1, for $600,000. Any excess of
cost is attributed to the Company’s building with a 20-year life. The equity balances of Company S are as
follows:
January 1, 20X1
December 31, 20X4
Common stock, $10 par
$100,000
$140,000
Other paid-in capital
200,000
280,000
Retained earnings
250,000
450,000
The only change in paid-in capital is a result of a 40% stock dividend paid in 20X3. The cost to simple equity conversion to bring the investment
account to its December 31, 20X4, balance is ____.
3. When the parent purchases some newly issued shares of a subsidiary, any adjustments resulting from the
subsidiary stock sales should be made
4. On January 1, 20X1, Paris Ltd. paid $600,000 for its 75% interest in the Scott Company when Scott had total
equity of $550,000. Any excess of cost over book value was attributed to equipment with a 10-year life. On
January 1, 20X3, Scott Company had the following stockholders’ equity:
Common stock, $10 par
$100,000
Other paid-in capital
200,000
Retained earnings
350,000
On January 2, 20X3, Scott Company sold 2,500 additional shares of stock for $90 each in a private offering to noncontrolling shareholders. As a
result of this sale, which of the following changes would appear in the 20X3 consolidated statements?
5. On January 1, 20X1, Paris Ltd. paid $600,000 for its 75% interest in the Scott Company when Scott had total
equity of $550,000. Any excess of cost over book value was attributed to equipment with a 10-year life. On
January 1, 20X3, Scott Company had the following stockholders’ equity:
Common stock, $10 par
$100,000
Other paid-in capital
200,000
Retained earnings
350,000
On January 2, 20X3, Scott Company sold 2,500 additional shares of stock for $60 each in a private offering to noncontrolling shareholders. As a
result of this sale, which of the following changes would appear in the 20X3 consolidated statements?
6. When a parent purchases a portion of the newly issued stock of its subsidiary and the parent’s percentage of
ownership interest remains the same,
7. Company P owns 80% of the 10,000 outstanding common stock of Company S. If Company S issues 2,500
added shares of common stock, and Company P purchases some of the newly issued shares, which of the
following statements is true?
8. When a parent purchases a portion of the newly issued stock of its subsidiary and the ownership interest
increases,
9. On January 1, 20X1, Paul, Inc. acquired a 90% interest in Stephan Company. The $45,000 excess of purchase
price (parent’s share only) was attributable to goodwill. On January 1, 20X3, Stephan Company had the
following stockholders’ equity:
Common stock, $10 par
$100,000
Other paid-in capital
200,000
Retained earnings
300,000
On January 2, 20X3, Stephan sold 2,000 additional shares in a private offering. Stephan issued the new shares for $80 per share; Paul, Inc. purchased
all the shares. What is the journal entry that Paul will prepare to record this investment?
10. When a parent purchases a portion of the newly issued stock of its subsidiary in a private offering and the
ownership interest decreases,
11. On January 1, 20X1, Paul, Inc. acquired a 90% interest in Stephan Company. The $45,000 excess of
purchase price (parent’s share only) was attributable to goodwill. On January 1, 20X3, Stephan Company had
the following stockholders’ equity:
Common stock, $10 par
$100,000
Other paid-in capital
200,000
Retained earnings
300,000
On January 2, 20X3, Stephan sold 2,000 additional shares in a private offering. Stephan issued the new shares for $70 per share; Paul, Inc.
purchased 600 of the shares. As a result of this sale, there is a(n)
12. Pepper Company owns 60,000 of Salt Company’s 100,000 outstanding shares. This year, Salt purchased
20,000 of its outstanding shares from the NCI for $70,000. Pepper’s interest after the treasury stock purchase
is:
13. Pepper Company owned 60,000 of Salt Company’s 100,000 outstanding shares. On January 2, 20X3, Salt
purchased 20,000 of its outstanding shares from the NCI for $70,000. Pepper purchased its shares on January
1, 20X1, at which time the fair value of Salt exceeded its book value by $50,000. This difference was due to
machinery that was undervalued and had a remaining life of 5 years. On December 31, 20X2, Salt Company
had the following stockholders’ equity:
Common stock, $1 par
$100,000
Paid-in capital in excess of par
50,000
Retained earnings
270,000
Assuming Pepper uses the equity method to account for its investment in Salt, the adjustment to the Pepper’s books would include:
14. Pepper Company owned 60,000 of Salt Company’s 100,000 outstanding shares. On January 2, 20X3, Salt
purchased 20,000 of its outstanding shares from the NCI for $70,000. Pepper purchased its shares on January
1, 20X1, at which time the fair value of Salt exceeded its book value by $50,000. This difference was due to
machinery that was undervalued and had a remaining life of 5 years. On December 31, 20X2, Salt Company
had the following stockholders’ equity:
Common stock, $1 par
$100,000
Paid-in capital in excess of par
50,000
Retained earnings
270,000
The amount of the adjustment to Pepper’s equity would be a:
15. Consolidated statements for X, Y, and Z are proper if
16. Apple Inc. owns a 90% interest in Banana Company. Banana Company, in turn, owns a 80% interest in
Carrot Company. During 20X4, Carrot Company sold $50,000 of merchandise to Apple Inc. at a gross profit of
20%. Of this merchandise, $10,000 was still unsold by Apple Inc. at year end. The adjustment to the controlling
interest in consolidated net income for 20X4 is ____.
17. Apple Inc. purchased a 70% interest in the Banana Company for $490,000 on January 1, 20X3, when
Banana Company had the following stockholders’ equity:
Common stock, $10 par
$100,000
Paid-in capital in excess of par
250,000
Retained earnings
150,000
At the time of Apple’s purchase, Banana Company was an 80% owner of the Carrot Company. Also on that date, Carrot Company has a machine that
has a market value in excess of book value of $20,000. There is no difference between book and market value for any Banana Company assets. The
goodwill that would result from this purchase is ____.
18. Able Company owns an 80% interest in Barns Company and a 20% interest in Carns Company. Barns owns
a 40% interest in Carns Company.
19. Able Company owns an 80% interest in Barns Company and a 20% interest in Carns Company. Barns owns
a 40% interest in Carns Company. The reported income of Carns is $20,000 for 20X4. Which of the following
shows how it will be distributed?
Barns Carns
Controlling Non- Non-
Interest Controlling Controlling
20. Which of the following situations is viewed as the parent having treasury stock?
21. When a subsidiary owns shares of the parent, the subsidiary’s investment account
22. When a subsidiary purchases shares of the parent, on a consolidated basis:
23. Plum Inc. acquired 90% of the capital stock of Sterling Co. on 1/1/X1 at a cost of $540,000. On this date
Sterling had equipment (10-year life) carried at $200,000 under market and total equity amounting to $350,000.
On 1/1/X1 Sterling acquired 5% (10,000 shares) of Plum’s outstanding common stock for $3 per share.
Internally generated net income was $50,000 for Plum and $40,000 for Sterling.
Consolidated net income for 20X2 is
24. Plum Inc. acquired 90% of the capital stock of Sterling Co. on 1/1/X1 at a cost of $540,000. On this date
Sterling had equipment (10-year life) carried at $200,000 under market and total equity amounting to $350,000.
On 1/1/X1 Sterling acquired 5% (10,000 shares) of Plum’s outstanding common stock for $3 per share.
Internally generated net income was $50,000 for Plum and $40,000 for Sterling. The noncontrolling interest in
consolidated net income is
25. Company P had 300,000 shares of common stock outstanding. It owned 80% of the outstanding common
stock of S. S owned 20,000 shares of P common stock. In the consolidated balance sheet, Company P’s
outstanding common stock may be shown as
26. A owns 80% of B and 20% of C. B owns 32% of C, and C owns 10% of A. Which interest will be
considered NCI in the consolidated balance sheet?
27. Manke Company owns a 90% interest in Neske Company. Neske, in turn, owns a 10% interest in Manke.
Neske has 10,000 common stock shares outstanding, and Manke has 20,000 common stock shares outstanding.
How many shares would each firm show as outstanding in the consolidated balance sheet, under the treasury
stock method?
28. On January 1, 20X1, Prism Company purchased 7,500 shares of the common stock of Sight Company for
$495,000. On this date, Sight had 20,000 shares of $10 par common stock authorized, 10,000 shares issued and
outstanding. Other paid-in capital and retained earnings were $200,000 and $300,000 respectively. On January
1, 20X1, any excess of cost over book value is due to a patent, to be amortized over 15 years.
Sight’s net income and dividends for two years were:
20X1
20X2
$50,000
$80,000
10,000
20,000
In November 20X1, Sight Company declared a 10% stock dividend at a time when the market price of its common stock was $50 per share. The
stock dividend was distributed on December 31, 20X1.
For both 20X1 and 20X2, Prism Company has accounted for its investment in Sight Company using the simple equity method.
During 20X1, Sight Company sold goods to Prism Company for $40,000, of which $10,000 was on hand on December 31, 20X1. During 20X2,
Sight sold goods to Prism for $60,000 of which $15,000 was on hand on December 31, 20X2. Sight’s gross profit on intercompany sales is 40%.
Required:
Complete the Figure 8-1 worksheet for consolidated financial statements for 20X2.
Figure 8-1
Trial Balance
Eliminations and
Prism
Sight
Adjustment
s
Account Titles
Company
Company
Debit
Credit
Inventory, December 31
100,000
52,000
Other Current Assets
167,000
448,000
Investment in Sight Company
570,000
Land
50,000
80,000
Buildings and Equipment
350,000
320,000
Accumulated Depreciation
(100,000)
(60,000)
Patent
Current Liabilities
(120,000)
(40,000)
Long-Term Liabilities
(200,000)
(100,000)
Common Stock – P Co.
(300,000)
Other Paid-in Capital – P Co.
(142,000)
Retained Earnings – P Co.
(265,000)
Common Stock – S Co.
(110,000)
Other Paid-in Capital – S Co.
(240,000)
Retained Earnings – S Co.
(290,000)
Net Sales
(520,000)
(450,000)
Cost of Goods Sold
300,000
260,000
Operating Expenses
120,000
110,000
Subsidiary Income
(60,000)
Dividends Declared – P Co.
50,000
Dividends Declared – S Co.
20,000
Consolidated Net Income
To NCI
To Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
0
0
0
0
(continued)
Consol.
Control.
Consol.
Income
Retained
Balance
Account Titles
Statement
NCI
Earnings
Sheet
Inventory, December 31
Other Current Assets
Investment in Sight Company
Land
Buildings and Equipment
Accumulated Depreciation
Patent
Current Liabilities
Long-Term Liabilities
Common Stock – P Co.
Other Paid-in Capital – P Co.
Retained Earnings – P Co.
Common Stock – S Co.
Other Paid-in Capital – S Co.
Retained Earnings – S Co.
Net Sales
Cost of Goods Sold
Operating Expenses
Subsidiary Income
Dividends Declared – P Co.
Dividends Declared – S Co.
Consolidated Net Income
To NCI
To Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
Determination and Distribution of Excess Schedule:
Entity
Parent
NCI
Entity FV
660,000
495,000
165,000
Book value:
Common Stock ($10)
100,000
Paid-in Cap in Excess of Par
200,000
RE 1/1/X1
300,000
Book value:
600,000
450,000
150,000
Excess-attributable to patent
60,000
For the worksheet solution, please refer to Answer 8-1.
29. On January 1, 20X1, Prism Company purchased 7,500 shares of the common stock of Sight Company for
$495,000. On this date, Sight had 20,000 shares of $10 par common stock authorized, 10,000 shares issued and
outstanding. Other paid-in capital and retained earnings were $200,000 and $300,000 respectively. On January
1, 20X1, any excess of cost over book value is due to a patent, to be amortized over 15 years.
Sight’s net income and dividends for two years were:
20X1
20X2
$50,000
$80,000
10,000
20,000
In November 20X1, Sight Company declared a 10% stock dividend at a time when the market price of its common stock was $50 per share. The
stock dividend was distributed on December 31, 20X1.
For both 20X1 and 20X2, Prism Company has accounted for its investment in Sight using the cost method.
During 20X1, Sight Company sold goods to Prism Company for $40,000, of which $10,000 was on hand on December 31, 20X1. During 20X2,
Sight sold goods to Prism for $60,000 of which $15,000 was on hand on December 31, 20X2. Sight’s gross profit on intercompany sales is 40%.
Required:
Complete the Figure 8-2 worksheet for consolidated financial statements for 20X2.
Figure 8-2
Trial Balance
Eliminations and
Prism
Sight
Adjustment
s
Account Titles
Company
Company
Debit
Credit
Inventory, December 31
100,000
52,000
Other Current Assets
114,000
448,000
Investment in Sight Company
495,000
Land
50,000
80,000
Buildings and Equipment
350,000
320,000
Accumulated Depreciation
(100,000)
(60,000)
Patent
Current Liabilities
(120,000)
(40,000)
Long-Term Liabilities
(200,000)
(100,000)
Common Stock – P Co.
(300,000)
Other Paid-in Capital – P Co.
(147,000)
Retained Earnings – P Co.
(176,000)
Common Stock – S Co.
(110,000)
Other Paid-in Capital – S Co.
(240,000)
Retained Earnings – S Co.
(290,000)
Net Sales
(520,000)
(450,000)
Cost of Goods Sold
300,000
260,000
Operating Expenses
120,000
110,000
Dividend Income
(16,000)
Dividends Declared – P Co.
50,000
Dividends Declared – S Co.
20,000
Consolidated Net Income
To NCI
To Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
0
0
0
0
(continued)
Consol.
Control.
Consol.
Income
Retained
Balance
Account Titles
Statement
NCI
Earnings
Sheet
Inventory, December 31
Other Current Assets
Investment in Sight Company
Land
Buildings and Equipment
Accumulated Depreciation
Patent
Current Liabilities
Long-Term Liabilities
Common Stock – P Co.
Other Paid-in Capital – P Co.
Retained Earnings – P Co.
Common Stock – S Co.
Other Paid-in Capital – S Co.
Retained Earnings – S Co.
Net Sales
Cost of Goods Sold
Operating Expenses
Dividend Income
Dividends Declared – P Co.
Dividends Declared – S Co.
Consolidated Net Income
To NCI
To Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
0
0
0
0
Determination and Distribution of Excess Schedule:
Entity
Parent
NCI
Entity FV
660,000
495,000
165,000
Book value:
Common Stock ($10)
100,000
Paid-in Cap in Excess of Par
200,000
RE 1/1/X1
300,000
Book value:
600,000
450,000
150,000
Excess-attributable to patent
60,000
For the worksheet solution, please refer to Answer 8-2.