CHAPTER 8
UNDERSTANDING THE ISSUES
1. The stock dividend will result in the following entry being made by the subsidiary:
Retained Earnings (10,000 shares × $50 per share) ………………. 500,000
Common Stock ($1 par, 10,000 shares × $1) …………………….. 10,000
2. The parent shares in any equity increases from the excess of the current book value of $40 per
share ($4,000,000/100,000 shares) that the subsidiary receives. The parent does not record as in-
3. The subsidiary is selling the additional shares at $45 each, which is in excess of the current book
value of $40 per share ($4,000,000/100,000 shares).
(a) If the parent buys less than its current ownership percentage of shares, it will increase its equity
4. Control, in this example, is a “chain link” process. If A controls B and B, in turn, controls C, then all
three are under common ownership, and B and C are controlled by A.
5. The 2% holding in Company P shares, owned by Company S, is treated as treasury stock. This ap–
proach views the subsidiary as the parent’s agent in purchasing parent company shares. As treasury
8–3 Ch. 8—Exercises
EXERCISES
EXERCISE 8-1
(1) Retained Earnings (3,000 × $40) …………………………………………….. 120,000
Common Stock …………………………………………………………………. 30,000
Paid-In Capital in Excess of Par ………………………………………….. 90,000
To record stock dividend distributed on July 1, 2015.
(2) Memo: Investment in Lego Company now includes 2,700 (30,000 × 90% × 10%) additional
shares for a total of 29,700 shares.
Cash ……………………………………………………………………………………. 14,850
(3) Subsidiary Income …………………………………………………………………. 108,000
Investment in Lego Company ……………………………………………… 93,150
Dividends—Leego Company ………………………………………………. 14,850
Exercise 8-1, Concluded
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (90%) (10%)
Fair value of subsidiary …………………… $900,000 $810,000 $ 90,000
Less book value of interest acquired:
Common stock ($10 par) ……………. $300,000
Paid-in capital in excess of par …… 150,000
Retained earnings …………………….. 200,000
EXERCISE 8-2
Investment in Trailer …………………………………………………………………… 57,750
Subsidiary Income …………………………………………………………………. 57,750
Calculation:
90% × first 6 months’ income of $35,000 ………………………………….. $31,500
75%* × second 6 months’ income of $35,000 ……………………………. 26,250
Total …………………………………………………………………………………………. $57,750
8–5 Ch. 8—Exercises
EXERCISE 8-3
Maintain Increase Decrease
Interest
Interest Interest
Shares purchased by parent ……………………………….. 8,000 9,000 5,000
Total shares owned by parent after purchase ………… 24,000 25,000 21,000
Total subsidiary shares outstanding after issue ……… 30,000 30,000 30,000
Subsidiary equity after sale ($450,000 + $60,000
Parent’s ownership percent before purchase ………… × 80% × 80% × 80%
Parent’s equity interest before purchase ………………. $ 448,000 $ 448,000 $ 448,000
Price paid ($60 per share) ………………………………….. 480,000 540,000 300,000
Total investment ………………………………………………… $ 928,000 $ 988,000 $ 748,000
Net adjustment ………………………………………………….. $ 0 $ 21,333 $ (64,000)
Maintain ownership percentage interest:
Investment in Calco Company ……………………………………………… 480,000
Cash …………………………………………………………………………….. 480,000
EXERCISE 8-4
Investment in Nolan …………………………………………………………………. 81,360
Retained Earnings—Tarman ………………………………………………… 81,360
To convert investment from cost to equity for income.
Income equity adjustment:
Jan. 1, 2015 to Jan. 1, 2017 increase in retained earning ($42,000 × 60%) $25,200
Jan. 1, 2017 to Jan. 1, 2019 increase in retained earnings ($78,000 × 72%*) 56,160
Total …………………………………………………………………………………………….. $81,360
EXERCISE 8-5
(1)
Company A’s Books Company B’s Books
December 31, 2015 Cash …………………………………. 4,000
Investment in B …………………… 12,000
Subsidiary Income—B ………. 16,000
December 31, 2016 Cash …………………………………. 4,000 Cash ……………………………………. 3,000
Investment in B …………………… 32,000 Investment in C ……………………… 12,000
Subsidiary Income—B ………. 36,000 Subsidiary Income—C ………. 15,000
(2)
Company A’s Books Company B’s Books
December 31, 2015 Investment in C ……………………… 7,000
Subsidiary Income—C ………. 7,000
December 31, 2016 Cash ……………………………………. 3,500
Investment in C ……………………… 14,000
Subsidiary Income—C ………. 17,500
EXERCISE 8-6
(1)
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (60%) (40%)
Fair value of subsidiary …………………… $4,500,000 $2,700,000 $1,800,000
Less book value of interest acquired:
Common stock …………………………. $ 400,000
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Cain Company equipment ………………. $ 80,000 debit D1
*NCI of Cain Company is also increased by $40,000.
(2) Eliminations and Adjustments:
Retained Earnings—Able ($12,000 × 80% × 60%) ………………….. 5,760
Retained Earnings—Baker ($12,000 × 80% × 40%) ………………… 3,840
8–9 Ch. 8—Exercises
EXERCISE 8-7
Companies A, B, and C
Consolidated Income Statement
For Year Ended December 31, 2015
Sales [($300,000 + $400,000 + $100,000) –
intercompany sales of $75,000] ………………………………………. $725,000
Cost of goods sold [$200,000 + $300,000 + $60,000 –
Subsidiary Company C Income Distribution
Unrealized profit in ending Internally generated net
inventory ……………………………. $6,000 income ……………………………. $30,000
Adjusted net income ………………. $24,000
Subsidiary Company B Income Distribution*
Internally generated net income . $70,000
60% × Company C adjusted
income of $24,000 ……………. 14,400
Gain realized through
*There is no impact shown for the ending inventory held by Company C since the gross profit was written down to
zero under LCM.
Parent Company A Income Distribution
Unrealized profit in ending Internally generated net
inventory ……………………………. $720 income ……………………………. $ 40,000
EXERCISE 8-8
Determination and Distribution of Excess Schedule, Ace Acquisition of Bell
Company Parent NCI
Implied Price Value
Fair Value (60%) (40%)
Fair value of subsidiary …………………… $700,000 $420,000 $280,000
Less book value of interest acquired:
Common stock ($5 par) ……………… $200,000
Paid-in capital in excess of par …… 100,000
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Carter inventory (80% …………………….. $ 16,000 debit D1 1 $16,000
EXERCISE 8-9
(1) Company N’s books:
Cash …………………………………………………………………………….. 2,000
Investment in Company O ……………………………………………….. 14,000
Subsidiary Income (40% × $40,000) ……………………………… 16,000
Company M’s books:
Cash …………………………………………………………………………….. 9,000
Investment in Company N ……………………………………………….. 86,400
8–11 Ch. 8—Exercises
Exercise 8-9, Concluded
Subsidiary O Company Income Distribution
Unrealized gross profit in Internally generated income ….. $40,000
ending inventory …………………. $6,000 Realized gross profit in
beginning inventory …………. 4,500
Adjusted income ………………….. $38,500
NCI share …………………………… × 40%
NCI ……………………………………. $15,400
Subsidiary N Company Income Distribution
Unrealized gross profit in Internally generated income ….. $ 90,000
Parent Company M Income Distribution
Internally generated net
income ………………………….. $200,000
EXERCISE 8-10
(1)
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (60%) (40%)
Fair value of subsidiary …………………… $580,000 $348,000 $232,000
Less book value of interest acquired:
(2) Myles Corporation and Subsidiary Downer Corporation
Consolidated Income Statement
For Year Ended December 31, 2017
Sales ……………………………………………………………………………………………… $1,150,000
Less cost of goods sold …………………………………………………………………….. 840,000
Gross profit ……………………………………………………………………………………… $ 310,000
Subsidiary Downer Corporation Income Distribution
Equipment depreciation ……………. $1,500 Internally generated net income .. $30,000
Adjusted net income ………………. $28,500
NCI share ……………………………… × 40%
NCI ………………………………………. $11,400
8–13 Ch. 8—Problems
PROBLEMS
PROBLEM 8-1
Wells Corporation booked entries for adjustments to investment in Towne Company:
2015
(1)* December 31 Investment in Towne (80% × $50,000) …………… 40,000
(2)* Memo: All calculations are now based on 8,800 shares.
2016
(3)* July 1 Investment in Towne …………………………………… 14,400
Paid-In Capital in Excess of Par ………………. 14,400
(4)* December 31 Investment in Towne …………………………………… 16,000
Subsidiary Income …………………………………. 16,000
Problem 8-1, Continued
Wells Corporation booked entries for adjustments to investment in Sara Company:
2015
(5)* July 1 Investment in Sara ………………………………………. 12,000
Subsidiary Income …………………………………. 12,000
(6)* July 1 Investment in Sara ………………………………………. 85,900
Retained Earnings (decrease in equity) …………. 6,600
(7)* December 31 Investment in Sara ………………………………………. 12,400
Subsidiary Income …………………………………. 12,400
(8)*January 1 Retained Earnings ………………………………………. 13,950
(9)* December 31 Investment in Sara ………………………………………. 28,933
Subsidiary Income …………………………………. 28,933
Problem 8-1, Concluded
Schedules to Determine Wells Corporation’s Adjustments to Its Investment
Total Change in Total Controlling Change in
Subsidiary Parent’s Parent’s Subsidiary Subsidiary Share of Controlling
Shares Shares Interest Equity Equity Equity Investment
Towne
January 1, 2015, Balances ……… 10,000 8,000 80% ……….. $220,000 $176,000 …………
2015 Income …………………………. 10,000 8,000 80 $50,000 270,000 216,000 (1) $40,000
December 31, 2015, Stock
dividend …………………………… 11,000 8,800 80 ……….. 270,000 216,000 …………
January–June 2016, Income ……. 11,000 8,800 80 25,000 295,000 236,000 (2) 20,000
PROBLEM 8-2
Bear Corporation purchase of Kelly Company Shares:
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (60%) (40%)
Fair value of subsidiary …………………… $375,000 $225,000 $150,000
Less book value of interest acquired:
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Goodwill ……………………………………….. $ 25,000 debit D
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (80%) (20%)
Fair value of subsidiary …………………… $312,500 $250,000 $ 62,500
Less book value of interest acquired:
Common stock ($20 par) ……………. $200,000
Retained earnings …………………….. 100,000
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
8–17 Ch. 8—Problems
Problem 8-2, Continued
*Entry to convert investment in Kelly Company to simple equity method as of December 31,
2017:
Investment in Kelly ……………………………………………………. 78,750
Additional Paid-In Capital in Excess of Par—Bear
Corporation ………………………………………………………….. 12,750
Retained Earnings ……………………………………………… 91,500
Problem 8-2, Continued
Schedules of Equity Adjustments for January 1, 2015–December 31, 2017
Adjustments
Reflected
an Increase to
Controlling Additional
Total Shares Increase in Total Share of Increase in Paid-In Capital
Subsidiary Held by Parent’s Subsidiary Subsidiary Subsidiary Controlling Retained in Excess
Kelly Common Stock Shares Parent Interest Equity Equity Equity Investment Earnings of Par
January 1, 2015, Balances………………. 20,000 12,000 60% ………….. $375,000* $225,000 ………….. ………… …………
January–June 2015, Income ……………. 20,000 12,000 60 $ 25,000 400,000 240,000 $ 15,000 $ 15,000 …………
July 1, 2015, Sale of stock ………………. 25,000 15,000 60 100,000 500,000 300,000 60,000** ………… …………
Problem 8-2, Concluded
Schedules of Equity Adjustments for January 1, 2015–December 31, 2017
Adjustments
Reflected
an Increase to
Controlling Paid-In
Total Shares Increase in Total Share of Increase in Capital
Subsidiary Held by Parent’s Subsidiary Subsidiary Subsidiary Controlling Retained in Excess
Samco Common Stock Shares Parent Interest Equity Equity Equity Investment Earnings of Par
January 1, 2015, Balances……….. 10,000 8,000 80% ……….. $312,500* $250,000 ……….. ………. ………
Income, 2015 …………………………. 10,000 8,000 80 40,000 352,500 282,000 $32,000 $32,000 ………
December 31, 2015, Stock
PROBLEM 8-3
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (80%) (20%)
Fair value of subsidiary …………………… $875,000 $700,000 $175,000
Less book value of interest acquired:
Common stock ($2 par) ……………… $200,000
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Building ………………………………………… $ 80,000 debit D1 20 $4,000