Exam 7: Special Issues in Accounting for an Investment in a Subsidiary

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.

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?

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

Control of a subsidiary was achieved with the initial investment in subsidiary stock. When a subsequent block of subsidiary's stock is purchased

On January 1, 20X1, Pepper Company purchased 90% of the common stock of Salt Company for $360,000 when Salt had total shareholders' equity as follows: Any excess of cost over book value on this date is attributed to a patent, to be amortized over 10 years. 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. Pepper elected to account for its investment in Salt using the cost method. During 20X1, Salt had a net loss of $10,000 and paid no dividends. In 20X2, Salt had net income of $100,000 and paid dividends totaling $36,000. During 20X2, Salt sold merchandise to Pepper for $40,000, of which $20,000 is still held by Pepper on December 31, 20X2. Salt's usual gross profit is 40%. Required: Complete the Figure 7-8 worksheet for consolidated financial statements for the year ended December 31, 20X2.

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

When selling an investment in a subsidiary, in order to record the appropriate gain or loss:

Which of the following is not true of an investor's investment in the preferred stock of an investee?

When preparing a consolidated balance sheet worksheet when the investment account is maintained under the simple equity method:

On January 1, 20X1, Pepper Company purchased 90% of the common stock of Salt Company for $360,000 when Salt had total shareholders' equity as follows: Any excess of cost over book value on this date is attributed to a patent, to be amortized over 10 years. 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. Pepper elected to account for its investment in Salt using the simple equity method. During 20X1, Salt had a net loss of $10,000 and paid no dividends. In 20X2, Salt had net income of $100,000 and paid dividends totaling $36,000. During 20X2, Salt sold merchandise to Pepper for $40,000, of which $20,000 is still held by Pepper on December 31, 20X2. Salt's usual gross profit is 40%. Required: Complete the Figure 7-7 worksheet for consolidated financial statements for the year ended December 31, 20X2.

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 ____.

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:

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.

Which of the following statements is incorrect regarding a parent's purchase of additional subsidiary shares?

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: 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.

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

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: 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.

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?

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: 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 ____.

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: 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.