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

Partridge purchased a 60% interest in Sparrow on January 1, 2016, for $240,000.At the time of the purchase, Sparrow had the following stockholders' equity: Common stock ( \ 10 par) \ 80,000 Retained earnings Total stockholders' equity \ 200,000 Any excess is attributable to equipment with a 10-year life.On January 1, 2016, the retained earnings of Sparrow was $175,000.The entire investment was sold for $300,000 on January 1, 2016.The gain was ____.

Pine Company purchased a 60% interest in the Scent Company on January 1, 2016 for $360,000.On that date, the stockholders' equity of Scent Company was $450,000.Any excess cost on 1/1/16 was attributable to goodwill.Pine purchased another 20% interest on January 1, 2019 for $200,000.On January 1, 2019, 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

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 hol dings. (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.

On January 1, 2016, 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, 2016, 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 2016, Parent has accounted for its investment in Subsidiary using the cost method. ? During 2016, Subsidiary sold merchandise to Parent for $70,000, of which $20,000 is held by Parent on December 31, 2016.Subsidiary's usual gross profit on affiliated sales is 50%. ? On December 31, 2016, Parent still owes Subsidiary $5,000 for merchandise acquired in December. ? On July 1, 2016, 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, 2016. ?

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

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

Page Company purchased an 80% interest in the common stock of the Seed Company for $600,000 on January 1, 2019, 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 2019 and paid no dividends. The preferred stock is two years in arrears on January 1, 2019.The controlling interest's share of Seed's 2019 net income is ____.

On January 1, 2016, 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, 2016, the only tangible asset of Solomon that was undervalued was land, which was worth $15,000 more than book value. ? On January 1, 2017, 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: ? ? 2016 2017 Net income for year \ 50,000 \ 80,000 Dividends, paid-in December 0 50,000 In the last quarter of 2017, Solomon sold $80,000 of goods to Patrick, at a gross profit rate of 30%.On December 31, 2017, $20,000 of these goods are in Patrick's ending inventory.In both 2016 and 2017, 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.

Pine Company purchased a 60% interest in the Scent Company on January 1, 2016 for $360,000.On that date, the stockholders' equity of Scent Company was $450,000.Any excess cost on 1/1/16 was attributable to goodwill.Pine purchased another 20% interest on January 1, 2019 for $200,000.On January 1, 2019, 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 ____.

Partridge purchased a 60% interest in Sparrow on January 1, 2016, for $240,000.At the time of the purchase, Sparrow had the following stockholders' equity: Common stock (\ 10 par ) \ 80,000 Retained earnings Total stockholders' equity \ 200,000 Any excess is attributable to goodwill.On January 1, 2016, the retained earnings of Sparrow was $175,000.The entire investment was sold for $300,000 on January 1, 2016.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 ____.

On January 1, 2016, 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 2016 through 2019 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, 2019, 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 2019.

Pilatte Company acquired a 90% interest in the common stock of Sweet Company for $630,000 on January 1, 2019, when Sweet Company had the following stockholders' equity: ? ? Preferred stock ( 5\% cumul ative, \ 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.

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

On January 1, 2016, 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 2016 through 2019 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, 2019, 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 2019.

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

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, 2020.Plant Company purchased 100% of the outstanding preferred stock on January 1, 2020, at a price in excess of book value.The result of this transaction with regard to the consolidated statements is that

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

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

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? ?

Page Company purchased an 80% interest in the common stock of the Seed Company for $600,000 on January 1, 2019, 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 2019 and paid no dividends. The preferred stock is one year in arrears on January 1, 2019.The goodwill that will appear on the consolidated balance sheet prepared on January 1, 2019, is ____.