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

Question 1

Partridge & Sparrow scenario:
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.
Refer to Partridge and Sparrow. The entire investment was sold for $300,000 on January 1, 20X6. The gain was ____.

A) $87,000
B) $90,000
C) $27,000
D) $78,000

Answer 1

A

Question 2

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

A) There can never be an income statement gain or loss.
B) Due to the constraints of conservatism, there can never be an income statement gain but a loss should be recognized if so indicated.
C) If the price paid to reacquire the shares exceeds their book value, the debit first is used to reduce existing paid-in capital in excess of par from retirement and the balance is a debit to Retained Earnings.
D) If the price paid to reacquire the shares is less than their book value, there is a credit to paid-in capital in excess of par from retirement.

Answer 2

B

Question 3

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

A) the difference in subsidiary retained earnings at the beginning of the current fiscal year and the retained earnings when the first block was acquired.
B) the difference in subsidiary retained earnings at the beginning of the current fiscal year and the retained earnings when the block giving a controlling interest was acquired.
C) the difference in subsidiary retained earnings at the beginning of the current fiscal year and the retained earnings of each block at its acquisition.
D) the difference in subsidiary retained earnings at the beginning of the current fiscal year and the retained earnings when the last block was acquired.

Answer 3

C

Question 4

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

A) a gain.
B) a loss.
C) only cash and related equity.
D) goodwill.

Question 5

When a subsequent block of an existing subsidiary's stock is purchased,

A) the determination and distribution of excess schedule incorporates the identifiable net asset values from previous acquisitions.
B) the determination and distribution of excess schedule is completely independent of the identifiable net asset values from previous acquisitions.
C) additional goodwill is recognized for any excess of cost over book value
D) none of the above.

Question 6

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

A) the parent must change from the cost method to the equity method.
B) the parent must change from the equity method to the cost method.
C) no change in accounting methods is required.
D) none of the above.

Question 7

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

A) there will be added goodwill.
B) there will be a loss recorded in the year of the purchase.
C) the preferred stock will not appear on the balance sheet and there will be a decrease in retained earnings as a result of the purchase.
D) the investment in preferred stock will appear on the balance sheet.

Question 8

Pine & Scent scenario:
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.
Refer to the Pine and Scent scenario. As part of the consolidation process, the excess of cost over book on the new block of shares is treated as

A) additional goodwill
B) a loss on acquisition of additional subsidiary shares
C) an increase to Pine's Investment in Scent account
D) a reduction in parent's paid-in capital in excess of par

Question 9

Page & Seed scenario:
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:
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.
Refer to Page and Seed. The preferred stock is 2 years in arrears on January 1, 20X4. The noncontrolling interest share of 20X4 net income was ____.

A) $3,200
B) $6,000
C) $8,000
D) $16,000

Question 10

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?

Question 11

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) a gain.
B) a loss.
C) only cash and related equity.
D) goodwill.

Question 12

Patten and Salty scenario:
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.
Refer to the Patten and Salty scenario. The NCI share of 20X4 consolidated income is

A) $10,000
B) $12,400
C) $16,725
D) $43,400

Question 13

In the year a parent sells its subsidiary investment, the results of subsidiary operations prior to the sale date are

A) consolidated to the point of sale.
B) shown on the balance sheet in the stockholders' equity section as an adjustment to retained earnings.
C) not reflected on any of the parent's statements.
D) not consolidated.

Question 14

When a parent sells its subsidiary interest, a gain (loss) is recognized if the parent

Question 15

Partridge & Sparrow scenario:
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.
Refer to Partridge and Sparrow. During the first 6 months of 20X6, $25,000 was earned by Company S. The entire investment was sold for $300,000 on July 1, 20X6. The gain (loss) was ____.

A) $87,000
B) $78,000
C) $12,000
D) $60,000

Question 16

Pine & Scent scenario:
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.
Refer to the Pine and Scent scenario. The goodwill balance on the December 31, 20X4, balance sheet is ____.

A) $100,000
B) $60,000
C) $0
D) $150,000

Question 17

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

A) it is a sale of an investment at a gain or a loss.
B) it is likened to a treasury stock transaction that may not result in a gain or a loss.
C) it is a transaction between the controlling and noncontrolling ownership interests and has no effect on consolidated income. The transaction would impact only paid-in capital.
D) the increase or decrease in equity as a result of the sale is an adjustment to donated capital.

Question 18

Page & Seed scenario:
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:
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.
Refer to Page and Seed. The preferred stock is 2 years in arrears on January 1, 20X4. The controlling interest's share of Seed's 20X4 net income is ____.

A) $24,000
B) $23,360
C) $25,600
D) $32,000

Question 19

Pine & Scent scenario:
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.
Refer to the Pine and Scent scenario. The excess of cost over book on the new block of stock is ____.

A) $60,000
B) $50,000
C) $48,000
D) $20,000

Question 20

Page & Seed scenario:
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:
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.
Refer to Page and Seed. The preferred stock is 1 year in arrears on January 1, 20X4. The goodwill that will appear on the consolidated balance sheet prepared on January 1, 20X4, is ____.

A) $80,000
B) $88,000
C) $210,000
D) $168,000

Question 21

Company P Industries purchased a 70% interest in Company S on January 1, 20X1, and prepared the following determination and distribution of excess schedule:
Since the purchase, there have been the following intercompany transactions:
Required:
Complete the following schedule to adjust the retained earnings of the noncontrolling and controlling interest on the December 31, 20X5, worksheet for a consolidated balance sheet only. Company P uses the simple equity method to account for its investment.

Question 22

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.

Question 23

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?

A) Debit $4,000
B) Debit $6,000
C) Debit $3,200
D) Debit $4,800

Question 24

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:
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.

Question 25

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:
The preferred stock dividends are 2 years in arrears. Any excess is attributable to equipment with a 6-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.

Question 26

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 7-8 worksheet for consolidated financial statements for the year ended December 31, 20X2.

Question 27

On January 1, 20X1, 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, 20X1, any excess of cost over book value is due to the undervaluation of land, building, and goodwill. Land is worth $10,000 more than cost. Building is worth $50,000 more than book value, has a remaining life of 10 years, and is depreciated using the straight-line method.
During 20X1 and 20X2, Parent accounted for its investment in Subsidiary using the simple equity method.
During 20X2, Subsidiary sold merchandise to Parent for $50,000, of which $10,000 is held by Parent on December 31, 20X2. Subsidiary's gross profit on sales is 40%. On December 31, 20X2, Parent still owes Subsidiary $7,000 for merchandise acquired in December.
On July 1, 20X0, Subsidiary sold $100,000 par value of 10%, 10-year bonds for $104,000. The bonds pay interest semiannually on January 1 and July 1. Straight-line amortization of premium is used. On January 1, 20X2, Parent repurchased one-half of the bonds at par.
On January 1, 20X2, Parent purchased equipment for $104,610 and immediately leased the equipment to Subsidiary on a 4-year lease. The minimum lease payments of $30,000 are to be made annually on January 1, beginning immediately, for a total of 4 payments. The implicit interest rate is 10%. The useful life of the equipment is 4 years. The lease has been capitalized by both companies. Subsidiary is depreciating the equipment using the straight-line method and assuming a salvage value of $4,610.
A partial lease amortization schedule, applicable to either company, is presented below:
Required:
Prepare a determination and distribution of excess schedule. Next, complete the Figure 7-14 worksheet for a consolidated balance sheet as of December 31, 20X2. Round all computations to the nearest dollar.

Question 28

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

A) bonds payable, $30,000.
B) bonds payable, $34,000.
C) bonds payable, $100,000.
D) bonds payable will not appear.

Question 29

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 $100,000 and paid dividends, on preferred and common, totaling $40,000.
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.
In 20X1 and 20X2, Parent has accounted for its investments in Subsidiary's preferred and common using the simple equity method.
During 20X2, Subsidiary sold merchandise to Parent for $40,000, of which $15,000 is still held by Parent on December 31, 20X2. Subsidiary's usual gross profit is 40%.
Required:
Complete the Figure 7-10 worksheet for consolidated financial statements for the year ended December 31, 20X2.

Question 30

On January 1, 20X1, 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, 20X1, 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 20X1, Parent has accounted for its investment in Subsidiary using the cost method.
During 20X1, Subsidiary sold merchandise to Parent for $70,000, of which $20,000 is held by Parent on December 31, 20X1. Subsidiary's usual gross profit on affiliated sales is 50%.
On December 31, 20X1, Parent still owes Subsidiary $5,000 for merchandise acquired in December.
On July 1, 20X1, 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 7-13 worksheet for a consolidated balance sheet as of December 31, 20X1.

Question 31

Patrick & Solomon scenario:
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.
Refer to Patrick and Solomon. 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.
b.
Complete the Figure 7-2 worksheet for consolidated financial statements for 20X2.

Question 32

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.

Question 33

Patrick & Solomon scenario:
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.
Refer to Patrick and Solomon. 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 7-3 worksheet for consolidated financial statements for 20X2.

Question 34

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?

Question 35

Poplar & Sequoia scenario:
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%.
Refer to Poplar and Sequoia. Prepare Poplar's general journal entries for 20X3.