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

Question 1

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.

Answer 1

C
Because the parent has control over the subsidiary, the two companies will be presented on a consolidated basis. Therefore, it makes no difference which method the parent uses to account for transactions with the subsidiary.

Question 2

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 2

C
When investment blocks are carried at cost, each investment must be separately converted to its simple equity balance as of the beginning of the year. The adjustment is based on the change in subsidiary retained earnings between the date of acquisition of the individual investment and the beginning of the current year.

Question 3

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.
The preferred stock is two 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

Answer 3

B
Note that only one year of dividends is included here as preferred dividends in arrears at the date of the acquisition would have gone on the D&D schedule to calculate goodwill.

Question 4

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.
The preferred stock is one 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 5

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 goodwill balance on the December 31, 20X4, balance sheet is ____.

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

Question 6

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. 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

Question 7

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 8

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 9

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 ____.

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

Question 10

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

A)the investment must be adjusted to show the balance under the sophisticated equity method.
B)the investment must be adjusted to show the balance under the equity method.
C)a final consolidation must be prepared.
D)the unamortized balances of the excess of the purchase price over the book value of the investment must be written off.

Question 11

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

Question 12

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:

Question 13

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.

Question 14

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 15

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

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

Question 16

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. As part of the consolidation process, the excess of the price paid 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 17

In the year a parent sells its entire 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 18

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.
The preferred stock is two 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

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 goodwill. On January 1, 20X6, the retained earnings of Sparrow was $175,000. The entire investment was sold for $300,000 on January 1, 20X6. 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 ____.

A)$105,000
B)$81,000
C)$27,000
D)$39,000

Question 20

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 ____.

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

Question 21

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.

Question 22

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.

Question 23

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 may 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 24

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.

Question 25

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:
(1)On January 1, 20X2, Company P sold a piece of equipment with a net book value of $40,000 to Company S for $50,000. The equipment had a five-year remaining life.
(2)Each year, starting in 20X3, Company S has sold merchandise for resale to Company P at a gross profit of 20%. A summary of transactions shows the following:
(3)On January 1, 20X5, Company P purchased Company S's 8%, $100,000 face value bonds for $98,000, which were issued at par value. The bonds have five years to maturity.
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 26

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 27

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 28

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 29

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 30

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

A)the parent's share of subsidiary income should be eliminated against retained earnings.
B)the parent's share of the subsidiary's equity accounts may be eliminated directly against the investment account.
C)any intercompany sales must be eliminated against cost of goods sold.
D)the investment account should be converted to the cost method as of the end of the year.

Question 31

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

A)Because preferred stock normally does not carry voting rights, an investor many not have controlling interest if owning 100% of the preferred stock.
B)The investor's purchase of investee's outstanding preferred stock viewed of a retirement of the stock.
C)Preferred stock is included in the Determination and Distribution of Excess Schedule to calculate goodwill.
D)Preferred stock dividends reduce the income available to the NCI.

Question 32

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 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.

Question 33

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%. Prepare Poplar's general journal entries for 20X3.

Question 34

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 35

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 36

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.

Question 37

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.

Question 38

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?

A)$45,000
B)$41,250
C)$37,250
D)$38,250

Question 39

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.