Deck 8: Subsidiary Equity Transactions; Indirect and Mutual Holdings

Question 1

Porter & Solheim: On January 1, 20X1, Porter, Inc. paid $600,000 for its 75% interest in Solheim Company when Solheim had total equity of $550,000. Any excess of cost over book value was attributable to equipment with a 10-year life. Porter's investment in Solheim Company is recorded under the cost method.
Solheim had the following stockholders' equity on the dates shown:
$\begin{array}{lrrr}&1 / 1 / \mathrm{X} 1&1 / 1 / \mathrm{X} 3&1 / 1 / \mathrm{X} 4\\\text { Common stock } \$ 10 \text { par } & \$ 100,000 & \$ 100,000 & \$ 125,000 \\\text { Other paid-in capital } & 200,000 & 200,000 & 375,000 \\\text { Retained earnings } & 250,000 & 350,000 & 400,000\end{array}$

-Refer to Porter & Solheim. On January 2, 20X3, Solheim Company sold 2,500 additional shares of stock for $80 each in a private offering to noncontrolling shareholders. As a result of this issuance, the Porter's "Investment in Solheim" account should be adjusted by ____.

A) $7,500
B) $9,600
C) $11,500
D) $11,250

Answer 1

$7,500

Question 2

Company P owns 80% of the 10,000 outstanding common stock of Company S. If Company S issues 2,500 added shares of common stock, and Company P purchases some of the newly issued shares, which of the following statements is true?

A) Other than recording the purchase, there is no adjustment to the controlling interest if the parent purchases all the shares issued.
B) Other than recording the purchase, there is no adjustment to the controlling interest if the parent does not purchase any of the shares issued.
C) Other than recording the purchase, there is no adjustment to the controlling interest if the parent purchases 80% of the shares issued.
D) There is a new excess of cost over book value or excess of book value over cost if the parent purchases 80% of the newly issued shares.

Answer 2

C

Question 3

Paul & Stephan: On January 1, 20X1, Paul, Inc. acquired a 90% interest in Stephan Company. The $45,000 excess of purchase price (parent's share only) was attributable to goodwill. On January 1, 20X3, Stephan Company had the following stockholders' equity:
$\begin{array}{lr}\text { Common stock, } \$ 10 \text { par } & \$ 100,000 \\\text { Other paid-in capital } & 200,000 \\\text { Retained earnings } & 300,000\end{array}$ On January 2, 20X3, Stephan sold 2,000 additional shares in a private offering.

-Refer to Paul and Stephan. Stephan issued the new shares for $70 per share; Paul, Inc. purchased 600 of the shares. As a result of this sale, there is a(n)

A) gain on the consolidated income statement of $5,000.
B) decrease in the controlling interest paid-in excess of $5,000.
C) increase in the controlling interest paid-in capital in excess of par of $5,000
D) increase in the controlling interest Retained Earnings of $5,000

Answer 3

increase in the controlling interest paid-in capital in excess of par of $5,000

Question 4

Apple Inc. purchased a 70% interest in the Banana Company for $490,000 on January 1, 20X3, when Banana Company had the following stockholders' equity: At the time of Apple's purchase, Banana Company was an 80% owner of the Carrot Company. Also on that date, Carrot Company has a machine that has a market value in excess of book value of $20,000. There is no difference between book and market value for any Banana Company assets. The goodwill that would result from this purchase is ____.
$\begin{array}{lr}\text { Common stock, } \$ 10 \text { par } & \$ 100,000 \\\text { Other paid-in capital } & 250,000 \\\text { Retained earnings } & 150,000\end{array}$

A) $200,000
B) $180,000
C) $140,000
D) $126,000

Question 5

When a parent purchases a portion of the newly issued stock of its subsidiary and the parent's percentage of ownership interest remains the same,

A) any difference between the change in equity and the price paid is the excess of cost or book value attributable to the new block.
B) any difference between the change in equity and the price paid is viewed as a gain or loss on the sale of an interest.
C) any difference between the change in equity and the price paid is viewed as a change in paid-in capital or retained earnings.
D) there will be no adjustment to parent's paid-in capital

Question 6

Paris & Scott: On January 1, 20X1, Paris Ltd. paid $600,000 for its 75% interest in the Scott Company when Scott had total equity of $550,000. Any excess of cost over book value was attributed to equipment with a 10-year life. On January 1, 20X3, Scott Company had the following stockholders' equity:
$\begin{array}{lr}\text { Common stock, } \$ 10 \text { par } & \$ 100,000 \\\text { Other paid-in capital } & 200,000 \\\text { Retained earnings } & 350,000\end{array}$

-Refer to Paris & Scott. On January 2, 20X3, Scott Company sold 2,500 additional shares of stock for $90 each in a private offering to noncontrolling shareholders. As a result of this sale, which of the following changes would appear in the 20X3 consolidated statements?

A) $7,500 gain
B) $37,500 loss
C) $7,500 increase in controlling paid-in capital
D) $37,500 decrease in controlling paid-in capital

Question 7

When a parent purchases a portion of the newly issued stock of its subsidiary in a private offering and the ownership interest decreases,

A) any difference between the change in equity and the price paid is the excess of cost or book value attributable to the new block.
B) any difference between the change in equity and the price paid is viewed as a gain or loss on the sale of an interest.
C) any difference between the change in equity and the price paid is viewed as a change in paid-in capital or retained earnings.
D) there will be no adjustment.

Question 8

Apple Inc. owns a 90% interest in Banana Company. Banana Company, in turn, owns a 80% interest in Carrot Company. During 20X4, Carrot Company sold $50,000 of merchandise to Apple Inc. at a gross profit of 20%. Of this merchandise, $10,000 was still unsold by Apple Inc. at year end. The adjustment to the controlling interest in consolidated net income for 20X4 is ____.

A) $560
B) $1,440
C) $1,600
D) $1,800

Question 9

When the parent purchases some newly issued shares of a subsidiary, any adjustments resulting from the subsidiary stock sales should be made

A) at the end of the current fiscal year when the worksheet is prepared.
B) at the time of the sale when the equity method is used.
C) at the time of the sale if the cost method is used.
D) retroactively to the start of the current fiscal year.

Question 10

Paul & Stephan: On January 1, 20X1, Paul, Inc. acquired a 90% interest in Stephan Company. The $45,000 excess of purchase price (parent's share only) was attributable to goodwill. On January 1, 20X3, Stephan Company had the following stockholders' equity:
On January 2, 20X3, Stephan sold 2,000 additional shares in a private offering.
Refer to Paul and Stephan. Stephan issued the new shares for $80 per share; Paul, Inc. purchased all the shares. What is the journal entry that Paul will prepare to record this investment?

Question 11

Paris & Scott: On January 1, 20X1, Paris Ltd. paid $600,000 for its 75% interest in the Scott Company when Scott had total equity of $550,000. Any excess of cost over book value was attributed to equipment with a 10-year life. On January 1, 20X3, Scott Company had the following stockholders' equity:
$\begin{array}{lr}\text { Common stock, } \$ 10 \text { par } & \$ 100,000 \\\text { Other paid-in capital } & 200,000 \\\text { Retained earnings } & 350,000\end{array}$

-Refer to Paris & Scott. On January 2, 20X3, Scott Company sold 2,500 additional shares of stock for $60 each in a private offering to noncontrolling shareholders. As a result of this sale, which of the following changes would appear in the 20X3 consolidated statements?

A) $7,500 loss
B) $37,500 loss
C) $37,500 decrease in controlling paid-in capital
D) $7,500 decrease in controlling paid-in capital

Question 12

Company P purchased a 80% interest in the Company S on January 1, 20X1, for $600,000. Any excess of cost is attributed to the Company's building with a 20-year life. The equity balances of Company S are as follows: $\begin{array}{lrr}&\text { January } 1,20 \mathrm{X} 1&\text { December } 31,20 \mathrm{X} 4\\\text { Common stock, } \$ 10 \text { par } & \$ 100,000 & \$ 140,000 \\\text { Other paid-in capital } & 200,000 & 280,000 \\\text { Retained earnings } & 250,000 & 450,000\end{array}$ The only change in paid-in capital is a result of a 40% stock dividend paid in 20X3. The cost to simple equity conversion to bring the investment account to its December 31, 20X4, balance is ____.

A) $30,000
B) $136,000
C) $160,000
D) $256,000

Question 13

Able Company owns an 80% interest in Barns Company and a 20% interest in Carns Company. Barns owns a 40% interest in Carns Company. The reported income of Carns is $20,000 for 20X4. Which of the following shows how it will be distributed?

Question 14

Which of the following situations is a mutual holding?

A) A owns 80% of B, and B owns 70% of C.
B) A owns 80% of B and 20% of C; B owns 70% of C.
C) A owns 80% of B, and B owns 20% of A.
D) None of the above.

Question 15

Able Company owns an 80% interest in Barns Company and a 20% interest in Carns Company. Barns owns a 40% interest in Carns Company.

A) Carn will not be included in the consolidation process
B) Carn will be included in the consolidation process; 20% of prior period amortizations will be distributed to Retained Earnings-Carn
C) Carn will be included in the consolidation process; 40% of prior period amortizations will be distributed to Retained Earnings-Carn
D) Carn will be included in the consolidation process; NCI will be allocated 6.4% of prior-period profits originated by Carn

Question 16

Company P had 300,000 shares of common stock outstanding. It owned 80% of the outstanding common stock of S. S owned 20,000 shares of P common stock. In the consolidated balance sheet, Company P's outstanding common stock may be shown as

A) 285,000 shares.
B) 300,000 shares.
C) 300,000 shares, less 20,000 shares of treasury stock.
D) 300,000 shares, footnoted to indicate that S holds 20,000 shares.

Question 17

Porter & Solheim: On January 1, 20X1, Porter, Inc. paid $600,000 for its 75% interest in Solheim Company when Solheim had total equity of $550,000. Any excess of cost over book value was attributable to equipment with a 10-year life. Porter's investment in Solheim Company is recorded under the cost method.
Solheim had the following stockholders' equity on the dates shown:
$\begin{array}{lrrr}&1 / 1 / \mathrm{X} 1&1 / 1 / \mathrm{X} 3&1 / 1 / \mathrm{X} 4\\\text { Common stock } \$ 10 \text { par } & \$ 100,000 & \$ 100,000 & \$ 125,000 \\\text { Other paid-in capital } & 200,000 & 200,000 & 375,000 \\\text { Retained earnings } & 250,000 & 350,000 & 400,000\end{array}$

-Refer to Porter & Solheim. On January 2, 20X3, Solheim sold 2,500 additional shares of stock for $100 each in a private offering to noncontrolling shareholders. As a result of this issuance, the Porter's "Investment in Solheim" account should be adjusted by ____.

A) $5,500
B) $12,500
C) $15,500
D) $18,750

Question 18

When a parent purchases a portion of the newly issued stock of its subsidiary and the ownership interest increases,

A) any difference between the change in equity and the price paid is the excess of cost or book value attributable to the new block.
B) any difference between the change in equity and the price paid is viewed as a gain or loss on the sale of an interest.
C) any difference between the change in equity and the price paid is viewed as a change in paid-in capital or retained earnings.
D) there will be no adjustment.

Question 19

Consolidated statements for X, Y, and Z are proper if

A) X owns 100% of the outstanding common stock of Y and 49% of Z; M owns 51% of Z.
B) X owns 100% of the outstanding common stock of Y and 75% of Z; X bought the stock of Z one month before the statement date and sold it 6 weeks later.
C) X owns 100% of the outstanding stock of Y; Y owns 75% of Z.
D) There is no interrelation of financial control among X, Y, and Z; however, they are contemplating the joint purchase of 100% of the outstanding stock of D.

Question 20

A parent company owns a 100% interest in a subsidiary. Recently, the subsidiary paid a 10% stock dividend. The dividend should be recorded on the books of the parent

A) at the par value or stated value of the shares received.
B) at the market value of the shares on the date of declaration.
C) at the market value of the shares on the date of distribution.
D) merely as a memo entry indicating that the cost of the original investment now is allocated to a greater number of shares.

Question 21

A owns 80% of B and 20% of C. B owns 32% of C, and C owns 10% of A. Which interest will not be included in the consolidated balance sheet?

A) 10% of A
B) 100% of C
C) 10% of A and 48% of C
D) 20% of B and 48% of C

Question 22

Two types of intercompany stock purchases significantly complicate the consolidation process. The first occurs when the subsidiary issues added shares of stock in a public issue and the parent buys a portion of the shares. The second occurs when the subsidiary purchases outstanding shares of the parent company.
Required:
a.
Discuss the current theoretical consolidation procedure for situations in which the parent buys a portion of the newly issued subsidiary shares that is (1) equal to its existing ownership percentage, (2) greater than its existing ownership percentage, and (3) less than its existing ownership percentage.
b.
Discuss the most widely supported, current theoretical consolidation procedures used when the subsidiary purchases outstanding common stock shares of the parent.

Question 23

On January 1, 20X1, Parent Company purchased 8,000 shares of the common stock of Subsidiary Company for $350,000. On this date, Subsidiary had 20,000 shares of $5 par common stock authorized, 10,000 shares issued and outstanding. Other paid-in capital and retained earnings were $150,000 and $200,000 respectively. On January 1, 20X1, any excess of cost over book value is due to a patent, to be amortized over 15 years. Parent Company uses the simple equity method to account for its investment in Sub.
Subsidiary's net income and dividends for two years were:
On January 1, 20X2, Subsidiary Company sold an additional 2,500 shares of common stock to noncontrolling shareholders for $50 per share.
In the last quarter of 20X2, Subsidiary Company sold goods to Parent Company for $40,000. Subsidiary's usual gross profit on intercompany sales is 40%. On December 31, $7,500 of these goods are still in Parent's ending inventory.
Required:
Complete the Figure 8-5 worksheet for consolidated financial statements for 20X2.

Question 24

On January 1, 20X1, Parent Company purchased 8,000 shares of the common stock of Subsidiary Company for $350,000. On this date, Subsidiary had 20,000 shares of $5 par common stock authorized, 10,000 shares issued and outstanding. Other paid-in capital and retained earnings were $150,000 and $200,000 respectively. On January 1, 20X1, any excess of cost over book value is due to a patent, to be amortized over 15 years. Parent Company uses the simple equity method to account for its investment in Sub.
Subsidiary's net income and dividends for two years were:
On January 1, 20X2, Subsidiary Company sold an additional 2,500 shares of common stock to noncontrolling shareholders for $50 per share.
In the last quarter of 20X2, Subsidiary Company sold goods to Parent Company for $40,000. Subsidiary's usual gross profit on intercompany sales is 40%. On December 31, $7,500 of these goods are still in Parent's ending inventory.
Required: Prepare the following items
a.
Determination and distribution schedule effective 1/1/X1
b.
Parent's journal entry to record change in ownership interest due to Sub's issuance of additional shares on 1/1/X2. Support with schedule of Parent's ownership interest before and after the 1/1/X2 issuance.
c.
All necessary elimination entries necessary to prepare the consolidating worksheet on 12/31/X2

Question 25

On January 1, 20X1, Prism Company purchased 7,500 shares of the common stock of Sight Company for $495,000. On this date, Sight had 20,000 shares of $10 par common stock authorized, 10,000 shares issued and outstanding. Other paid-in capital and retained earnings were $200,000 and $300,000 respectively. On January 1, 20X1, any excess of cost over book value is due to a patent, to be amortized over 15 years.
Sight's net income and dividends for two years were:
In November 20X1, Sight Company declared a 10% stock dividend at a time when the market price of its common stock was $50 per share. The stock dividend was distributed on December 31, 20X1.
For both 20X1 and 20X2, Prism Company has accounted for its investment in Sight Company using the simple equity method.
During 20X1, Sight Company sold goods to Prism Company for $40,000, of which $10,000 was on hand on December 31, 20X1. During 20X2, Sight sold goods to Prism for $60,000 of which $15,000 was on hand on December 31, 20X2. Sight's gross profit on intercompany sales is 40%.
Required:
Complete the Figure 8-3 worksheet for consolidated financial statements for 20X2.

Question 26

Manke Company owns a 90% interest in Neske Company. Neske, in turn, owns a 10% interest in Manke. Neske has 10,000 common stock shares outstanding, and Manke has 20,000 common stock shares outstanding. How many shares would each firm show as outstanding in the consolidated balance sheet, under the treasury stock method?

A) Manke, 20,000
B) Manke, 20,000; Neske, 1,000
C) Manke, 18,000; Neske, 1,000
D) Manke, 18,000

Question 27

Parrot, Inc. purchased a 60% interest in Swallow Company on January 1, 20X1, for $204,000. Any excess of cost was attributable to goodwill.
On January 1, 20X4, Swallow purchased 2,400 of its shares held by noncontrolling stockholders for $50 per share. Swallow equity balances on various dates were as follows:
Parrot maintains its investment at cost; Swallow recorded the purchase of its shares as treasury stock at cost.
Required:
Prepare the necessary determination and distribution of excess schedules and all Figure 8-1 worksheet eliminations and adjustments on the following partial worksheet prepared on December 31, 20X5:

Question 28

On January 1, 20X1, Parent Company purchased 9,000 shares of the common stock of Subsidiary Company for $405,000. On this date, Subsidiary had 20,000 shares of $5 par common stock authorized, 10,000 shares issued and outstanding. Other paid-in capital and retained earnings were $150,000 and $200,000 respectively. On January 1, 20X1, any excess of cost over book value is due to a patent, to be amortized over 10 years.
Subsidiary's net income and dividends for two years were:
On January 1, 20X2, Subsidiary Company sold an additional 2,000 shares of common stock for $50 per share. Parent purchased 1,200 shares of the new issue, and noncontrolling shareholders purchased the other 800.
For both 20X1 and 20X2, Parent Company has applied the simple equity method.
Required:
a.
Prepare a schedule that measures Parent's change in interest ownership effective with Sub's issuance of the 2,000 shares and Parent's acquisition of 1,200 of those shares.
b.
Prepare Parent's journal entry to record its purchase of the 1,200 shares on 1/1/X2
c.
Prepare a schedule showing the 12/31/X2 balance of Parent's Investment in Sub account

Question 29

Paula Inc. purchased an 80% interest in the Sharon Co. for $480,000 on January 1, 20X1, when Sharon Co. had the following stockholders' equity:
Any excess is attributable to goodwill.
On January 1, 20X3, Sharon Co. purchased a 10% interest in the Paula Inc. at a price equal to book value. Both firms maintain investments under the cost method.
Required:
a.
Complete the Figure 8-2 partial worksheet for December 31, 20X3, assuming the use of the treasury stock method.
b.
Calculate the distribution of income for 20X3, assuming that internally generated net income is $50,000 for Paula and $20,000 for Sharon.

Question 30

On January 1, 20X1, Parent Company purchased 85% of the common stock, 8,500 shares, of Subsidiary Company for $317,500. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $50,000, $100,000, and $200,000 respectively. Any excess of cost over book value is due to goodwill.
On January 1, 20X2, Subsidiary purchased, from its noncontrolling shareholders, 1,000 shares of its common stock, 10% of the stock outstanding on that date. The price paid was $44,000. The trial balances of Parent and Sub as of 12/31/X2 are given below:
Required (round all amounts to whole dollars; round percentages to one decimal: XX.X%)
a.
Prepare the D&D schedule for the 1/1/X1 acquisition.
b.
Prepare a schedule to determine the change in Parent's interest in Sub.
c.
Prepare all journal entries for Parent for the year ended 12/31/X2
d.
Prepare, in journal form, all elimination entries necessary for the 12/31/X2 consolidation worksheet.

Question 31

On January 1, 20X1, Parent Company purchased 85% of the common stock, 8,500 shares, of Subsidiary Company for $317,500. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $50,000, $100,000, and $200,000 respectively. Any excess of cost over book value is due to goodwill.
On January 1, 20X2, Subsidiary purchased, from its noncontrolling shareholders, 1,000 shares of its common stock, 10% of the stock outstanding on that date. The price paid was $44,000.
Required (round all amounts to whole dollars; round percentages to one decimal: XX.X%)
a.
Prepare an analysis to determine Parent's revised ownership interest following Sub's treasury stock transaction.
b.
Complete the Figure 8-11 worksheet for consolidated financial statements for 20X2

Question 32

Plum & Sterling: Plum Inc. acquired 90% of the capital stock of Sterling Co. on 1/1/X1 at a cost of $540,000. On this date Sterling had equipment (10-year life) carried at $200,000 under market and total equity amounting to $350,000.
On 1/1/X1 Sterling acquired 5% (10,000 shares) of Plum's outstanding common stock for $3 per share. Internally generated net income was $50,000 for Plum and $40,000 for Sterling.
Refer to Plum and Sterling. Consolidated net income for 20X2 is

A) $90,000
B) $86,000
C) $83,500
D) $70,000

Question 33

Plum & Sterling: Plum Inc. acquired 90% of the capital stock of Sterling Co. on 1/1/X1 at a cost of $540,000. On this date Sterling had equipment (10-year life) carried at $200,000 under market and total equity amounting to $350,000.
On 1/1/X1 Sterling acquired 5% (10,000 shares) of Plum's outstanding common stock for $3 per share. Internally generated net income was $50,000 for Plum and $40,000 for Sterling.
Refer to Plum and Sterling. The noncontrolling interest in consolidated net income is

A) $2,000
B) $18,000
C) $7,500
D) $6,800

Question 34

On January 1, 20X1, Prism Company purchased 7,500 shares of the common stock of Sight Company for $495,000. On this date, Sight had 20,000 shares of $10 par common stock authorized, 10,000 shares issued and outstanding. Other paid-in capital and retained earnings were $200,000 and $300,000 respectively. On January 1, 20X1, any excess of cost over book value is due to a patent, to be amortized over 15 years.
Sight's net income and dividends for two years were:
In November 20X1, Sight Company declared a 10% stock dividend at a time when the market price of its common stock was $50 per share. The stock dividend was distributed on December 31, 20X1.
For both 20X1 and 20X2, Prism Company has accounted for its investment in Sight using the cost method.
During 20X1, Sight Company sold goods to Prism Company for $40,000, of which $10,000 was on hand on December 31, 20X1. During 20X2, Sight sold goods to Prism for $60,000 of which $15,000 was on hand on December 31, 20X2. Sight's gross profit on intercompany sales is 40%.
Required:
Complete the Figure 8-4 worksheet for consolidated financial statements for 20X2.

Question 35

On January 1, 20X1, Parent Company purchased 90% of the common stock of Sub-A Company for $90,000. On this date, Sub-A had common stock, other paid-in capital, and retained earnings of $10,000, $20,000, and $60,000 respectively.
On January 1, 20X2, Sub-A Company purchased 80% of the common stock of Sub-B Company for $64,000. On this date, Sub-B Company had common stock, other paid-in capital, and retained earnings of $5,000, $30,000, and $40,000 respectively.
Any excess of cost over book value on either purchase is due to a patent, to be amortized over ten years.
Both Parent and Sub-A have accounted for their investments using the simple equity method.
During 20X2, Sub-B sold merchandise to Sub-A for $20,000, of which one-fourth is still held by Sub-B on December 31, 20X2. Sub-B's usual gross profit is 40%. During 20X3, Sub-B sold more goods to Sub-A for $30,000, of which $10,000 is still on hand on December 31, 20X3.
Required:
Complete the Figure 8-9 worksheet for consolidated financial statements for 20X3.

Question 36

On 1/1/X1 Poncho acquired an 80% interest in Stroller for $560,000 when Stroller's equity consisted of $530,000 paid-in capital and $100,000 Retained Earnings. Any excess of purchase price over was attributed to goodwill.
On January 1, 20X6, Stroller had the following stockholders' equity:
On January 2, 20X6, Company S sold 1,000 additional shares to noncontrolling shareholders in a public offering for $50 per share. Stroller's net income for 20X6 was 80,000. Poncho uses the simple equity method to record its investment in Stroller.
Required:
a.
Prepare Poncho's journal entry to adjust its Investment in Stroller account on January 2, 20X6. Assume that Poncho has $500,000 additional paid-in capital.
b.
Determine the carrying value of Poncho's Investment in Stroller account on December 31, 20X6.