Solution manual advanced accounting 10e by fischer taylor CH08

Exercise 8-1, Concluded Determination and Distribution of Excess Schedule Company Implied Fair Value Parent Price 90% NCI Value 10% Adjustment of identifiable accounts: Worksheet

CHAPTER 8 UNDERSTANDING THE ISSUES

1 The stock dividend will result in the

follow-ing entry befollow-ing made by the subsidiary:

The parent need make no adjustment to its

investment account since there has been

no change in the total subsidiary equity

When eliminating the investment in

subsid-iary account, the parent will now simply

eliminate its share of the revised (but equal

in total) subsidiary equity accounts

2 The parent’s share in any equity increases

from the excess of the current book value

of $40 per share ($4,000,000/100,000

shares) that the subsidiary receives The

parent does not record as income the

in-crease in equity that results Rather, it is an

increase in the parent’s paid-in capital in

excess of par The calculation in this case

Increase in equity interest $ 150,000

3 The subsidiary is selling the additional

shares at $50 each, which is in excess of

the current book value of $40 per share

($4,000,000/100,000 shares)

(a) If the parent buys less than its current ownership percentage of shares, it will increase its equity to the extent others pay more than book value The in- crease will normally go to paid-in capi- tal in excess of par

(b) If the parent maintains its percentage,

there is no impact other than an crease in the investment account equal

in-to the price paid The parent will supply 90% of the funds and will own 90% of the equity provided by the new funds (c) If the parent buys more than 90% of

the shares issued, it will adjust its vestment based on the impact of the sale A sale at more than book value will cause a reduction in the invest- ment; a sale at less than book value will cause an increase in the invest- ment

4 Control, in this example, is a “chain link”

process If A controls B and B, in turn, controls C, then all three are under com- mon ownership, and B and C are controlled

by A

In the distribution of Company C’s $10,000 income, 40% (or $4,000) will flow to the NCI of Company C, and 60% (or $6,000) will flow to Company B, the controlling in- terest That $6,000 will flow as follows: 40% (or $2,400) will flow to the NCI of Company

B, and 60% (or $3,600) will flow to

Compa-ny A, the controlling interest

5 The 2% holding in Company P shares,

owned by Company S, is best treated as treasury stock This approach views the subsidiary as the parent’s agent in purchas- ing parent company shares As treasury stock, the 2,000 shares will not share in the distribution of income and will not create a separate excess of cost or book value

418

EXERCISES EXERCISE 8-1

To record stock dividend distributed on July 1, 20X1

Lamp Company Stockholders’ Equity December 31, 20X1

Retained earnings [$200,000 original balance +

$120,000 income – $105,000 stock dividend –

(2) Memo: Investment in Lamp Company now includes 2,700 (30,000 × 90% × 10%) additional shares for a total of 29,700 shares

To record receipt of cash dividend (29,700 shares × $0.50)

To record 90% interest in Lamp Company’s $120,000 net

To eliminate current-year entries to investment account

Exercise 8-1, Concluded

Determination and Distribution of Excess Schedule

Company Implied Fair Value

Parent Price (90%)

NCI Value (10%)

Adjustment of identifiable accounts:

Worksheet Key

Calculation:

Interest after sale

*(10,000 shares × 90%)/(10,000 shares + 2,000 shares)

420

EXERCISE 8-3

Subsidiary equity after sale ($450,000 + $50,000

Subsidiary equity prior to sale (after fair value adjustment)

Maintain ownership percentage interest:

Increase ownership percentage interest:

Retained Earnings—Tom Company (assumes no paid-in capital

Decrease ownership percentage interest:

EXERCISE 8-4

To convert investment from cost to equity for income

Income equity adjustment:

*(60% × 30,000 shares)/(30,000 – 5,000 treasury stock shares)

Adjustment for treasury stock purchase:

To eliminate the investments against the subsidiary’s equity

*60% × 30,000 shares × $12

December 31, 20X2 Cash 4,000 Cash 3,000

Investment in B 32,000 Investment in C 12,000 Subsidiary Income—B 36,000 Subsidiary Income—C 15,000

80% × ($30,000 + $15,000 from C)

December 31, 20X3 Cash 4,000 Cash 3,000

Investment in B 42,400 Investment in C 15,000 Subsidiary Income—B 46,400 Subsidiary Income—C 18,000

80% × ($40,000 + $18,000 from C)

90% × ($40,000 + $21,000 from C)

Parent Price (60%)

NCI Value (40%)

Adjustment of identifiable accounts:

Adjustment

Worksheet Key

*NCI of Company S-2 is also increased by $40,000

(2) Eliminations and Adjustments:

424

EXERCISE 8-7

Companies A, B, and C Consolidated Income Statement For Year Ended December 31, 20X5 Sales [($300,000 + $400,000 + $100,000) –

Cost of goods sold [$200,000 + $300,000 + $60,000 –

intercompany sales of $75,000 – realized profit

in beginning inventory of $1,800 + unrealized profit

Expenses ($60,000 + $30,000 + $10,000 – $4,000

Subsidiary Company C Income Distribution

Subsidiary Company B Income Distribution*

Parent Company A Income Distribution

EXERCISE 8-8 Determination and Distribution of Excess Schedule

Company Implied Fair Value

Parent Price (60%)

NCI Value (40%)

Adjustment of identifiable accounts:

Adjustment

Amortization per Year Life

Worksheet Key

426

Exercise 8-9, Concluded Subsidiary O Company Income Distribution

Subsidiary N Company Income Distribution

Parent Company M Income Distribution

Internally generated net

Parent Price (60%)

NCI Value (40%)

Adjustment of identifiable accounts:

Adjustment

Amortization per Year Life

Worksheet Key

Consolidated Income Statement For Year Ended December 31, 20X3

Less cost of goods sold 840,000

Less expenses (including equipment depreciation of $1,500) 231,500

Consolidated net income $ 78,500

Subsidiary Downer Corporation Income Distribution

Parent Myles Corporation Income Distribution

Parent Price (60%)

NCI Value (40%)

Adjustment of identifiable accounts:

Adjustment

Amortization per Year Life

Worksheet Key

(2) Excess of cost or book value due to swap

Equity after swap:

Remaining excess ($30,000 – 2 yrs × $1,500

Equity prior to swap:

PROBLEMS PROBLEM 8-1

Zee Corporation booked entries for adjustments to investment in Tomline Company:

To record parent’s share of subsidiary

20X2

To adjust investment for subsidiary sale

of stock to noncontrolling interest

20X2

To record 64% parent share of subsidiary

*Calculations are on page 431

430

Problem 8-1, Continued Zee Corporation booked entries for adjustments to investment in Sandel Company:

20X1

To record 60% parent share of subsidiary

20X1

To record 62% parent share of subsidiary

20X2

To record decrease in equity due to

Problem 8-1, Concluded Schedules to Determine Zee Corporation’s Adjustments to Its Investment

Total Change in Total Controlling Change in Subsidiary Parent’s Parent’s Subsidiary Subsidiary Share of Controlling Shares Shares Interest Equity Equity Equity Investment Tomline

January 1, 20X1, Balances 10,000 8,000 80% $220,000 $176,000 20X1 Income 10,000 8,000 80 $40,000 260,000 208,000 (1) $32,000 December 31, 20X1, Stock Dividend 11,000 8,800 80 260,000 208,000 January–June 20X2, Income 11,000 8,800 80 25,000 285,000 228,000 (2) 20,000 July 1, 20X2, Stock Sale 13,750 8,800 64 88,000 373,000 238,720* (3)

10,720

July–December 20X2, Income 13,750 8,800 64 25,000 398,000 254,720 (4) 16,000 Sandel

January 1, 20X1, Balances 30,000 18,000 60 400,000 240,000 January–June 20X1, Income 30,000 18,000 60 15,000 415,000 249,000 (5) 9,000 July 1, 20X1, Stock Sale 35,000 21,700 62 100,000 515,000 319,300** (6)

70,300

July–December 20X1, Income 35,000 21,700 62 15,000 530,000 328,600 (7) 9,300 January 1, 20X2, Purchase of

Treasury Stock 30,000 21,700 72.333 (90,000) 440,000 318,265***(8)

(10,335)

20X2 Income 30,000 21,700 72.333 40,000 480,000 347,198 (9) 28,933

*$373,000 × 64% = $238,720; balance after $238,720 – balance before $228,000 = $10,720 increase

**$515,000 × 62% = $319,300; balance after $319,300 – balance before $249,000 = $70,300 increase

$70,300 increase in investment – $74,000 paid for new shares = $3,700 decrease in Zee’s equity

***$440,000 × 72.333% = $318,265; balance after $318,265 – balance before $328,600 = $10,335 decrease

432

PROBLEM 8-2

Bear Corporation purchase of Kelly Company Shares:

Determination and Distribution of Excess Schedule

Company Implied Fair Value

Parent Price (60%)

NCI Value (40%)

Adjustment of identifiable accounts:

Worksheet Key

Bear Corporation purchase of Samco Company Shares:

Determination and Distribution of Excess Schedule

Company Implied Fair Value

Parent Price (80%)

NCI Value (20%)

Adjustment of identifiable accounts:

Worksheet Key

Problem 8-2, Continued

Schedules of Equity Adjustments for January 1, 20X1–December 31, 20X3

Adjustments Reflected

January 1, 20X1, Balances 20,000 12,000 60% $375,000* $225,000

January–June 20X1, Income 20,000 12,000 60 $ 25,000 400,000 240,000 $ 15,000 $ 15,000

July 1, 20X1, Sale of stock 25,000 15,000 60 100,000 500,000 300,000 60,000**

July 20X1–December 20X2, Income 25,000 15,000 60 85,000 585,000 351,000 51,000 51,000

December 31, 20X2, Cash dividend 25,000 15,000 60 (25,000) 560,000 336,000 (15,000) (15,000)

January–July 20X3, Income 25,000 15,000 60 30,000 590,000 354,000 18,000 18,000

July 1, 20X3, Treasury stock purchase 20,000 15,000 75 (135,000) 455,000 341,250*** (12,750)

$(12,750) July–December 20X3, Income 20,000 15,000 75 30,000 485,000 363,750 22,500 22,500

Total adjustments $ 91,500 $(12,750)

*From D&D

**Required debit to investment account and credit to Cash for $60,000 to record additional purchase

***After (75% × $455,000 = $341,250) – before $354,000 = $12,750 decrease in equity

436

Problem 8-2, Concluded

Schedules of Equity Adjustments for January 1, 20X1–December 31, 20X3

Adjustments Reflected

an Increase to

January 1, 20X1, Balances 10,000 8,000 80% $312,500* $250,000

Income, 20X1 10,000 8,000 80 40,000 352,500 282,000 $32,000 $32,000

December 31, 20X1, Stock dividend 11,000 8,800 80 352,500 282,000

January–September 20X2, Income 11,000 8,800 80 22,500 375,000 300,000 18,000 18,000

October 1, 20X2, Sale of stock 15,000 9,000 60 120,000 495,000 297,000 (3,000)**

$(9,000)** October 20X2–December 20X3, Income 15,000 9,000 60 62,500 557,500 334,500 37,500 37,500

Total adjustments $87,500 $(9,000)

*From D&D

**The investment has been increased by $6,000 (cost of the stock purchased by the parent), while the controlling share of equity has decreased by

$3,000 The total decrease of $9,000 is deducted from additional paid-in capital in excess of par The adjustment shown reduces the investment

ac-count (and additional paid-in capital in excess of par) to reconcile it with the parent’s share of the subsidiary equity

PROBLEM 8-3

Determination and Distribution of Excess Schedule

Company Implied Fair Value

Parent Price (80%)

NCI Value (20%)

Adjustment of identifiable accounts:

Adjustment

Amortization per Year Life

Worksheet Key

438

Problem 8-3, Continued

Pepka Company and Subsidiary Sheck Company Worksheet for Consolidated Financial Statements For Year Ended December 31, 20X4

Cost of Goods Sold 1,120,000 450,000 (EI) 10,000 (IS) 200,000 1,380,000

Consolidated Net Income (142,000)

To NCI (see distribution schedule) 24,120 (24,120)

To Controlling Interest (see distribution schedule) 117,880 (117,880) Total NCI (442,800)

(442,800)

Retained Earnings—Controlling Interest, December 31, 20X4 (507,080)

(507,080)

Totals 0

440

Problem 8-3, Concluded Eliminations and Adjustments:

($180,000 – $100,000)]

Controlling interest in subsidiary equity after sale

(64% × {$780,000 + $250,000 sale + $115,000 goodwill

Controlling interest in subsidiary equity before sale

$960)

(D)/(NCI) Distribute $112,000 (64% × $175,000) excess and $63,000 (36% × $175,000) NCI

adjustment according to the determination and distribution of excess schedule

(1) Building, $60,000 and (2) Goodwill, $115,000

Dis-tribute to retained earnings, 64% controlling, 36% NCI

Subsidiary Sheck Company Income Distribution

Parent Pepka Company Income Distribution

Internally generated net

64% × Sheck adjusted

PROBLEM 8-4 Determination and Distribution of Excess Schedule

Company Implied Fair Value

Parent Price (60%)

NCI Value (40%)

Adjustment of identifiable accounts:

Worksheet Key

442

Problem 8-4, Continued

Mitta Corporation and Subsidiary Train Company Worksheet for Consolidated Financial Statements For Year Ended December 31, 20X3

(ISb) 20,000 (2,500,000) Subsidiary Income (32,000) (CY1) 32,000 Cost of Goods Sold 1,170,000 420,000 (EIa) 2,000 (BIa) 1,500

(EIb) 600 (ISa) 30,000 (BIb) 1,800 (ISb) 20,000 1,539,300

444

Problem 8-4, Continued

Mitta Corporation and Subsidiary Train Company Worksheet for Consolidated Financial Statements For Year Ended December 31, 20X3

(Concluded)

Consolidated Net Income (200,700)

To NCI (see distribution schedule) 18,432 (18,432)

To Controlling Interest (see distribution schedule) 182,268 (182,268)

Eliminations and Adjustments:

(CV) Conversion entry for stock sale:

Interest after sale [64% × ($262,000 + $30,000 goodwill + $100,000 proceeds)] $250,880 Interest prior to sale [60% × ($262,000 + $30,000 goodwill)] 175,200 Increase/(Decrease) $ 75,680 Price paid (4,000 × $20) (80,000) Total decrease in equity and investment $ (4,320) (CY1) Eliminate the current-year entries for income

(CY2) Eliminate the current-year entries for dividends

(EL) Eliminate parent’s 64% share of subsidiary equity

(D)/(NCI) Distribute original excess (64% × $30,000) and NCI adjustment (36% × $30,000)

(BIa) Eliminate profit on Mitta’s goods in Train’s beginning inventory

($6,000 × 25% = $1,500) Distribute to retained earnings

(ISa) Eliminate 20X3 sales of $30,000

(EIa) Eliminate profit on Mitta’s goods in Train’s ending inventory ($8,000 × 25% = $2,000)

Sales from Train to Mitta:

(BIb) Eliminate profit on Train’s goods in Mitta’s beginning inventory ($6,000 × 30% = $1,800), allocate 64% and 36%

(ISb) Eliminate 20X3 sales of $20,000

(EIb) Eliminate profit on Train’s goods in Mitta’s ending inventory ($2,000 × 30% = $600)

446

Problem 8-4, Concluded Subsidiary Train Company Income Distribution

Parent Mitta Corporation Income Distribution

PROBLEM 8-5

Investment in Webo Company, January 1, 20X1:

Determination and Distribution of Excess Schedule

Company Implied Fair Value

Parent Price (80%)

NCI Value (20%)