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Question;1.;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.;7-10;Chapter 7;7-11;Chapter 7;2.;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?;3.;Company P purchased 10% of the outstanding stock of;Company S. on January 1, 20X3, for $75,000. Any excess of cost is attributable;to goodwill. On January 1, 20X5, Company P acquired an additional 60% interest;in Company S. for $500,000. At the time of the second purchase, equipment with;a 5-year remaining life was undervalued by $50,000. Any remaining excess was;attributable to goodwill. The following stockholders' equities existed for;Company S:....................;January;1;January;1;January;1;Common stock;20X3;20X5;20X6;$ 80,000;$ 80,000;$ 80,000;Paid-in capital in excess of;par;120,000;120,000;120,000;Retained earnings...............;300,000;500,000;700,000;7-12;Chapter 7;Required;Prepare all necessary eliminating and adjusting entries to these;investments on the Figure 7-1 partial worksheet dated December 31, 20X6.;Include all necessary supporting schedules.;7-13;Chapter 7;4.;Pilatte Company acquired a 90% interest in the;common stock of Sweet Company for $575,000 on January 1, 20X3, when Sweet;Company had the following stockholders' equity;Preferred;stock (5% cumulative, $100 par)..............;$ 80,000;Common;stock ($10;par).................................;350,000;Paid-in;capital in excess of par;75,000;common;stock.........................................;Retained;earnings......................................;150,000;Total................................................;$655,000;========;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.;5.;On January 1, 20X1, Company P purchased a 90%;interest in Company S for $320,000. Company P prepared the following;determination and distribution of excess schedule at that time;Price paid...............................;$320,000;Less: Interest acquired;$200,000;Common stock...........................;Retained earnings......................;100,000;Total stockholders' equity.............;$300,000;270,000;Interest;acquired......................;.90;Excess of cost over book value attributed;$;50,000;to a building (20-year life)...........;========;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, 19X3, for;$340,000.;7-14;Chapter;7;7-15;Chapter 7;Required;a. Assuming that Company P used;the simple equity method to reflect its investment in Company S, prepare;Company P's entries to record the sale.;b. Assuming;that Company P used the cost method to reflect its investment in Company S;prepare the entries to record the sale on Company P's books.;7-16;Chapter 7;6.;Company P Industries purchased a 70% interest in;Company S on January 1, 20X1, at a price $20,000 in excess of book value. The;excess was attributed to a patent with a life of 20 years. 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 cost plus 25%. A summary of transactions;shows the following;Dollar Sales;Ending;Year;Inventory;with Mark-up;with Mark-up;20X3.............................;$110,000;$30,000;20X4.............................;$120,000;$40,000;20X5.............................;$140,000;$60,000;(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.;Item;Calculation;Adjustment to RE of;Minority;Controlling;Patent;Equipment;Merchandise;Bonds;Total;7-17;Chapter 7;7.;On January 1, 20X1, Patrick Company purchased 60% of;the common stock of Solomon Company for $200,000. 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 which was undervalued was a;long-term investment, which was worth $15,000 more than book value.;On July 1, 20X2, Patrick Company purchased an additional 30% of;the common stock of Solomon Company for $140,000.;On July 1, 20X2, the long-term investment was undervalued by;$20,000 and any remaining excess of cost over book value was due to goodwill.;Net;income and dividends for 2 years for Solomon Company were:........................;Net income for year;20X1;20X2;$50,000;$80,000;Dividends, paid-in December................;0;50,000;In 20X2;the net income of Solomon for the first half of the year was $30,000.;In both;20X1 and 20X1, Patrick has accounted for its investment in Solomon using the;cost method.;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.;Required;a.;Using the information above or on the separate;worksheet, prepare determination and distribution of excess schedules for the;two purchases. Use the Patrick company concept (prorata market value approach);in any write-up of assets.;b. Complete;the Figure 7-2 worksheet for consolidated financial statements for 20X2.;7-18;Chapter 7;7-19;Chapter 7

 

Paper#44378 | Written in 18-Jul-2015

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