When the parent company sells a portion of its investment in a subsidiary, the workpaper entry to adjust for the current year’s income sold to noncontrolling stockholders includes a a..
Trang 1Chapter 8 Changes in Ownership Interest
Multiple Choice
1 When the parent company sells a portion of its investment in a subsidiary, the workpaper entry to
adjust for the current year’s income sold to noncontrolling stockholders includes a
a debit to Subsidiary Income Sold
b debit to Equity in Subsidiary Income
c credit to Equity in Subsidiary Income
d credit to Subsidiary Income Sold
2 A parent company may increase its ownership interest in a subsidiary by
a buying additional subsidiary shares from third parties
b buying additional subsidiary shares from the subsidiary
c having the subsidiary purchase its shares from third parties
d all of these
3 If a portion of an investment is sold, the value of the shares sold is determined by using the:
1 first-in, first-out method
2 average cost method
3 specific identification method
a 1
b 2
c 3
d 1 and 3
4 If a parent company acquires additional shares of its subsidiary’s stock directly from the subsidiary
for a price less than their book value:
1 total noncontrolling book value interest increases
2 the controlling book value interest increases
3 the controlling book value interest decreases
a 1
b 2
c 3
d 1 and 3
5 If a subsidiary issues new shares of its stock to noncontrolling stockholders, the book value of the
parent’s interest in the subsidiary may
a increase
b decrease
c remain the same
d increase, decrease, or remain the same
6 The purchase by a subsidiary of some of its shares from noncontrolling stockholders results in the
parent company’s share of the subsidiary’s net assets
a increasing
b decreasing
c remaining unchanged
d increasing, decreasing, or remaining unchanged
Trang 27 The computation of noncontrolling interest in net assets is made by multiplying the noncontrolling
interest percentage at the
a beginning of the year times subsidiary stockholders’ equity amounts
b beginning of the year times consolidated stockholders’ equity amounts
c end of the year times subsidiary stockholders’ equity amounts
d end of the year times consolidated stockholders’ equity amounts
8 Under the partial equity method, the workpaper entry that reverses the effect of subsidiary income
for the year includes a:
1 credit to Equity in Subsidiary Income
2 debit to Subsidiary Income Sold
3 debit to Equity in Subsidiary Income
a 1
b 2
c 3
d both 1 and 2
9 Polk Company owned 24,000 of the 30,000 outstanding common shares of Sloan Company on
January 1, 2010 Polk’s shares were purchased at book value when the fair values of Sloan’s assets and liabilities were equal to their book values The stockholders’ equity of Sloan Company on January 1, 2010, consisted of the following:
Common stock, $15 par value $ 450,000 Other contributed capital 337,500 Retained earnings 712,500
Sloan Company sold 7,500 additional shares of common stock for $90 per share on January 2, 2010
If Polk Company purchased all 7,500 shares, the book entry to record the purchase should increase the Investment in Sloan Company account by
a $562,500
b $590,625
c $675,000
d $150,000
e Some other account
10 Polk Company owned 24,000 of the 30,000 outstanding common shares of Sloan Company on
January 1, 2010 Polk’s shares were purchased at book value when the fair values of Sloan’s assets and liabilities were equal to their book values The stockholders’ equity of Sloan Company on January 1, 2010, consisted of the following:
Common stock, $15 par value $ 450,000 Other contributed capital 337,500 Retained earnings 712,500
Sloan Company sold 7,500 additional shares of common stock for $90 per share on January 2, 2010
If all 7,500 shares were sold to noncontrolling stockholders, the workpaper adjustment needed each time a workpaper is prepared should increase (decrease) the Investment in Sloan Company by
a ($140,625)
b $140,625
c ($112,500)
d $112,500
e None of these
Trang 311 On January 1, 2006, Parent Company purchased 32,000 of the 40,000 outstanding common shares
of Sims Company for $1,520,000 On January 1, 2010, Parent Company sold 4,000 of its shares of Sims Company on the open market for $90 per share Sims Company’s stockholders’ equity on January 1, 2006, and January 1, 2010, was as follows:
Common stock, $10 par value $400,000 $ 400,000
The difference between implied and book value is assigned to Sims Company’s land The amount of the gain on sale of the 4,000 shares that should be recorded on the books of Parent Company is
a $68,000
b $170,000
c $96,000
d $200,000
e None of these
Trang 412 On January 1, 2006, Patterson Corporation purchased 24,000 of the 30,000 outstanding common
shares of Stewart Company for $1,140,000 On January 1, 2010, Patterson Corporation sold 3,000
of its shares of Stewart Company on the open market for $90 per share Stewart Company’s
stockholders’ equity on January 1, 2006, and January 1, 2010, was as follows:
Common stock, $10 par value $ 300,000 $ 300,000
The difference between implied and book value is assigned to Stewart Company’s land As a result
of the sale, Patterson Corporation’s Investment in Stewart account should be credited for
a $165,000
b $206,250
c $120,000
d $142,500
e None of these
13 On January 1, 2006, Peterson Company purchased 16,000 of the 20,000 outstanding common shares
of Swift Company for $760,000 On January 1, 2010, Peterson Company sold 2,000 of its shares of Swift Company on the open market for $90 per share Swift Company’s stockholders’ equity on January 1, 2006, and January 1, 2010, was as follows:
Common stock, $10 par value $200,000 $ 200,000
The difference between implied and book value is assigned to Swift Company’s land Assuming no other equity transactions, the amount of the difference between implied and book value that would
be added to land on a workpaper for the preparation of consolidated statements on December 31,
2010, would be
a $120,000
b $115,000
c $105,000
d $84,000
e None of these
14 On January 1 2010, Paulson Company purchased 75% of Shields Corporation for $500,000
Shields’ stockholders’ equity on that date was equal to $600,000 and Shields had 60,000 shares issued and outstanding on that date Shields Corporation sold an additional 15,000 shares of
previously unissued stock on December 31, 2010
Assume that Paulson Company purchased the additional shares what would be their current
percentage ownership on December 31, 2010?
a 92%
b 87%
c 80%
d 100%
Trang 515 On January 1 2010, Powder Mill Company purchased 75% of Selfine Company for $500,000
Selfine Company’s stockholders’ equity on that date was equal to $600,000 and Selfine Company had 60,000 shares issued and outstanding on that date Selfine Company Corporation sold an
additional 15,000 shares of previously unissued stock on December 31, 2010
Assume Selfine Company sold the 15,000 shares to outside interests, Powder Mill Company’s percent ownership would be:
a 33 1/3%
b 60%
c 75%
d 80%
16 P Corporation purchased an 80% interest in S Corporation on January 1, 2010, at book value for
$300,000 S’s net income for 2010 was $90,000 and no dividends were declared On May 1, 2010, P reduced its interest in S by selling a 20% interest, or one-fourth of its investment for $90,000 What will be the Consolidated Gain on Sale and Subsidiary Income Sold for 2010?
Consolidated Gain on Sale Subsidiary Income Sold
17 P Corporation purchased an 80% interest in S Corporation on January 1, 2010, at book value for
$300,000 S’s net income for 2010 was $90,000 and no dividends were declared On May 1, 2010, P reduced its interest in S by selling a 20% interest, or one-fourth of its investment for $90,000 What would be the balance in the Investment of S Corporation account on December 31, 2010?
a $300,000
b $225,000
c $279,000
d $261,000
18 The purchase by a subsidiary of some of its shares from the noncontrolling stockholders results in
an increase in the parent’s percentage interest in the subsidiary The parent company’s share of the subsidiary’s net assets will increase if the shares are purchased:
a at a price equal to book value
b at a price below book value
c at a price above book value
d will not show an increase
Use the following information for Questions 19-21
On January 1, 2006, Perk Company purchased 16,000 of the 20,000 outstanding common shares of Self Company for $760,000 On January 1, 2010, Perk Company sold 2,000 of its shares of Self Company on the open market for $90 per share Self Company’s stockholders’ equity on January 1, 2006, and January 1,
2010, was as follows:
1/1/06 1/1/10 Common stock, $10 par value $ 200,000 $ 200,000
Other contributed capital 200,000 200,000
Retained earnings 400,000 700,000
$800,000 $1,100,000 The difference between implied and book value is assigned to Self Company’s land
Trang 619 The amount of the gain on sale of the 2,000 shares that should be recorded on the books of Perk
Company is
a $34,000
b $85,000
c $48,000
d $100,000
e None of these
20 As a result of the sale, Perk Company’s Investment in Self account should be credited for
a $110,000
b $137,500
c $80,000
d $95,000
e None of these
21 Assuming no other equity transactions, the amount of the difference between implied and book
value that would be added to land on a work paper for the preparation of consolidated statements on December 31, 2010 would be
a $120,000
b $115,000
c $105,000
d $84,000
22 On January 1, 2010, P Corporation purchased 75% of S Corporation for $500,000 S’s stockholders’
equity on that date was equal to $600,000 and S had 40,000 shares issued and outstanding on that date S Corporation sold an additional 8,000 shares of previously unissued stock on December 31,
2010
Assume that P Corporation purchased the additional shares what would be their current percentage ownership on December 31, 2010?
a 62 1/2%
b 75%
c 79 1/6%
d 100%
23 On January 1, 2010, P Corporation purchased 75% of S Corporation for $500,000 S’s stockholders’
equity on that date was equal to $600,000 and S had 40,000 shares issued and outstanding on that date S Corporation sold an additional 8,000 shares of previously unissued stock on December 31,
2010
Assume S sold the 8,000 shares to outside interests, P’s percent ownership would be:
a 56 1/4%
b 62 1/2%
c 75%
d 79 1/6%
Trang 7Problems
8-1 Piper Company purchased Snead Company common stock through open-market purchases as
follows:
Acquired Date Shares Cost
Snead Company had 12,000 shares of $20 par value common stock outstanding during the entire period Snead had the following retained earnings balances on the relevant dates:
Snead Company declared no dividends in 2009 or 2010 but did declare $60,000 of dividends in
2011 Any difference between cost and book value is assigned to subsidiary land Piper uses the equity method to account for its investment in Snead
Required:
A Prepare the journal entries Piper Company will make during 2010 and 2011 to account for its investment in Snead Company
B Prepare workpaper eliminating entries necessary to prepare a consolidated statements
workpaper on December 31, 2011
8-2 On January 1, 2008, Patel Company acquired 90% of the common stock of Seng Company for
$650,000 At that time, Seng had common stock ($5 par) of $500,000 and retained earnings of
$200,000
On January 1, 2010, Seng issued 20,000 shares of its unissued common stock, with a market value
of $7 per share, to noncontrolling stockholders Seng’s retained earnings balance on this date was
$300,000 Any difference between cost and book value relates to Seng’s land No dividends were declared in 2010
Required:
A Prepare the entry on Patel’s books to record the effect of the issuance assuming the cost method
B Prepare the elimination entries for the preparation of a consolidated statements workpaper on December 31, 2010 assuming the cost method
Trang 88-3 Pratt Company purchased 40,000 shares of Silas Company’s common stock for $860,000 on
January 1, 2010 At that time Silas Company had $500,000 of $10 par value common stock and
$300,000 of retained earnings Silas Company’s income earned and increase in retained earnings during 2010 and 2011 were:
Increase in Retained Earnings 200,000 300,000
Silas Company income is earned evenly throughout the year
On September 1, 2011, Pratt Company sold on the open market, 12,000 shares of its Silas Company stock for $460,000 Any difference between cost and book value relates to Silas Company land Pratt Company uses the cost method to account for its investment in Silas Company
Required:
A Compute Pratt Company’s reported gain (loss) on the sale
B Prepare all consolidated statements workpaper eliminating entries for a workpaper on
December 31, 2011
8-4 Pelky made the following purchases of Stark Company common stock:
Stockholders’ equity information for Stark Company for 2010 and 2011 follows:
Common stock, $10 par value $1,000,000 $1,000,000
Dividends declared, 12/15 (30,000) (40,000)
Retained earnings, 12/31 380,000 480,000
Total stockholders’ equity, 12/31 $1,380,000 $1,480,000
On July 1, 2011, Pelky sold 14,000 shares of Stark Company common stock on the open market for
$22 per share The shares sold were purchased on January 1, 2010 Stark notified Pelky that its net income for the first six months was $70,000 Any difference between cost and book value relates to subsidiary land Pelky uses the cost method to account for its investment in Stark Company
Required:
A Prepare the journal entry made by Pelky to record the sale of the 14,000 shares on July 1,
2011
B Prepare the workpaper eliminating entries needed for a consolidated statements workpaper on December 31, 2011
C Compute the amount of noncontrolling interest that would be reported on the consolidated balance sheet on December 31, 2011
Trang 98-5 P Company purchased 96,000 shares of the common stock of S Company for $1,200,000 on January
1, 2007, when S’s stockholders’ equity consisted of $5 par value, Common Stock at $600,000 and Retained Earnings of $800,000 The difference between cost and book value relates to goodwill
On January 2, 2010, S Company purchased 20,000 of its own shares from noncontrolling interests for cash of $300,000 to be held as treasury stock S Company’s retained earnings had increased to
$1,000,000 by January 2, 2010 S Company uses the cost method in regards to its treasury stock and
P Company uses the equity method to account for its investment in S Company
Required:
Prepare all determinable workpaper entries for the preparation of consolidated statements on
December 31, 2010
8-6 Penner Company acquired 80% of the outstanding common stock of Solk Company on January 1,
2008, for $396,000 At the date of purchase, Solk Company had a balance in its $2 par value
common stock account of $360,000 and retained earnings of $90,000 On January 1, 2010, Solk Company issued 45,000 shares of its previously unissued stock to noncontrolling stockholders for
$3 per share On this date, Solk Company had a retained earnings balance of $152,000 The
difference between cost and book value relates to subsidiary land No dividends were paid in 2010 Solk Company reported income of $30,000 in 2010
Required:
A Prepare the journal entry on Penner’s books to record the effect of the issuance assuming the equity method
B Prepare the eliminating entries needed for the preparation of a consolidated statements
workpaper on December 31, 2010, assuming the equity method
8-7 Petty Company acquired 85% of the common stock of Selmon Company in two separate cash
transactions The first purchase of 108,000 shares (60%) on January 1, 2009, cost $735,000 The second purchase, one year later, of 45,000 shares (25%) cost $330,000 Selmon Company’s
stockholders’ equity was as follows:
December 31 December 31
On April 1, 2010, after a significant rise in the market price of Selmon Company’s stock, Petty Company sold 32,400 of its Selmon Company shares for $390,000 Selmon Company notified Petty Company that its net income for the first three months was $22,000 The shares sold were identified
as those obtained in the first purchase Any difference between cost and book value relates to
goodwill Petty uses the partial equity method to account for its investment in Selmon Company
Trang 10Required:
A Prepare the journal entries Petty Company will make on its books during 2009 and 2010 to account for its investment in Selmon Company
B Prepare the workpaper eliminating entries needed for a consolidated statements workpaper on December 31, 2010
Short Answer
1 A parent’s ownership percentage in a subsidiary may change for several reasons Identify three reasons the ownership percentage may change
2 A parent company’s equity interest in a subsidiary may change as the result of the issuance of additional shares of stock by the subsidiary Describe the affect on the parent’s investment account when the new shares are (a) purchased ratably by the parent and noncontrolling shareholders or (b) entirely by the noncontrolling shareholders
Short Answer Question from the Textbook
1 Identify three types of transactions that result in a change in a parent company’s ownership interest in its subsidiary
2 Why is the date of acquisition of subsidiary stock important under the purchase method?
3 When a parent company has obtained control of a subsidiary through several purchases and
subsequently sells a portion of its shares in the subsidiary, how is the carrying value of the shares sold determined?
4 When a parent company that records its investment using the cost method during a fiscal year sells a portion of its investment, explain the correct accounting for any differences between selling price and recorded values
5 ABC Corporation purchased 10,000 shares(80%) of EZ Company at $35 per share and sold them several years later for $35 per share The consolidated income statement reports a loss on the sale of this
investment Explain
6 Explain how a parent company that owns less than100% of a subsidiary can purchase an entire new is-sue of common stock directly from the subsidiary
7 When a subsidiary issues additional shares of stock to noncontrolling stockholders and such issuance results in an increase in the book value of the parent’s share of the subsidiary’s equity, how should the increase be reflected in the financial statements? What if it results in a decrease?
8 P Company holds an 80% interest in S Company Determine the effect (that is, increase, decrease, no change, not determinable) on both the total book value of the noncontrolling interest and the
noncontrolling interest’s percentage of ownership in the net assets of S Company for each of the
following situations:
a P Company acquires additional shares directly from S Company at a price equal to the book value per share of the S Company stock immediately prior to the issuance
b S Company acquires its own shares on the open market The cost of these shares is less than their book value
c Assume the same situation as in (b) except that the cost of the shares is greater than their book value