Test bank with answers for advanced accounting 3e by jeter chapter 08

To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Changes in Ownership Interest Multiple Choice 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 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 If a portion of an investment is sold, the value of the shares sold is determined by using the: first-in, first-out method average cost method specific identification method a b c d and If a parent company acquires additional shares of its subsidiary’s stock directly from the subsidiary for a price less than their book value: total noncontrolling book value interest increases the controlling book value interest increases the controlling book value interest decreases a b c d and 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 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 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 8-2 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 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 Under the partial equity method, the workpaper entry that reverses the effect of subsidiary income for the year includes a: credit to Equity in Subsidiary Income debit to Subsidiary Income Sold debit to Equity in Subsidiary Income a b c d both and 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 Total $1,500,000 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 Total $1,500,000 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 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Changes in Ownership Interest 11 8-3 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: 1/1/06 1/1/10 Common stock, $10 par value $400,000 $ 400,000 Other contributed capital 400,000 400,000 Retained earnings 800,000 1,400,000 $1,600,000 $2,200,000 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 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 8-4 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 12 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: 1/1/06 1/1/10 Common stock, $10 par value $ 300,000 $ 300,000 Other contributed capital 300,000 300,000 Retained earnings 600,000 1,050,000 $1,200,000 $1,650,000 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: 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 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 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% http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Changes in Ownership Interest 15 8-5 On January 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 a $9,000 $6,000 b $9,000 $15,000 c $15,000 $6,000 d $15,000 $15,000 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 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 8-6 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 19 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% http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Changes in Ownership Interest 8-7 Problems 8-1 Piper Company purchased Snead Company common stock through open-market purchases as follows: Acquired Date Shares Cost 1/1/09 1,500 $ 50,000 1/1/10 3,300 $ 90,000 1/1/11 6,600 $250,000 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: January 1, 2009 January 1, 2010 January 1, 2011 December 31, 2011 $ 90,000 30,000 150,000 300,000 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 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 8-8 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 8-3 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: 2010 Income earned $260,000 Increase in Retained Earnings 200,000 2011 $360,000 300,000 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: Date 1/1/10 1/1/11 Shares 70,000 (70%) 10,000 (10%) Cost $1,000,000 160,000 Stockholders’ equity information for Stark Company for 2010 and 2011 follows: 2010 Common stock, $10 par value 1/1 Retained earnings Net income Dividends declared, 12/15 Retained earnings, 12/31 Total stockholders’ equity, 12/31 2011 $1,000,000 $1,000,000 300,000 110,000 (30,000) 380,000 $1,380,000 380,000 140,000 (40,000) 480,000 $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 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Changes in Ownership Interest 8-5 8-9 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 2009 Common Stock, $5 par Retained Earnings, 1/1 Net Income Dividends Declared, 9/30 Retained Earnings, 12/31 Total Stockholders’ Equity, 12/31 $ 900,000 262,000 69,000 (30,000) 301,000 $1,201,000 December 31 2010 $ 900,000 302,000 90,000 (38,000) 354,000 $1,254,000 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 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 8-10 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Required: 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 A parent’s ownership percentage in a subsidiary may change for several reasons Identify three reasons the ownership percentage may change 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 Identify three types of transactions that result in a change in a parent company’s ownership interest in its subsidiary Why is the date of acquisition of subsidiary stock important under the purchase method? 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? 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 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 Explain how a parent company that owns less than100% of a subsidiary can purchase an entire new issue of common stock directly from the subsidiary 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? 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 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Changes in Ownership Interest 8-11 d P Company and a noncontrolling stockholder each acquire 100 shares directly from S Com-pany at a price below the book value per share Business Ethics Question from Textbook During a recent review of the quarterly financial statements and supporting ledgers, you noticed several unusual journal entries While the dollar amounts of the journal entries were not large, there did not appear to be supporting documentation You decide to bring the matter to the attention of your immediate supervisor After you mentioned the issue, the supervisor calmly stated that the matter would be looked into and that you should not worry about it.1.You feel a bit uncomfortable about the situation What is your responsibility and what action, if any, should you take? http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 8-12 ANSWER KEY Multiple Choice d d d b d 10 d c c c d 11 12 13 14 15 b d c c b 16 a 17 c 18 b 19 b 20 d 21 c 22 c 23 b Problems 8-1 A 2010 Retained Earnings [0.125 × (90,000 – 30,000)] Investment in Snead Company 7,500 7,500 Investment in Snead Company [0.40 × (150,000 – 30,000)] Cash 48,000 2011 Cash (60,000 × 0.95) Investment in Snead Company 57,000 Investment in Snead Company [0.95 × (300,000 + 60,000 – 150,000)] Equity in Subsidiary Income B Equity in Subsidiary Income Dividends Declared—Snead Investment in Snead Company Common Stock 1/1 Retained Earnings—Snead Difference Between Implied and Book Value Investment in Snead Company Noncontrolling Interest in Equity 48,000 57,000 199,500 199,500 199,500 57,000 142,500 240,000 150,000 60,000 Land 430,500 19,500 60,000 Difference Between Implied and Book Value http://downloadslide.blogspot.com 60,000 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Changes in Ownership Interest 8-13 8-2 A Loss from Subsidiary Issuance of Shares Investment in Seng Company 15,000* 15,000* Patel Company’s share of Seng Company’s equity before the new issue (0.90 × 800,000) Patel Company’s share of Seng Company’s equity after the new issue 0.75 × (800,000 + 140,000) Decrease in Patel Company’s interest B Investment in Seng Company (300,000 – 200,000) × 0.90 1/1 Retained Eanings—Patel Common Stock Other Contributed Capital Retained Earnings Difference Between Implied and Book Value Investment in Seng Company (650,000 – 15,000 + 90,000) Noncontrolling Interest in Equity Land $720,000 705,000 $ 15,000 90,000 90,000 600,000 40,000 300,000 20,000 725,000 235,000 20,000 Difference Between Implied and Book Value 20,000 8-3 A Selling price $460,000 Carrying value sold ($860,000 × 12,000/40,000) 258,000 Gain on sale of investment $202,000 B Investment in Silas Company (0.56 × $200,000) 1/1 Retained Earnings—Pratt Company 112,000 Gain on Sale of Investments 1/1 Retained Earnings—Pratt Company 48,000 112,000 48,000 0.8 × $200,000 × 12/40 Gain on Sale of Investments Subsidiary Income Sold 57,600 57,600 (8/12 × $360,000 = $240,000 × 0.8 × 12/40) Common Stock—Silas Company 1/1 Retained Earnings—Silas Company Difference Between Implied and Book Value (28/40 × $220,000) Investment in Silas Company Noncontrolling Interest in Equity 500,000 500,000 154,000 http://downloadslide.blogspot.com 714,000 440,000 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 8-14 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Land 154,000 Difference Between Implied and Book Value 8-4 A 154,000 Cash (14,000 × $22) Investment in Stark Company Gain on Sale of Investments 308,000 200,000* 108,000 *14,000/70,000 × $1,000,000 B Investment in Stark Company Retained Earnings 1/1—Pelky 44,800 44,800 [0.7 × 0.8 × ($380,000 - $300,000)] Gain on Sale of Investments Retained Earnings 1/1—Pelky ($80,000 × 0.7 × 0.2) 11,200 11,200 Gain on Sale of Investments ($70,000 × 0.7 × 0.2) Subsidiary Income Sold Dividend Income (0.66 × $40,000) Dividends Declared—Stark Common Stock—Stark Retained Earnings—Stark Difference Between Implied and Book Value Investment in Stark Company 9,800 9,800 26,400 26,400 1,000,000 380,000 94,000 1,004,800 *$1,000,000 + 160,000 - $200,000 + $44,800 Noncontrolling Interest in Equity Land 469,200 94,000 Difference Between Implied and Book Value C $1,480,000 × 0.34 = $503,200 noncontrolling interest http://downloadslide.blogspot.com 94,000 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Changes in Ownership Interest 8-15 8-5 A Percentage on 1/1/2007 Percentage on 1/2/2010 96,000 / 120,000 = 80% 96,000 / 100,000 = 96% P Company’s share of S Company’s equity: Before reacquisition of treasury stock (80% × $1,600,000) = $1,280,000 After reacquisition of treasury stock [96% × ($1,600,000 - $300,000)= 1,248,000 Decrease in P Company’s share $ 32,000 Elimination entries determinable: Common Stock—S Retained Earnings—S Difference Between Cost and Book Value Treasury Stock—S (96% × $300,000) Investment in S Company 600,000 1,000,000 112,000 288,000 1,360,000 64,000 ($1,200,000 + $160,000) Noncontrolling Interest in Equity (600,000 + 1,000,000) x 04 Goodwill* Difference Between Implied and Book Value 112,000 112,000 *Original difference $1,200,000 – (80% × $1,400,000) = Plus: Decrease from treasury stock transaction 8-6 A B Investment in Solk Company* Gain from Issuance of Subsidiary Shares Equity Income ($30,000 × 0.64) Investment in Solk Company Common Stock—Solk Company Other Contributed Capital—Solk Company Retained Earnings—Solk Difference Between Implied and Book Value Investment in Solk Company Noncontrolling Interest in Equity Land $80,000 32,000 $112,000 4,480 4,480 19,200 19,200 450,000 45,000 152,000 36,000 450,080 232,920 36,000 Difference Between Implied and Book Value 36,000 *Penner Company’s share of Solk Company’s equity: Before sale to noncontrolling shareholders (0.8 × $512,000) $409,600 After sale to noncontrolling shareholders (0.64* × ($512,000 + $135,000) 414,080 Increase in Penner Company’s share $ 4,480 *(0.80 × 180,000) / (180,000 + 45,000) = 0.64 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 8-16 8-7 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition A 2009 Investment in Selmon Company Cash 735,000 735,000 Cash 18,000 Investment in Selmon Company (0.60 × $30,000 subsidiary dividend) Investment in Selmon Company Equity in Subsidiary Income (0.60 × $69,000 subsidiary income) 2010 Investment in Selmon Company Cash 18,000 41,400 41,400 330,000 330,000 Investment in Selmon Company Equity in Subsidiary Income (0.85 × $22,000 income for 1st three months) Cash 18,700 18,700 390,000 Investment in Selmon Company* Gain on Sale of Investment 231,480 158,520 *Cost of first purchase (60%) 2009 subsidiary income (0.60 × $69,000) 2009 subsidiary dividends (0.60 × $30,000) 2010 subsidiary income to April (0.60 × $22,000) Total Portion sold (32,400 ÷ 108,000) Carrying value of investment sold $735,000 41,400 (18,000) 13,200 771,600 × 0.30 $231,480 Cash 25,460 Investment in Selmon Company (0.67* × $38,000 subsidiary dividend) **0.67 = (108,000 + 45,000 - 32,400) 25,460 180,000 Investment in Selmon Company 45,560 Equity in Subsidiary Income [0.67 × ($90,000 – $22,000)] http://downloadslide.blogspot.com 45,560 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Changes in Ownership Interest 8-17 B Equity in Subsidiary Income ($18,700 + $45,560) 64,260 Subsidiary Income Sold ($22,000 × 0.60 × 0.30) Dividends Declared—Selmon ($38,000 × 0.67) Investment in Selmon Company Common Stock—Selmon 1/1 Retained Earnings—Selmon Difference Between Implied and Book Value Investment In Selmon Company Noncontrolling Interest in Equity Land 3,960 25,460 34,840 900,000 302,000 55,540 860,880 396,660 55,540 Difference Between Implied and Book Value 55,540 Short Answer A parent’s ownership percentage in a subsidiary may change because (a) additional shares of the subsidiary may be purchased on the open market, (b) some of the shares held by the parent company may be sold; or (c) the subsidiary may enter into capital transactions with the parent or outside parties that change the parent’s ownership percentage (a) If the shares issued by the subsidiary are purchased ratably by the parent and noncontrolling stockholders the percentage of stock owned by the parent and noncontrolling stockholders after the new issue would be the same as their respective interests prior to the issue (b) If the new shares are purchased entirely by the noncontrolling shareholders, the parents ownership percentage is reduced The book value of the parent’s interest in the subsidiary may increase, decrease, or remain the same depending on the relationship of the issue price to book value per share of stock Short Answer Questions from Textbook Solutions The three types of transactions that result in a change in a parent company’s ownership interest are: a The parent company may buy additional shares of subsidiary stock or sell a portion of its holdings; b The subsidiary may issue additional shares of stock to outsiders; c The subsidiary may acquire or reissue treasury shares from or to the noncontrolling shareholders or the parent company The date of acquisition of subsidiary stock is important under the purchase method because subsidiary retained earnings accumulated prior to the date of acquisition constitute a portion of the equity acquired by the parent company, whereas the parent’s share of subsidiary retained earnings accumulated after acquisition is a part of consolidated retained earnings On the date that control is achieved, all previous purchases are revalued to reflect the market value on the ―acquisition date,‖ which is the date that control is achieved Thus, they all have the same basis The correct accounting depends on whether the parent retains control, or maintains some ownership but surrenders control If the parent retains control, no gain or loss is reflected in the Income Statement Instead, an adjustment is made to contributed capital If the parent surrenders control, the entire interest http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 8-18 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition is adjusted to fair value, and a gain or loss reflected in the Income Statement on all shares owned prior to the sale A loss would be reported because the total of the $5 per share gain related to (1) the undistributed profits of EZ Company from the date of acquisition to the beginning of the year of sale and (2) the undistributed profit of EZ Company from the beginning of the year of sale to the date of sale exceeds the $5 per share overall gain Thus, the total assigned to the first two components of gain exceed the total gain The other market factors effect (the third component) produced a loss If a parent company owns less than 100% of a subsidiary and purchases an entire new issue of common stock directly from the subsidiary, either (1) the preemptive right has been waived previously, or (2) the noncontrolling stockholders elected not to exercise their rights Regardless of whether the issuance results in an increase or a decrease in the book value of the parent’s share of the subsidiary’s equity, the correct accounting is to adjust the contributed capital of the controlling interest Noncontrolling Interest Situation (a) (b) (c) (d) Total Book Value No Change Decrease Increase Increase Percent of Ownership Decrease Decrease Decrease Increase http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Changes in Ownership Interest 8-19 Business Ethics Question from Textbook Solution This is an awkward situation One strategy would be to wait a reasonable period of time, and check to see if anything has changed (have the entries been documented, adjusted, reversed, etc.?) If nothing has been done, mention it to the supervisor again If he (she) is unresponsive this time, tactfully bring up your concern with a higher-level supervisor http://downloadslide.blogspot.com ... ebook,solutions solutionsand andtest testbank, bank, visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 8-2 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition... ebook,solutions solutionsand andtest testbank, bank, visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 8-4 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition... ebook,solutions solutionsand andtest testbank, bank, visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 8-6 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition