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

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Chapter 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.




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8-2

Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition

7.

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
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.




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Chapter 8 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.




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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 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%




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Chapter 8 Changes in Ownership Interest
15.

8-5

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
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.

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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%




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Chapter 8 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.

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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.




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Chapter 8 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.




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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
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 issue 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.




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Chapter 8 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?




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Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition

8-12

ANSWER KEY
Multiple Choice
1.
2.
3.
4.
5.

d
d
d
b
d

6.
7.
8.
9.
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



60,000


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Chapter 8 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

714,000
440,000


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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



94,000


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Chapter 8 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




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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 1 (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)]



45,560


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Chapter 8 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
1.
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.
2. (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
1. 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
2. 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.
3. 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.
4. 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




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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.
5. 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.
6. 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.
7. 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
8.

Noncontrolling Interest
Situation
(a)
(b)
(c)

(d)

Total Book Value
No Change
Decrease
Increase
Increase

Percent of Ownership
Decrease
Decrease
Decrease
Increase




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Chapter 8 Changes in Ownership Interest 8-19

Business Ethics Question from Textbook Solution
1. 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.