Solution manual advanced accounting 10e by fischer taylor CH08

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CHAPTER 8
UNDERSTANDING THE ISSUES
1. The stock dividend will result in the following entry being made by the subsidiary:

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

Retained Earnings
(10,000 shares ×
$60 per share) ............ 600,000
Common Stock
($1 par, 10,000
shares × $1)................
10,000
Paid-In Capital in
Excess of Par
($600,000, $10 par) .....
590,000

(b) If the parent maintains its percentage,
there is no impact other than an increase in the investment account equal
to the price paid. The parent will supply
90% of the funds and will own 90% of
the equity provided by the new funds.

The parent need make no adjustment to its
investment account since there has been

no change in the total subsidiary equity.

(c) If the parent buys more than 90% of
the shares issued, it will adjust its investment based on the impact of the
sale. A sale at more than book value
will cause a reduction in the investment; a sale at less than book value
will cause an increase in the investment.

When eliminating the investment in subsidiary account, the parent will now simply
eliminate its share of the revised (but equal
in total) subsidiary equity accounts.
2. The parent’s share in any equity increases
from the excess of the current book value
of $40 per share ($4,000,000/100,000
shares) that the subsidiary receives. The
parent does not record as income the increase in equity that results. Rather, it is an
increase in the parent’s paid-in capital in
excess of par. The calculation in this case
would be as follows:
Equity after sale
{(90,000 shares/120,000
shares = 75%) ×
[$4,000,000 + ($50
× 20,000 shares)]} ..............
Equity prior to sale
(90% × $4,000,000) ...........
Increase in equity interest .....

4. Control, in this example, is a “chain link”
process. If A controls B and B, in turn,

controls C, then all three are under common ownership, and B and C are controlled
by A.
In the distribution of Company C’s $10,000
income, 40% (or $4,000) will flow to the
NCI of Company C, and 60% (or $6,000)
will flow to Company B, the controlling interest. That $6,000 will flow as follows: 40%
(or $2,400) will flow to the NCI of Company
B, and 60% (or $3,600) will flow to Company A, the controlling interest.

$3,750,000

$

3,600,000
150,000

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

3. The subsidiary is selling the additional
shares at $50 each, which is in excess of
the current book value of $40 per share
($4,000,000/100,000 shares).

417

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Ch. 8—Exercises

EXERCISES
EXERCISE 8-1
(1) Retained Earnings (3,000 × $35) .....................................................
Common Stock ............................................................................
Paid-In Capital in Excess of Par ..................................................
To record stock dividend distributed on July 1, 20X1.

105,000
30,000
75,000

Lamp Company
Stockholders’ Equity
December 31, 20X1
Common stock ($10 par)........................................................................
Paid-in capital in excess of par ..............................................................
Retained earnings [$200,000 original balance +
$120,000 income – $105,000 stock dividend –
(33,000 share × $0.50 = $16,500 cash dividend)] .............................
Total stockholders’ equity.......................................................................

$330,000
225,000

198,500
$753,500

(2) Memo: Investment in Lamp Company now includes 2,700 (30,000 × 90% × 10%) additional
shares for a total of 29,700 shares.
Cash .................................................................................................
Investment in Lamp Company .....................................................
To record receipt of cash dividend (29,700 shares × $0.50).

14,850

Investment in Lamp Company .........................................................
Subsidiary Income .......................................................................
To record 90% interest in Lamp Company’s $120,000 net
income for 20X1.
(3) Subsidiary Income............................................................................
Investment in Lamp Company .....................................................
Dividends, Lamp Company..........................................................
To eliminate current-year entries to investment account.

108,000

Goodwill ...........................................................................................
Common Stock [($300,000 + $30,000) × 90%] ................................
Paid-In Capital in Excess of Par [($150,000 + $75,000) × 90%] ......
Retained Earnings [($200,000—$105,000) × 90%] .........................
Investment in Lamp Company (includes $225,000 from D&D) ....
Retained Earnings—Lamp Company (NCI adjustment) ..............

250,000

297,000
202,500
85,500

418

14,850

108,000

108,000
93,150
14,850

810,000
25,000


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Ch. 8—Exercises

Exercise 8-1, Concluded
Determination and Distribution of Excess Schedule
Company
Implied
Fair Value
Fair value of subsidiary
$900,000
Less book value of interest acquired:

Common stock ($10 par)
$300,000
Paid-in capital in excess of par
150,000
Retained earnings
200,000
Total equity
$650,000
Interest acquired
Book value
Excess of fair value over book value
$250,000

Parent
Price
(90%)
$810,000

NCI
Value
(10%)
$ 90,000

$650,000
90%
$585,000
$225,000

$650,000
10%

$ 65,000
$ 25,000

Adjustment of identifiable accounts:

Goodwill

Worksheet
Key
debit D

Adjustment
$250,000

EXERCISE 8-2
Investment in Trail ..................................................................................
Subsidiary Income............................................................................

57,750
57,750

Calculation:
90% × first 6 months’ income of $35,000 .........................................
75%* × second 6 months’ income of $35,000 ..................................
Total .......................................................................................................
Investment in Trail ..................................................................................
Paid-In Capital in Excess of Par.......................................................
Calculation:
Interest after sale
Trail, January 1, equity ................................................................

Income, first 6 months .................................................................
Sale of shares (2,000 × $80) .......................................................
Total stockholders’ equity ........................................................
Interest .........................................................................................
Interest prior to sale [($550,000 + $35,000) × 90%].........................
Increase in ownership interest .........................................................
*(10,000 shares × 90%)/(10,000 shares + 2,000 shares)

419

$31,500
26,250
$57,750
32,250
32,250

$550,000
35,000
160,000
$745,000
×
75%

$558,750
526,500
$ 32,250


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Ch. 8—Exercises

EXERCISE 8-3

Shares purchased by parent ..........................................
Total shares owned by parent after purchase................
Total subsidiary shares outstanding after issue .............

Maintain
Interest
8,000
24,000
30,000

Increase
Interest
9,000
25,000
30,000

Decrease
Interest
5,000
21,000
30,000

Subsidiary equity after sale ($450,000 + $50,000
income + $50,000 goodwill + $400,000 sale)...........

$950,000

$950,000

$950,000

Parent’s ownership percent after purchase ...................
Parent’s new equity interest after purchase ...................

×
80%
$760,000

× 83.33%
$791,635

×
70%
$665,000

Subsidiary equity prior to sale (after fair value adjustment)
($450,000 + $50,000 income + $50,000 goodwill) ...
$550,000

$550,000

$550,000

Parent’s ownership percent before purchase ................
Parent’s equity interest before purchase .......................
Price paid ($40 per share) .............................................

Total investment .............................................................
Net adjustment ...............................................................

×
80%
$440,000
360,000
$800,000
$ (8,365)

×
80%
$440,000
200,000
$640,000
$ 25,000

×
80%
$440,000
320,000
$760,000
$
0

Maintain ownership percentage interest:
Investment in Cat Company ..........................................................
Cash .........................................................................................
Increase ownership percentage interest:
Investment in Cat Company ..........................................................

Retained Earnings—Tom Company (assumes no paid-in capital
in excess of par) .......................................................................
Cash .........................................................................................
Decrease ownership percentage interest:
Investment in Cat Company ..........................................................
Cash .........................................................................................
Paid-In Capital in Excess of Par—Tom Company ....................

420

320,000
320,000

351,635
8,365
360,000

225,000
200,000
25,000


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Ch. 8—Exercises

EXERCISE 8-4

Investment in Nolan ............................................................................
Retained Earnings—Tarman.........................................................

To convert investment from cost to equity for income.

81,360
81,360

Income equity adjustment:
Jan. 1, 20X1 to Jan. 1, 20X3 increase in retained earning ($42,000 × 60%)
Jan. 1, 20X3 to Jan. 1, 20X5 increase in retained earnings ($78,000 × 72%*)
Total ...........................................................................................................

$25,200
56,160
$81,360

*(60% × 30,000 shares)/(30,000 – 5,000 treasury stock shares)
Retained Earnings—Tarman Company ..............................................
Investment in Nolan ......................................................................

5,760
5,760

Adjustment for treasury stock purchase:
Equity after treasury stock purchase (72% × $327,000) ..............................
Equity prior to treasury stock purchase (60% × $402,000) ..........................
Increase (decrease) in investment ...............................................................
Elimination:
Common Stock—Nolan (72% × $300,000 ..........................................
Paid-In Capital in Excess of Par—Nolan (72% × $60,000) .................
Retained Earnings—Nolan (72% × $120,000) ....................................
Investment in Nolan ($216,000* + $81,360 – $5,760) ..................

Treasury Stock (at cost, 72% × $75,000) ......................................
To eliminate the investments against the subsidiary’s equity.
*60% × 30,000 shares × $12

421

$235,440
241,200
$ (5,760)

216,000
43,200
86,400
291,600
54,000


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Ch. 8—Exercises

EXERCISE 8-5
(1)
Company A’s Books
December 31, 20X1 Cash ........................................ 4,000
Investment in B ........................ 12,000
Subsidiary Income—B ..........
December 31, 20X2 Cash ........................................ 4,000
Investment in B ........................ 32,000
Subsidiary Income—B ..........

Income:
80% × ($30,000 +
$15,000 from C).
December 31, 20X3 Cash ........................................ 4,000
Investment in B ........................ 42,400
Subsidiary Income—B ..........
Income:
80% × ($40,000 +
$18,000 from C).

Company B’s Books

16,000
3,000
12,000

36,000

Cash ...........................................
Investment in C...........................
Subsidiary Income—C ..........

3,000
15,000

46,400

Cash ...........................................
Investment in C...........................
Subsidiary Income—C ..........

15,000

18,000

(2)
Company A’s Books

Company B’s Books

December 31, 20X1
December 31, 20X2

December 31, 20X3 Cash ........................................ 4,500
Investment in B ........................ 50,400
Subsidiary Income—B ..........
Income:
90% × ($40,000 +
$21,000 from C).

54,900

422

Investment in C...........................
Subsidiary Income—C ..........

7,000

Cash ...........................................

Investment in C...........................
Subsidiary Income—C ..........

3,500
14,000

Cash ...........................................
Investment in C...........................
Subsidiary Income—C ..........

3,500
17,500

7,000

17,500

21,000


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Ch. 8—Exercises

EXERCISE 8-6
(1)
Determination and Distribution of Excess Schedule
Company
Implied
Fair Value

Fair value of subsidiary
$4,200,000
Less book value interest acquired:
Common stock
$ 400,000
Paid-in capital in excess of par
1,100,000
Retained earnings
2,000,000
Total equity
$3,500,000
Interest acquired
Book value
Excess of fair value over book value
$ 700,000

Parent
NCI
Price
Value
(60%)
(40%)
$2,520,000 $1,680,000

$3,500,000 $3,500,000
60%
40%
$2,100,000 $1,400,000
$ 420,000 $ 280,000

Adjustment of identifiable accounts:

Company S-2 equipment
Company S-1 building (40%)
Goodwill
Total

Worksheet
Key
debit D1
debit D2
debit D3

Adjustment
$ 80,000
160,000*
460,000
$ 700,000

*NCI of Company S-2 is also increased by $40,000.
(2) Eliminations and Adjustments:
Retained Earnings—P ($12,000 × 80% × 60%)............................
Retained Earnings—S-1 ($12,000 × 80% × 40%) ........................
Retained Earnings—S-2 ($12,000 × 20%) for S-2’s NCI ..............
Accumulated Depreciation ............................................................
Machine ....................................................................................
To eliminate the remaining gain and restore machine value.

5,760
3,840

2,400
3,000

Accumulated Depreciation ............................................................
Depreciation Expense...............................................................
To recognize gain for current year.

3,000

423

15,000

3,000


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Ch. 8—Exercises

EXERCISE 8-7
Companies A, B, and C
Consolidated Income Statement
For Year Ended December 31, 20X5
Sales [($300,000 + $400,000 + $100,000) –
intercompany sales of $75,000] ..............................................
Cost of goods sold [$200,000 + $300,000 + $60,000 –
intercompany sales of $75,000 – realized profit
in beginning inventory of $1,800 + unrealized profit
in ending inventory of ($6,000 + $720)] ..................................

Gross profit ...................................................................................
Expenses ($60,000 + $30,000 + $10,000 – $4,000
depreciation adjustment for deferred gain on equipment).......
Consolidated net income ..............................................................
To NCI—Company C ..............................................................
To NCI—Company B ..............................................................
To controlling interest....................................................................

$725,000

489,920
$235,080
96,000
$139,080
$

9,600
17,680

27,280
$111,800

Subsidiary Company C Income Distribution
Unrealized profit in ending
inventory ..................................

$6,000

Internally generated net
income .....................................

$30,000

Adjusted net income ......................
NCI share ......................................
NCI ................................................

$24,000
× 40%
$ 9,600

Subsidiary Company B Income Distribution*
Internally generated net income ....
60% × Company C adjusted
income of $24,000 ...................
Gain realized through
depreciation .............................

$70,000

Adjusted net income ......................
NCI share ......................................
NCI ................................................

$88,400
× 20%
$17,680

14,400
4,000

*There is no impact shown for the ending inventory held by Company C since the gross profit was written down to
zero under LCM.

Parent Company A Income Distribution
Unrealized profit in ending
inventory ..................................

$720

Internally generated net
income ..................................... $ 40,000
80% × Company B adjusted
income of $88,400 ...................
70,720
Realized profit in beginning
inventory ..................................
1,800
Controlling interest......................... $111,800

424


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Ch. 8—Exercises

EXERCISE 8-8
Determination and Distribution of Excess Schedule
Company

Implied
Fair Value
Fair value of subsidiary
$640,000
Less book value of interest acquired:
Common stock ($5 par)
$200,000
Paid-in capital in excess of par
100,000
Retained earnings
150,000
Remaining excess ($25,000 –
$5,000 amortization)
20,000
Total equity
$470,000
Interest acquired
Book value
Excess of fair value over book value
$170,000

Parent
Price
(60%)
$384,000

NCI
Value
(40%)
$256,000

$470,000
60%
$282,000
$102,000

$470,000
40%
$188,000
$ 68,000

Adjustment of identifiable accounts:
Adjustment
$ 16,000*
30,000
124,000
$170,000

Font inventory (80%)
Hartland equipment
Goodwill
Total

Amortization
per Year
$16,000
6,000

Life
1

5

Worksheet
Key
debit D1
debit D2
debit D3

*NCI of Font is also increased by $4,000.
EXERCISE 8-9
(1) Company N’s books:
Cash .........................................................................................
Investment in Company O ........................................................
Subsidiary Income (40% × $40,000) ....................................

2,000
14,000
16,000

Company M’s books:
Cash .........................................................................................
Investment in Company N ........................................................
Subsidiary Income [90% × ($90,000 + $16,000)] .................
Cash .........................................................................................
Investment in Company O ........................................................
Subsidiary Income (20% × $40,000) ....................................

9,000
86,400
95,400

1,000
7,000
8,000

(2) Internally generated incomes ($200,000 + $90,000 + $40,000) ...
Beginning inventory profit..............................................................
Ending inventory profit ..................................................................
Consolidated net income...............................................................
NCI—Company O .....................................................................
NCI—Company N .....................................................................
To controlling interest ...............................................................

425

$330,000
7,000
(9,000)
$328,000
$

15,400
10,490

25,890
$302,110


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Ch. 8—Exercises

Exercise 8-9, Concluded
Subsidiary O Company Income Distribution
Unrealized gross profit in
ending inventory ......................

Internally generated income ..........
$6,000 Realized gross profit in
beginning inventory..................

$40,000

Adjusted income ............................
NCI share ......................................
NCI ................................................

$38,500
× 40%
$15,400

4,500

Subsidiary N Company Income Distribution
Unrealized gross profit in
ending inventory ......................

Internally generated income ........
$3,000 Share of O income
(40% × $38,500) ....................
Realized gross profit in

beginning inventory................

$ 90,000

Adjusted income ..........................
NCI share ....................................
NCI ..............................................

$104,900
×
10%
$ 10,490

15,400
2,500

Parent Company M Income Distribution
Internally generated net
income ..................................... $200,000
20% × O adjusted income
of $38,500 ................................
7,700
90% × N adjusted income
of $104,900 ..............................
94,410
Controlling interest......................... $302,110

426

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Ch. 8—Exercises

EXERCISE 8-10
(1)
Determination and Distribution of Excess Schedule
Company
Implied
Fair Value
Fair value of subsidiary
$580,000
Less book value of interest acquired:
Common stock ($10 par)
$500,000
Retained earnings
50,000
Total equity
$550,000
Interest acquired
Book value
Excess of fair value over book value
$ 30,000

Parent
Price
(60%)
$348,000

NCI

Value
(40%)
$232,000

$550,000
60%
$330,000
$ 18,000

$550,000
40%
$220,000
$ 12,000

Adjustment of identifiable accounts:
Adjustment
$30,000

Equipment

(2)

Amortization
per Year
$1,500

Worksheet
Key
debit D

Life
20

Myles Corporation and Subsidiary Downer Corporation
Consolidated Income Statement
For Year Ended December 31, 20X3
Sales ............................................................................................................
Less cost of goods sold................................................................................
Gross profit...................................................................................................
Less expenses (including equipment depreciation of $1,500) .....................
Consolidated net income..............................................................................
To NCI ....................................................................................................
To controlling interest .............................................................................

$
$
$

$1,150,000
840,000
310,000
231,500
78,500
11,400
67,100

Subsidiary Downer Corporation Income Distribution
Equipment depreciation ................

$1,500 Internally generated net income ....

$30,000

Adjusted net income ......................
NCI share ......................................
NCI ................................................

$28,500
× 40%
$11,400

Parent Myles Corporation Income Distribution
Internally generated net income ....
60% × Downer income of $28,500

$50,000
17,100

Controlling interest.........................

$67,100

427


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Ch. 8—Exercises

EXERCISE 8-11

(1)
Determination and Distribution of Excess Schedule
Company
Implied
Fair Value
Fair value of subsidiary
$580,000
Less book value of interest acquired:
Common stock ($10 par)
$500,000
Retained earnings
50,000
Total equity
$550,000
Interest acquired
Book value
Excess of fair value over book value
$ 30,000

Parent
Price
(60%)
$348,000

NCI
Value
(40%)
$232,000

$550,000

60%
$330,000
$ 18,000

$550,000
40%
$220,000
$ 12,000

Adjustment of identifiable accounts:

Equipment

Adjustment
$30,000

Amortization
per Year
$1,500

Life
20

(2) Excess of cost or book value due to swap
Equity after swap:
Subsidiary equity prior to swap ...........................
$600,000
Remaining excess ($30,000 – 2 yrs. × $1,500
amortization)...................................................
27,000

Market value of shares issued ..................................................
Total .....................................................................................
Ownership interest (40,000/60,000) ..............................................
×
Equity prior to swap:
Subsidiary equity prior to swap .................................................
Ownership interest (30,000/50,000) .........................................
Increase in interest ........................................................................
Market value of shares issued ......................................................
Debit Myles retained earnings for decrease in equity ...................

428

×

Worksheet
Key
debit D

$627,000
150,000
$777,000
2/3

$518,000

$627,000
60%

$

376,200
$141,800
150,000
8,200


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Ch. 8—Problems

PROBLEMS
PROBLEM 8-1

Zee Corporation booked entries for adjustments to investment in Tomline Company:
20X1
(1)*December 31 Investment in Tomline (80% × $40,000) .............
Subsidiary Income ........................................
To record parent’s share of subsidiary
income.
(2)*Memo: All calculations are now based on 8,800 shares.
20X2
July 1
Investment in Tomline (80% × $25,000) .............
Subsidiary Income ........................................
To record parent’s share of subsidiary
income for one-half year.
20X2
(3)*July 1

Investment in Tomline ........................................
Paid-In Capital in Excess of Par ...................
To adjust investment for subsidiary sale
of stock to noncontrolling interest.

20X2
(4)*December 31 Investment in Tomline ........................................
Subsidiary Income ........................................
To record 64% parent share of subsidiary
income for one-half year.
*Calculations are on page 431.

429

32,000
32,000

20,000
20,000

10,720
10,720

16,000
16,000


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Ch. 8—Problems

Problem 8-1, Continued
Zee Corporation booked entries for adjustments to investment in Sandel Company:
20X1
(5)*July 1

20X1
(6)*July 1

Investment in Sandel ..........................................
Subsidiary Income ........................................
To record 60% parent share of subsidiary
income for one-half year.

9,000

Investment in Sandel ..........................................
Retained Earnings (decrease in equity) .............
Cash .............................................................
To record purchase of 3,700 additional
subsidiary shares.

70,300
3,700

20X1
(7)*December 31 Investment in Sandel ..........................................
Subsidiary Income ........................................
To record 62% parent share of subsidiary
income for one-half year.

9,000

74,000

9,300
9,300

20X2
(8)*January 1

Retained Earnings ..............................................
Investment in Sandel ....................................
To record decrease in equity due to
treasury stock purchase.

10,335

(9)*December 31 Investment in Sandel ..........................................
Subsidiary Income ........................................
To record parent’s share of subsidiary
income.

28,933

*Calculations are on page 431.

430

10,335

28,933


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Ch. 8—Problems

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

Parent’s
Shares

Parent’s
Interest

Change in
Subsidiary
Equity

Total
Subsidiary
Equity

Controlling
Share of

Equity

Change in
Controlling
Investment

10,000
10,000
11,000
11,000
13,750

8,000
8,000
8,800
8,800
8,800

80%
80
80
80
64

...........
$40,000
...........
25,000
88,000

$220,000
260,000
260,000
285,000
373,000

13,750

8,800

64

25,000

398,000

254,720 (4)

30,000
30,000
35,000

18,000
18,000
21,700

60
60
62

...........
15,000
100,000

400,000
415,000
515,000

240,000
............
249,000 (5)
9,000
319,300** (6)

35,000

21,700

62

15,000

530,000

328,600 (7)

30,000

21,700

72.333

(90,000)

440,000

318,265***(8)

30,000

21,700

72.333

40,000

480,000

347,198 (9)

Tomline
January 1, 20X1, Balances .........
20X1 Income ...............................
December 31, 20X1, Stock Dividend
January–June 20X2, Income ......
July 1, 20X2, Stock Sale .............
......................................... 10,720
July–December 20X2, Income ....

$176,000

............
208,000 (1) $32,000
208,000
............
228,000 (2)
20,000
238,720* (3)
16,000

Sandel
January 1, 20X1, Balances .........
January–June 20X1, Income ......
July 1, 20X1, Stock Sale .............
......................................... 70,300
July–December 20X1, Income ....
January 1, 20X2, Purchase of
Treasury Stock ......................
(10,335)
20X2 Income ...............................

*$373,000 × 64% = $238,720; balance after $238,720 – balance before $228,000 = $10,720 increase.
**$515,000 × 62% = $319,300; balance after $319,300 – balance before $249,000 = $70,300 increase.
$70,300 increase in investment – $74,000 paid for new shares = $3,700 decrease in Zee’s equity.
***$440,000 × 72.333% = $318,265; balance after $318,265 – balance before $328,600 = $10,335 decrease.

431

9,300

28,933

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Ch. 8—Problems

432


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Ch. 8—Problems

PROBLEM 8-2
Bear Corporation purchase of Kelly Company Shares:
Determination and Distribution of Excess Schedule
Company
Implied
Fair Value
Fair value of subsidiary
$375,000
Less book value of interest acquired:
Common stock ($10 par)
$200,000
Paid-in capital in excess of par
50,000
Retained earnings
100,000
Total equity
$350,000

Interest acquired
Book value
Excess of fair value over book value
$ 25,000

Parent
Price
(60%)
$225,000

NCI
Value
(40%)
$150,000

$350,000
60%
$210,000
$ 15,000

$350,000
40%
$140,000
$ 10,000

Adjustment of identifiable accounts:

Goodwill

Worksheet

Key
debit D

Adjustment
$25,000

Bear Corporation purchase of Samco Company Shares:
Determination and Distribution of Excess Schedule
Company
Implied
Fair Value
Fair value of subsidiary
$312,500
Less book value of interest acquired:
Common stock ($20 par)
$200,000
Retained earnings
100,000
Total equity
$300,000
Interest acquired
Book value
Excess of fair value over book value
$ 12,500

Parent
Price
(80%)
$250,000

NCI
Value
(20%)
$ 62,500

$300,000
80%
$240,000
$ 10,000

$300,000
20%
$ 60,000
$ 2,500

Adjustment of identifiable accounts:

Goodwill

Adjustment
$12,500

433

Worksheet
Key
debit D


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Ch. 8—Problems

Problem 8-2, Continued

*Entry to convert investment in Kelly Company to simple equity method as of December 31,
20X3:
Investment in Kelly .............................................................
Additional Paid-In Capital in Excess of Par—Bear
Corporation ....................................................................
Retained Earnings ......................................................

78,750
12,750
91,500

*Entry to convert investment in Samco Company to simple equity method as of December 31,
20X3:
Investment in Samco..........................................................
Additional Paid-In Capital in Excess of Par—Bear
Corporation ....................................................................
Retained Earnings ......................................................
*Calculations are from the following two schedules.

434

78,500
9,000
87,500

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Ch. 8—Problems

Problem 8-2, Continued
Schedules of Equity Adjustments for January 1, 20X1–December 31, 20X3
Adjustments
Reflected
an Increase to
Additional
Paid-In Capital
Retained
in Excess
Earnings
of Par
............
............
15,000 $ 15,000

Controlling
Total
Shares
Increase in
Total
Share of Increase in
Subsidiary Held by Parent’s
Subsidiary Subsidiary Subsidiary Controlling
Kelly Common Stock
Shares

Parent
Interest
Equity
Equity
Equity
Investment
January 1, 20X1, Balances .................. 20,000
12,000
60%
..............
$375,000* $225,000 .............
January–June 20X1, Income ............... 20,000
12,000
60
$
25,000
400,000
240,000
$
.............................................................
July 1, 20X1, Sale of stock ................... 25,000
15,000
60
100,000
500,000
300,000
60,000** ..........
............
July 20X1–December 20X2, Income ... 25,000
15,000

60
85,000
585,000
351,000
51,000
51,000 ............
December 31, 20X2, Cash dividend .... 25,000
15,000
60
(25,000)
560,000
336,000
(15,000)
(15,000) ............
January–July 20X3, Income ................. 25,000
15,000
60
30,000
590,000
354,000
18,000
18,000 ............
July 1, 20X3, Treasury stock purchase 20,000
15,000
75
(135,000)
455,000
341,250*** (12,750) ............
............................................. $(12,750)
July–December 20X3, Income ............. 20,000

15,000
75
30,000
485,000
363,750
22,500
22,500 ............
Total adjustments ..................................................................................................................................................................
$ 91,500
$(12,750)

*From D&D

**Required debit to investment account and credit to Cash for $60,000 to record additional purchase.
***After (75% × $455,000 = $341,250) – before $354,000 = $12,750 decrease in equity.

435


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Ch. 8—Problems

Problem 8-2, Concluded
Schedules of Equity Adjustments for January 1, 20X1–December 31, 20X3
Adjustments
Reflected
an Increase to
Controlling
Paid-In

Increase in
Total
Share of Increase in
Capital
Subsidiary Subsidiary Subsidiary Controlling Retained
in Excess
Equity
Equity
Equity
Investment Earnings
of Par
..............
$312,500* $250,000 .............
............
............
40,000
352,500
282,000
$32,000
$32,000 ............
..............
352,500
282,000 .............
............
............
22,500
375,000
300,000
18,000
18,000 ............

120,000
495,000
297,000
(3,000)** .........

Total
Shares
Subsidiary
Held by
Parent’s
Samco Common Stock
Shares
Parent
Interest
January 1, 20X1, Balances ..........
10,000
8,000
80%
Income, 20X1 ...............................
10,000
8,000
80
December 31, 20X1, Stock dividend 11,000
8,800
80
January–September 20X2, Income
11,000
8,800
80
October 1, 20X2, Sale of stock ....

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

37,500 ............
$87,500
$(9,000)

*From D&D
**The investment has been increased by $6,000 (cost of the stock purchased by the parent), while the controlling share of equity has decreased by
$3,000. The total decrease of $9,000 is deducted from additional paid-in capital in excess of par. The adjustment shown reduces the investment account (and additional paid-in capital in excess of par) to reconcile it with the parent’s share of the subsidiary equity.

436


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Ch. 8—Problems

PROBLEM 8-3

Determination and Distribution of Excess Schedule
Company
Parent
NCI
Implied
Price
Value
Fair Value
(80%)
(20%)
Fair value of subsidiary
$875,000 $700,000
$175,000
Less book value of interest acquired:
Common stock ($2 par)
$200,000
Paid-in capital in excess of par
400,000
Retained earnings
100,000
Total equity
$700,000 $700,000
$700,000
20%
Interest acquired
80%
Book value
$560,000

$140,000
$ 35,000
Excess of fair value over book value
$175,000 $140,000
Adjustment of identifiable accounts:

Building
Goodwill
Total

Adjustment
$ 60,000
115,000
$175,000

437

Amortization
per Year
$3,000

Life
20

Worksheet
Key
debit D1
debit D2

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Ch. 8—Problems

Problem 8-3, Continued
Pepka Company and Subsidiary Sheck Company
Worksheet for Consolidated Financial Statements
For Year Ended December 31, 20X4
Trial Balance
Pepka
Sheck

Eliminations
and Adjustments
Dr.
Cr.

Consolidated
Income
Statement

NCI

Controlling
Retained
Earnings

Consolidated
Balance
Sheet

Cash...............................................................
179,040
55,000 ...............
.................
.................
.................
.................
..........................................................234,040
Accounts Receivable (net) .............................
280,000
190,000 .............
.................
.................
.................
.................
..........................................................470,000
Inventory ........................................................
325,000
175,000 .............
(EI)
............. 10,000 ...............
.................
....................................................................... 490,000
Investment in Sheck Company.......................
700,000 .............
(CVa) 64,000
(EL)
659,200 ....
.................

.................
.................
................. ................. (CVb)
8,160
(D)
112,000 ....
.................
.................
.................
................. ................
................. (adj)
960
.................
.................
.................
.................
Property, Plant, and Equipment .....................
2,450,000
1,400,000 (D1)
60,000 ......
.................
.................
.................
....................................................... 3,910,000
Accumulated Depreciation .............................
(1,256,000)
(536,000) ...........
(A)
............... 9,000 ...............
.................

....................................................................... (1,801,000)
Goodwill ......................................................... ................. ................. (D2)
115,000
.................
.................
.................
.................
..........................................................115,000
Liabilities ........................................................
(750,000)
(210,000) ...........
.................
.................
.................
.................
....................................................... (960,000)
Common Stock ($10 par)—Pepka .................
(1,500,000) .....
.................
.................
.................
.................
.................
.................................................... (1,500,000)
Paid-In Capital in Excess of Par—Pepka ....... ................. .................
................. (CVb)
8,160 ...............
.................
.................
........................................................... (8,160)

Retained Earnings—Pepka ............................
(375,000) ............
(A)
3,840 (CVa)
64,000 ......
.................
(434,200) ..
....................................................................... ................. ................. (adj)
960
.................
.................
.................
.................
.................
Common Stock ($2 par)—Sheck.................... .................
(250,000) (EL)
160,000 ...............
.................
............(90,000) ..............
.......................................................................
Paid-In Capital in Excess of Par—Sheck ....... .................
(600,000) (EL)
384,000 ...............
.................
..........(216,000) ..............
.......................................................................
Retained Earnings—Sheck ............................ .................
(180,000) (EL)
115,200
(NCI)

............. 63,000
.................
(125,640) ..
.......................................................................
................. ................. (A)
2,160
.................
.................
.................
.................
.................
Sales ..............................................................
(1,600,000)
(750,000)
(IS)
200,000 ....
.............. (2,150,000) ........
.................
.......................................................................
Subsidiary Dividend Income ...........................
(23,040) ............
(CY)
23,040 .................
.................
.................
.................
.................
.......................................................................

438

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Ch. 8—Problems
Cost of Goods Sold ........................................
.......................................................................
Other Expenses .............................................
.......................................................................
Dividends Declared ........................................
............................................................45,000

1,120,000
405,000
45,000

450,000

(EI)

10,000 (IS)

220,000

(A)

3,000 ........

36,000 ...............

(CY)

200,000 ...............

1,380,000 .

.................

........... 628,000 ................

.................

............. 23,040

12,960 ......

0
0
1,149,360
1,149,360 .
.................
.................
.................
.................
.................
Consolidated Net Income ........................................................................................................................................
(142,000) ..............
To NCI (see distribution schedule) ..........................................................................................................................
24,120
(24,120) ....

.................
(117,880) ..
To Controlling Interest (see distribution schedule) ..................................................................................................
117,880 ...............
Total NCI ........................................................................................................................................................................................
(442,800) ...............
(442,800)
Retained Earnings—Controlling Interest, December 31, 20X4 .............................................................................................................................
(507,080)
(507,080)
Totals .....................................................................................................................................................................................................................................
0

439


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Ch. 8—Problems

Problem 8-3, Concluded
Eliminations and Adjustments:
(CVa)
(CVb)

Convert the investment to the equity method for share of prior income [80% ×
($180,000 – $100,000)].
Convert the investment to the equity method for the result of the subsidiary stock sale:

Controlling interest in subsidiary equity after sale

(64% × {$780,000 + $250,000 sale + $115,000 goodwill
+ [$60,000 – ($3,000 × 2) = $54,000 building]}) ....................................
$767,360
Controlling interest in subsidiary equity before sale
[80% × ($780,000 + $115,000 goodwill + $54,000 remaining building)]
759,200
Net increase in paid-in capital in excess of par—parent ............................
$
8,160
(CY)
Eliminate intercompany dividends.
(EL)
Eliminate parent’s share of subsidiary equity (80,000 ÷ 125,000 = 64%).
(adj)
Adjust for change in parent amortization for prior years ($3,000 × 2 years × 16% =
$960).
(D)/(NCI) Distribute $112,000 (64% × $175,000) excess and $63,000 (36% × $175,000) NCI
adjustment according to the determination and distribution of excess schedule.
(1) Building, $60,000 and (2) Goodwill, $115,000.
(A)
Amortize excess for current year and two prior years: Building = $3,000 per year. Distribute to retained earnings, 64% controlling, 36% NCI.
(IS)
Eliminate intercompany sale of $200,000.
(EI)
Eliminate profit in ending inventory ($50,000 × 20% = $10,000).

Subsidiary Sheck Company Income Distribution
Profit in ending inventory ...............
Building amortization .....................

$10,000 Internally generated net
3,000
income .....................................

$80,000

Adjusted net income ......................
NCI share ......................................
NCI ................................................

$67,000
× 36%
$24,120

Parent Pepka Company Income Distribution
Internally generated net
income ..................................... $ 75,000
64% × Sheck adjusted
income of $67,000 ...................
42,880
Controlling interest......................... $117,880

440


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Ch. 8—Problems

PROBLEM 8-4

Determination and Distribution of Excess Schedule
Company
Implied
Fair Value
Fair value of subsidiary
$260,000
Less book value of interest acquired:
Common stock ($5 par)
$100,000
Paid-in capital in excess of par
50,000
Retained earnings
80,000
Total equity
$230,000
Interest acquired
Book value
Excess of fair value over book value
$ 30,000

Parent
Price
(60%)
$156,000

NCI
Value
(40%)
$104,000

$230,000
60%
$138,000
$ 18,000

$230,000
40%
$ 92,000
$ 12,000

Adjustment of identifiable accounts:

Goodwill

Adjustment
$ 30,000

441

Worksheet
Key
debit D