ch08_test bank jeter advanced accounting 3rd edition

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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Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd

Edition

8-2

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.




Chapter 8 Changes in Ownership Interest

8-3

11. 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.





Edition

8-4

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


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


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%





8-5

15. 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


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.





Edition

8-6

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%





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 $ 90,000

January 1, 2010 30,000

January 1, 2011 150,000

December 31, 2011 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.





Edition

8-8

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 2011

Income earned $260,000 $360,000

Increase in Retained Earnings 200,000 300,000

Silas Company income is earned evenly throughout the year.

On September 1, 2011, Pratt Company sold on the open market, 12,000 shares of its Silas Company

stock for $460,000. Any difference between cost and book value relates to Silas Company land.

Pratt Company uses the cost method to account for its investment in Silas Company.

Required:

A. Compute Pratt Company’s reported gain (loss) on the sale.

B. Prepare all consolidated statements workpaper eliminating entries for a workpaper on

December 31, 2011.

8-4 Pelky made the following purchases of Stark Company common stock:

Date Shares Cost

1/1/10 70,000 (70%) $1,000,000

1/1/11 10,000 (10%) 160,000

Stockholders’ equity information for Stark Company for 2010 and 2011 follows:

2010 2011

Common stock, $10 par value $1,000,000 $1,000,000

1/1 Retained earnings 300,000 380,000

Net income 110,000 140,000

Dividends declared, 12/15 (30,000) (40,000)

Retained earnings, 12/31 380,000 480,000

Total stockholders’ equity, 12/31 $1,380,000 $1,480,000

On July 1, 2011, Pelky sold 14,000 shares of Stark Company common stock on the open market for

$22 per share. The shares sold were purchased on January 1, 2010. Stark notified Pelky that its net

income for the first six months was $70,000. Any difference between cost and book value relates to

subsidiary land. Pelky uses the cost method to account for its investment in Stark Company.

Required:

A. Prepare the journal entry made by Pelky to record the sale of the 14,000 shares on July 1,

2011.

B. Prepare the workpaper eliminating entries needed for a consolidated statements workpaper on

December 31, 2011.

C. Compute the amount of noncontrolling interest that would be reported on the consolidated

balance sheet on December 31, 2011.





8-9

8-5 P Company purchased 96,000 shares of the common stock of S Company for $1,200,000 on January

1, 2007, when S’s stockholders’ equity consisted of $5 par value, Common Stock at $600,000 and

Retained Earnings of $800,000. The difference between cost and book value relates to goodwill.

On January 2, 2010, S Company purchased 20,000 of its own shares from noncontrolling interests

for cash of $300,000 to be held as treasury stock. S Company’s retained earnings had increased to

$1,000,000 by January 2, 2010. S Company uses the cost method in regards to its treasury stock and

P Company uses the equity method to account for its investment in S Company.

Required:

Prepare all determinable workpaper entries for the preparation of consolidated statements on

December 31, 2010.

8-6 Penner Company acquired 80% of the outstanding common stock of Solk Company on January 1,

2008, for $396,000. At the date of purchase, Solk Company had a balance in its $2 par value

common stock account of $360,000 and retained earnings of $90,000. On January 1, 2010, Solk

Company issued 45,000 shares of its previously unissued stock to noncontrolling stockholders for

$3 per share. On this date, Solk Company had a retained earnings balance of $152,000. The

difference between cost and book value relates to subsidiary land. No dividends were paid in 2010.

Solk Company reported income of $30,000 in 2010.

Required:

A. Prepare the journal entry on Penner’s books to record the effect of the issuance assuming the

equity method.

B. Prepare the eliminating entries needed for the preparation of a consolidated statements

workpaper on December 31, 2010, assuming the equity method.

8-7 Petty Company acquired 85% of the common stock of Selmon Company in two separate cash

transactions. The first purchase of 108,000 shares (60%) on January 1, 2009, cost $735,000. The

second purchase, one year later, of 45,000 shares (25%) cost $330,000. Selmon Company’s

stockholders’ equity was as follows:

December 31 December 31

2009 2010

Common Stock, $5 par $ 900,000 $ 900,000

Retained Earnings, 1/1 262,000 302,000

Net Income 69,000 90,000

Dividends Declared, 9/30 (30,000) (38,000)

Retained Earnings, 12/31 301,000 354,000

Total Stockholders’ Equity, 12/31 $1,201,000 $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.





Edition

8-10

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 is-

sue of common stock directly from the subsidiary.

7. When a subsidiary issues additional shares of stock to noncontrolling stockholders and such issuance

results in an increase in the book value of the parent’s share of the subsidiary’s equity, how should the

increase be reflected in the financial statements? What if it results in a decrease?

8. P Company holds an 80% interest in S Company. Determine the effect (that is, increase, decrease, no

change, not determinable) on both the total book value of the noncontrolling interest and the

noncontrolling interest’s percentage of ownership in the net assets of S Company for each of the

following situations:

a. P Company acquires additional shares directly from S Company at a price equal to the book value

per share of the S Company stock immediately prior to the issuance.

b. S Company acquires its own shares on the open market. The cost of these shares is less than their

book value.

c. Assume the same situation as in (b) except that the cost of the shares is greater than their book

value.





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 un-

usual 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?





Edition

8-12

ANSWER KEY

Multiple Choice

1. d 6. d 11. b 16. a 21. c

2. d 7. c 12. d 17. c 22. c

3. d 8. c 13. c 18. b 23. b

4. b 9. c 14. c 19. b

5. d 10. d 15. b 20. d

Problems

8-1 A. 2010

Retained Earnings [0.125 × (90,000 – 30,000)] 7,500

Investment in Snead Company 7,500

Investment in Snead Company

[0.40 × (150,000 – 30,000)] 48,000

Cash 48,000

2011

Cash (60,000 × 0.95) 57,000


Investment in Snead Company

[0.95 × (300,000 + 60,000 – 150,000)] 199,500

Equity in Subsidiary Income 199,500

B. Equity in Subsidiary Income 199,500

Dividends Declared—Snead 57,000


Common Stock 240,000

1/1 Retained Earnings—Snead 150,000

Difference Between Implied and Book Value 60,000


Noncontrolling Interest in Equity 19,500

Land 60,000






8-13

8-2

A. Loss from Subsidiary Issuance of Shares 15,000*

Investment in Seng Company 15,000*

Patel Company’s share of Seng Company’s equity

before the new issue (0.90 × 800,000) $720,000

Patel Company’s share of Seng Company’s equity

after the new issue 0.75 × (800,000 + 140,000) 705,000

Decrease in Patel Company’s interest $ 15,000

B. Investment in Seng Company

(300,000 – 200,000) × 0.90 90,000

1/1 Retained Eanings—Patel 90,000

Common Stock 600,000

Other Contributed Capital 40,000

Retained Earnings 300,000


Investment in Seng Company

(650,000 – 15,000 + 90,000) 725,000


Land 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) 112,000

1/1 Retained Earnings—Pratt Company 112,000

Gain on Sale of Investments 48,000

1/1 Retained Earnings—Pratt Company

0.8 × $200,000 × 12/40 48,000


Subsidiary Income Sold

(8/12 × $360,000 = $240,000 × 0.8 × 12/40) 57,600

Common Stock—Silas Company 500,000

1/1 Retained Earnings—Silas Company 500,000

Difference Between Implied and Book Value

(28/40 × $220,000) 154,000

Investment in Silas Company 714,000






Edition

8-14

Land 154,000


Book Value 154,000

8-4 A. Cash (14,000 × $22) 308,000

Investment in Stark Company 200,000*

Gain on Sale of Investments 108,000 *14,000/70,000 × $1,000,000

B. Investment in Stark Company 44,800

Retained Earnings 1/1—Pelky 44,800 [0.7 × 0.8 × ($380,000 - $300,000)]


Retained Earnings 1/1—Pelky 11,200

($80,000 × 0.7 × 0.2)

Gain on Sale of Investments ($70,000 × 0.7 × 0.2) 9,800

Subsidiary Income Sold 9,800

Dividend Income (0.66 × $40,000) 26,400

Dividends Declared—Stark 26,400

Common Stock—Stark 1,000,000

Retained Earnings—Stark 380,000


Investment in Stark Company 1,004,800 *$1,000,000 + 160,000 - $200,000 + $44,800


Land 94,000


Book Value 94,000

C. $1,480,000 × 0.34 = $503,200 noncontrolling interest





8-15

8-5 A. Percentage on 1/1/2007 96,000 / 120,000 = 80%

Percentage on 1/2/2010 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 600,000

Retained Earnings—S 1,000,000

Difference Between Cost and Book Value 112,000

Treasury Stock—S (96% × $300,000) 288,000

Investment in S Company

($1,200,000 + $160,000) 1,360,000

Noncontrolling Interest in Equity 64,000 (600,000 + 1,000,000) x .04

Goodwill* 112,000


Book Value 112,000

*Original difference $1,200,000 – (80% × $1,400,000) = $80,000

Plus: Decrease from treasury stock transaction 32,000

$112,000

8-6 A. Investment in Solk Company* 4,480

Gain from Issuance of Subsidiary Shares 4,480

B. Equity Income ($30,000 × 0.64) 19,200

Investment in Solk Company 19,200

Common Stock—Solk Company 450,000

Other Contributed Capital—Solk Company 45,000

Retained Earnings—Solk 152,000


Investment in Solk Company 450,080


Land 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





Edition

8-16

8-7 A. 2009

Investment in Selmon Company 735,000

Cash 735,000

Cash 18,000

Investment in Selmon Company (0.60 × $30,000

subsidiary dividend) 18,000


Equity in Subsidiary Income (0.60 × $69,000

subsidiary income) 41,400

2010


Cash 330,000


Equity in Subsidiary Income

(0.85 × $22,000 income for 1st three months) 18,700

Cash 390,000

Investment in Selmon Company* 231,480

Gain on Sale of Investment 158,520

*Cost of first purchase (60%) $735,000

2009 subsidiary income (0.60 × $69,000) 41,400

2009 subsidiary dividends (0.60 × $30,000) (18,000)

2010 subsidiary income to April 1 (0.60 × $22,000) 13,200

Total 771,600

Portion sold (32,400 ÷ 108,000) × 0.30

Carrying value of investment sold $231,480

Cash 25,460

Investment in Selmon Company (0.67* ×

$38,000 subsidiary dividend) 25,460 **0.67 = (108,000 + 45,000 - 32,400) 180,000


Equity in Subsidiary Income [0.67 × ($90,000 –

$22,000)] 45,560





8-17

B. Equity in Subsidiary Income ($18,700 + $45,560) 64,260

Subsidiary Income Sold ($22,000 × 0.60 × 0.30) 3,960

Dividends Declared—Selmon ($38,000 × 0.67) 25,460


Common Stock—Selmon 900,000

1/1 Retained Earnings—Selmon 302,000


Investment In Selmon Company 860,880


Land 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





Edition

8-18

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 Total Book Value Percent of Ownership

(a) No Change Decrease

(b) Decrease Decrease

(c) Increase Decrease

(d) Increase Increase





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.




ch08_test bank jeter advanced accounting 3rd edition

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