solusi manual advanced acc zy Chap009

Chapter 09 - Consolidation Ownership Issues

CHAPTER 9
CONSOLIDATION OWNERSHIP ISSUES
ANSWERS TO QUESTIONS
Q9-1 Preferred stock of the subsidiary is eliminated in the consolidation process in a
manner comparable to that used in eliminating the common stock of the subsidiary. For
those preferred shares held by the parent company, a proportionate share of subsidiary
income and net assets assigned to the preferred shares is eliminated against the balance in
the parent's investment account. Subsidiary income and net assets assigned to preferred
shares not held by the parent are included as a part of the noncontrolling interest along with
the balances assigned to noncontrolling interest for common stock not held by the parent.
The claim of the preferred shareholders normally is computed before the common stock is
eliminated so that any priority claim associated with the preferred stock can be properly
recognized and assigned to the correct shareholder group.
Q9-2 All preferred shares held by the parent are eliminated against the balance in the
investment account. Those held by unrelated parties are included in the total assigned to
the noncontrolling interest.
Q9-3 Preferred dividends normally are deducted in arriving at income available to common
shareholders. When preferred dividends are paid by the subsidiary to shareholders other
than the parent, the income accruing to the common shares held by the parent company is
reduced. Therefore, they must be deducted to arrive at income available to the parent
company shareholders. No preferred dividends are deducted if the parent company owns
all the shares or if no dividends are declared and the preferred stock is noncumulative.
Q9-4 In the event the preferred shares are redeemed, the subsidiary must pay the call
premium and the net assets of the subsidiary will be reduced by the amount of the
premium. Because it is more conservative to assume the call premium will be paid, the
amount of the premium normally is added to the claim of the preferred shareholders and
deducted from the equity assigned to the common shareholders whenever consolidated
statements are prepared.
Q9-5 The fair value of the net assets of the subsidiary is computed by deducting the fair
value of the subsidiary's liabilities from the fair value of its assets. When the subsidiary has
preferred stock outstanding, the claims of the preferred shareholders, including dividends in
arrears and participation rights held by preferred shareholders, must be taken into
consideration in determining the fair value of net assets available to common shareholders.
These items, when deducted from the fair value of the identifiable assets of the acquired
company, will reduce the amount of net assets assigned to common stock and potentially
increase the amount reported as goodwill.

9-1


Q9-6 The parent may record the difference between the carrying value and the sale price
of the shares as either a gain on sale of investment or an adjustment to its additional paid-in
capital. No gain or loss on the sale of subsidiary shares should be reported in the
consolidated statements. If the parent records a gain on the sale, it should be eliminated in
the consolidation process and treated as a part of additional paid-in capital of the
consolidated entity.
Q9-7 All common shareholders should share equally in the net assets of a company.
When a subsidiary sells additional shares to a nonaffiliate at a price in excess of existing
book value, the effect will be to increase the net book value of all shareholders. Because it
is a capital transaction, no gain or loss is recognized on the sale.
Q9-8 Each purchase of additional shares should be examined to determine the difference
between the price paid and underlying book value. When an amount greater than book
value is paid directly to the subsidiary for the shares, the book value of the shares held by
the noncontrolling interest will increase. As a result, the increase in the parent’s claim on the
net assets of the subsidiary will be less than the amount paid. When consolidated
statements are prepared, additional paid-in capital or retained earnings (if the parent has no
additional paid-in capital) must be debited for the increase in the balance assigned to the
noncontrolling interest, thereby reducing the amount reported in the consolidated balance
sheet.
Q9-9 All the shares of the subsidiary are eliminated in preparing the consolidated
statements. Thus, treasury shares reported by the subsidiary are eliminated in the
consolidation workpaper. The effect of the retirement on the consolidated statements
depends on the price paid and whether the shares were purchased from the parent or from
a nonaffiliate.
Q9-10 Indirect ownership is a general term used whenever one company owns shares of
another company and that company holds ownership in a third company. Indirect control
occurs when a majority of the shares of a particular company are held by one or more
companies that are, in turn, under the control of another company. By exercising its control
over those companies the parent can exercise control of the company indirectly owned.
Q9-11 A reciprocal relationship exists if Subsidiary A and Subsidiary B hold ownership in
each other. If Subsidiary A records investment income based on the reported net income of
Subsidiary B and Subsidiary B records investment income based on the reported net
income of Subsidiary A, the sum of the reported net income totals for the two companies
may be substantially greater than the sum of the reported operating income totals for the
two companies. Parent company net income will be overstated if the impact of the
reciprocal relationship is ignored when the parent company records investment income on
its ownership in the two subsidiaries.
Q9-12 Under the treasury stock method the parent company shares that have been
purchased by a subsidiary are reported as treasury stock in the consolidated balance sheet.
The carrying value of the shares is the amount paid by the subsidiary when they were
purchased.

9-2


Q9-13 Consolidated net income will be reduced by $100,000. Income assigned to the
controlling interest will be reduced by $72,000 ($100,000 x .90 x .80) when the unrealized
profit of Tiny Corporation is eliminated. A total of $10,000 is treated as a reduction to the
income assigned to noncontrolling shareholders of Tiny Corporation ($100,000 x .10) and
$18,000 is a reduction of the income assigned to noncontrolling shareholders of Subsidiary
Company ($100,000 x .90 x .20).
Q9-14 All three companies should be included in the consolidated financial statements.
Slide Company should be consolidated with Bit Company because Bit holds majority
ownership of Slide. Bit Company, in turn, should be consolidated with Snapper Corporation
because Snapper holds majority ownership of Bit.
Q9-15 A subsidiary's stock dividend results in the capitalization of some portion of its
retained earnings. Such an action will have no effect on the consolidated financial
statements since the entire stockholders' equity section of the subsidiary is eliminated in
preparing the consolidation workpaper.
Q9-16 A 15 percent stock dividend is a small stock dividend and must be recorded by
capitalizing retained earnings equal to the market price per share of the stock times the
number of shares actually issued. As a result, retained earnings will decrease and the par
value of stock outstanding and additional paid-in capital will increase on the subsidiary's
books. There should be no change in the investment account balance reported by the
parent. Thus, the only change in the eliminating entries is the relative amount debited to
each of the three individual stockholders' equity accounts of the subsidiary.
Q9-17 When the parent or other affiliates own all the shares of all companies included in
the consolidation, the order in which the consolidation is completed may not be particularly
critical. On the other hand, when less than 100 percent ownership is held there is a much
greater chance of error in apportioning unrealized profits or other adjustments between
noncontrolling ownership and consolidated net income when some other sequence is used.
By starting the consolidation with the company furthest away from the parent, the
computation of income assigned to noncontrolling interest at each level can be most easily
accomplished.

9-3


SOLUTIONS TO CASES
C9-1 Effect of Subsidiary Preferred Stock
When a parent company does not own all the shares of a subsidiary, income assigned to
the noncontrolling interest includes (1) a portion of subsidiary preferred dividends and (2) a
portion of earnings available to common shareholders.
To determine the amount of income to assign to preferred and common shareholders of the
subsidiary, the controller needs to have the following information about the preferred stock:
1. The number of preferred shares outstanding and the number owned by the parent and
other affiliates.
2. The annual preferred dividend rate per share and whether the dividends are cumulative
or noncumulative.
3. If the dividends are noncumulative, the amount of preferred dividends declared during
the period, if any.
In this particular case the parent does not appear to own any of the subsidiary's preferred
shares. Once the controller determines the portion of subsidiary income assignable to
common shareholders, consolidated net income attributable to the controlling interest is
computed by adding the parent's pro rata share of this amount to the parent's income from
its own operations.

C9-2 Consolidated Stockholders’ Equity: Theory vs. Practice
a. 1Upon the sale of stock of a subsidiary, Xerox used to recognize a gain or loss in the
consolidated income statement equal to the company’s proportionate share of the
corresponding increase or decrease in that subsidiary’s equity. Under FASB 160, the sale
of subsidiary shares is viewed as an equity transaction and does not affect income.
Instead, the difference between the fair value of the consideration received and the change
in the amount of the noncontrolling interest is recognized as an adjustment to stockholders’
equity (usually additional paid-in capital).
b. Occidental Petroleum has generally treated subsidiary preferred stock as a liability (the
amount is small). It should be reported as part of the noncontrolling interest.

9-4


C9-3 Sale of Subsidiary Shares
MEMO
To:

Robert Reader
Vice President of Finance
Book Corporation

From:
Re:

, CPA
Recognition of Gain on Sale of Subsidiary Shares

Previous accounting standards did not specifically address the issue of how to treat a sale
of subsidiary shares when the parent retained controlling ownership. However, a common
practice was to recognize a gain or loss on the sale of shares.
The FASB’s recent issuance of FASB 160 makes clear that, from a consolidated
perspective, a parent’s sale of subsidiary shares while maintaining control is an equity
transaction. Accordingly, no gain or loss on the sale should be reported in the consolidated
income statement. Instead, equity should be adjusted by the difference between the
consideration received and the change in the parent’s subsidiary interest.
In the current situation, Book’s interest in Lance prior to its sale of Lance shares was
$360,000, an amount equal to 90 percent of Lance’s $400,000 book value. Immediately
following the sale of Lance shares, Book’s remaining 60 percent interest in Lance is
$240,000 ($400,000 x .60), a decrease of $120,000 ($360,000 - $240,000). The difference
between the proceeds received and the change in the book value of Book’s interest in
Lance is as follows:
Proceeds received ($5.60 x 30,000 shares)
Change in book value of interest ($360,000 - $240,000)
Required adjustment to equity

$168,000
120,000
$ 48,000

This $48,000 difference should be reported within equity in the consolidated balance sheet.
Although alternatives exist in terms of how to meet the FASB’s reporting requirement, the
following entry to record the sale of shares on Book’s books would be consistent with the
FASB’s requirement and probably the most efficient approach:
Cash

Investment in Lance Company Stock
Additional Paid-In Capital

168,000

120,000
48,000

The additional paid-in capital recorded on Book’s books would carry over to the
consolidated balance sheet and would be included in consolidated equity.
If Book elected to record a $48,000 gain on the sale of Lance shares instead of recognizing
additional paid-in capital as shown in the entry, that gain would have to be transferred to
additional paid-in capital in the preparation of consolidated financial statements.
Primary citation:
FASB 160
ARB 51 (as amended by FASB 160), Par. 33.
9-5


9-6


C9-4 Sale of Subsidiary Shares
(a) With a sale of shares to a nonaffiliate, net resources have been brought into the
consolidated entity and the noncontrolling shareholders have an additional claim. The
excess of the proceeds received from the sale over the change in the parent’s interest in
the subsidiary increases the amount of additional paid-in capital reported in the
consolidated balance sheet. A sale of subsidiary shares to a nonaffiliate also changes the
amount of income assigned to the noncontrolling interest in the consolidated income
statement and the amount of net assets assigned to the noncontrolling interest in the
consolidated balance sheet.
(b) When a parent sells shares of one subsidiary to another subsidiary, net resources to
the consolidated entity do not change. Any gain recorded by the parent must be eliminated
when the investment balance reported by the subsidiary is eliminated in preparing
consolidated financial statements. A change in the claim of the noncontrolling interest is
likely to occur if the subsidiary that purchases the shares is not wholly owned. As a result,
there may be some change in consolidated income and the balance sheet totals assigned
to noncontrolling interest.

C9-5 Reciprocal Ownership
A great many factors beyond the immediate impact on reported earnings may be important
in deciding on the use of the funds. Items such as the following should be considered:
1. Are the excess funds held by Thorson available only temporarily or are they not likely to
be needed in the foreseeable future?
2. Will there be any regulatory or taxation problems associated with one or more of the
alternatives?
3. Can shares of the companies be purchased in the desired quantities and at existing
market prices or are there potential difficulties associated with one or more alternatives?
4. Is it desirable to acquire more shares of either subsidiary since controlling ownership
already is in the hands of Strong Manufacturing?
5. Have the noncontrolling shareholders of either subsidiary been troublesome or caused
the parent to refrain from actions that it might otherwise have taken?
With the information given, it is difficult to determine which action will have the most
favorable impact on consolidated net income. The earnings of each company, the number
of shares outstanding, and the relative market prices of the shares each will have an effect.
In general, reported income is maximized by purchasing the shares with the lowest priceearnings ratio.

9-7


SOLUTIONS TO EXERCISES
E9-1 Multiple-Choice Questions on Preferred Stock Ownership
1.

d

$50,000 = $20,000 + $30,000

2.

c

$29,000 = $20,000 + .30($30,000)

3.

b

Only the retained earnings of the acquiring company is included.

4.

a

The portion held by the parent is eliminated when the preferred investment is
eliminated, and the portion held by nonaffiliates is eliminated and included with the
balance reported as noncontrolling interest in the consolidated balance sheet.

E9-2 Multiple-Choice Questions on Multilevel Ownership
1.

b

$188,000 = $100,000 + .80[$80,000 + .60($50,000)]

2.

b

$20,000 = .40($50,000)

3.

c

$22,000 = .20[$80,000 + .60($50,000)]

4.

c

$42,000 = .40($50,000) + .20[$80,000 + .60($50,000)]

5.

b

$2,400 = .80 x .60[($150,000 + $100,000 - $200,000) / 10 years)

E9-3 Acquisition of Preferred Shares
Eliminating entries:
E(1)

E(2)

Common Stock — Separate Company
Retained Earnings
Investment in Separate Company Common
Stock
Noncontrolling Interest
Eliminate investment in common stock.

50,000
150,000

Preferred Stock — Separate Company
Investment in Separate Company
Preferred Stock
Eliminate subsidiary preferred stock.

100,000

9-8

140,000
60,000

60,000
40,000


E9-4 Reciprocal Ownership [AICPA Adapted]
a.

None of Simba's dividends is reported in the consolidated statements. All of
Simba's dividends are eliminated in the consolidation process.

b.

Only 90 percent of Pride's dividends are included in the consolidated retained
earnings statement. The dividend payment on the 10 percent owned by Simba is
an intercorporate payment to an affiliate and must be eliminated in the
consolidation process.

E9-5 Subsidiary with Preferred Stock Outstanding
E(1)

E(2)

Common Stock — Topple Company
Retained Earnings
Investment in Topple Common Stock

150,000
210,000

Preferred Stock — Topple Company
Investment in Topple Preferred Stock

200,000

270,000
90,000

80,000
120,000

E9-6 Subsidiary with Preferred Stock Outstanding
a.

Entries recorded by Clayton Corporation:
(1)

Cash
Record purchase of Topple stock.

270,000
80,000

(2)

Cash
Record dividends from Topple:
$25,500 = ($50,000 - $16,000) x .75

(3)

Cash
Dividend Income
Record dividends on preferred stock
from Topple: $16,000 x .40

6,400

(4)

Income from Subsidiary
Record equity-method income:
$40,500 = ($70,000 - $16,000) x .75

40,500

9-9

25,500

350,000

25,500

6,400

40,500


E9-6 (continued)
b.

E(1)

Dividends Declared — Common Stock
Eliminate income from subsidiary.

E(2)

Dividend Income — Preferred
Dividends Declared — Preferred
Eliminate dividend income from
subsidiary preferred.

E(3)

Income to Noncontrolling Interest
Dividends Declared — Preferred Stock
Assign income to noncontrolling interest:
$23,100 = [($70,000 - $16,000) x .25] +
($16,000 x .60)
$9,600 = $16,000 x .60
$8,500 = ($50,000 - $16,000) x .25
$5,000 = $13,500 - $8,500

23,100

E(4)

Common Stock — Topple Company
Retained Earnings, January 1
Eliminate beginning investment balance.

150,000
210,000

Preferred Stock — Topple Company

200,000

E(5)

9-10

40,500

6,400

25,500
15,000

6,400

9,600
8,500
5,000

270,000
90,000

80,000
120,000


E9-7 Preferred Dividends and Call Premium
a.

Culbertson Company's contribution to 20X2 consolidated net income is equal to
its reported net income of $70,000.

b.

Income assigned to noncontrolling interest:
Preferred shares [.40($100,000 x .12)]
Common shares {.10[$70,000 - ($100,000 x .12)]}
Total income assigned to noncontrolling interest

c.

$ 4,800
5,800
$10,600

Retained earnings assignable to preferred shareholders:
Dividends in arrears [5 years x ($100,000 x .12)]
Call feature ($2 x 10,000 shares)
Total retained earnings assigned to preferred stock

d.

Book value of common shares:
Par value of common shares outstanding
Retained earnings balance
Less: Balance assigned to preferred shares
Book value of common shares

e.

$60,000
20,000
$80,000

$380,000
(80,000)

$300,000
300,000
$600,000

Total noncontrolling interest:
Preferred stock [.40($100,000 + $80,000)]
Common stock (.10 x $600,000)
Total noncontrolling interest

9-11

$
72,000
60,000
$132,000


E9-8 Multilevel Ownership
a.

Consolidated net income for 20X6 is $190,000 ($90,000 +
$40,000
+ $60,000)

b.

Income of $36,800 is assigned to the noncontrolling interest:
Income from Dally ($40,000 x .35)
Income from Latent [($60,000 + $16,000) x .30]
Total income assigned to noncontrolling interest

c.

Income of $153,200 is assigned to the controlling interest:
Consolidated net income
Less: Income assigned to noncontrolling interest
Income assigned to controlling interest

d.

$14,000
22,800
$36,800

Only the $45,000 of dividends paid by Grasper Corporation to its
shareholders will be reported as dividends declared in Grasper’s
20X6 consolidated retained earnings statement.

9-12

$190,000
(36,800)
$153,200


E9-9 Eliminating entries for Multilevel Ownership
a.

Journal entries recorded by Brown Corporation on its investment in Tann Company:
(1)

(2)

Cash
Investment in Tann Company Stock
Record dividends from Tann Company:
$15,000 x .60

(3)

b.

Cash
Record purchase of Tann Company stock.

Income from Tann Company
$40,000 x .60

9,000

24,000

120,000

9,000

24,000

Journal entries recorded by Promise Enterprises on its investment in Brown
Corporation:
(1)

Investment in Brown Corporation Stock
Cash
Record purchase of Brown Corporation
stock.

(2)

Cash
Record dividends from Brown Corporation:
$50,000 x .90

(3)

c.

120,000

Income from Brown Corporation
($120,000 + $24,000) x .90

315,000

45,000

129,600

315,000

45,000

129,600

E(1)

Income from Tann Company
Dividends Declared
Eliminate income from Tann Company.

24,000

E(2)

Dividends Declared
$16,000 = $40,000 x .40
$6,000 = $15,000 x .40

16,000

9-13

9,000
15,000

6,000
10,000


E9-9 (continued)
E(3)

Common Stock — Tann Company
Eliminate investment in Tann Company
stock:
$120,000 = $200,000 x .60
$80,000 = $200,000 x .40

100,000
60,000
40,000

E(4)

Income from Brown Corporation
Dividends Declared
Eliminate income from Brown Corporation.

129,600

E(5)

Dividends Declared
Assign income to noncontrolling
shareholders of Brown Corporation:
$14,400 = ($120,000 + $24,000) x .10
$5,000 = $50,000 x .10
$9,400 = $14,400 - $5,000

E(6)

Common Stock — Brown Corporation
Eliminate investment in Brown
Corporation stock:
$315,000 = $350,000 x .90
$35,000 = $350,000 x .10

9-14

14,400

150,000
60,000
140,000

120,000
80,000

45,000
84,600

5,000
9,400

315,000
35,000


E9-10 Reciprocal Ownership
Operating income of Grower Supply Corporation
Operating income of Schultz Company
Less: Income to noncontrolling interest:
($50,000 x .15)
Income to controlling interest

9-15

$112,000
50,000
$162,000
(7,500)
$154,500


E9-11 Consolidated Balance Sheet with Reciprocal Ownership
Talbott Company and Short Company
Consolidated Balance Sheet Workpaper
December 31, 20X9
Talbott
Company

Item
Cash
Accounts Receivable
Inventory
Buildings and
Equipment (net)
Investment in Short
Co. Common Stock
Investment in Talbott
Co. Common Stock
Treasury Stock
Debits
Accounts Payable
Bonds Payable
Common Stock
Retained Earnings
Credits

Short
Company

78,000
120,000
150,000

39,000
80,000
120,000

117,000
200,000
270,000

400,000

300,000

700,000

Eliminations
Credit

352,000

Consolidated

(1)352,000
61,000

(2) 61,000

1,100,000

600,000

90,000
400,000
300,000
310,000

60,000
100,000
200,000
240,000

(1)200,000
(1)240,000

1,100,000

600,000

501,000

E(1)
Common Stock — Short Company
Retained Earnings
Investment in Short Company Common
Stock
E(2)

Debit

Treasury Stock
Investment in Talbott Company
Common Stock

9-16

(2) 61,000

(1) 88,000
501,000

61,000
1,348,000
150,000
500,000
300,000
310,000
88,000
1,348,000

200,000
240,000
352,000
88,000
61,000
61,000


E9-11 (continued)
Talbott Company and Subsidiary
Consolidated Balance Sheet
December 31, 20X9
Current Assets:
Cash
Accounts Receivable
Inventory
Noncurrent Assets:
Buildings and Equipment (net)
Total Assets

$117,000
200,000
270,000

$

587,000

700,000
$1,287,000

Current Liabilities:
Accounts Payable
Bonds Payable
Stockholders' Equity:
Controlling Interest:
Common Stock
Retained Earnings
Total Controlling Interest
Total Equity before Reduction for Treasury Shares
Less: Treasury Shares
Total Stockholders’ Equity
Total Liabilities and Stockholders' Equity

9-17

$ 150,000
500,000
$300,000
310,000
$610,000
88,000
$698,000
(61,000)

637,000
$1,287,000


E9-12 Subsidiary Stock Dividend
a.

Lake Company:
Stock Dividends Declared
Common Stock

40,000

40,000

Lindale Company: No entry required.
b.

Eliminating entries, December 31, 20X3:
E(1)

E(2)

Dividends Declared

E(3)

c.

Dividends Declared
Investment in Lake Company Stock

Common Stock — Lake Company
Stock Dividends Declared

17,500

7,500

140,000
200,000

7,000
10,500
3,000
4,500

210,000
90,000
40,000

Eliminating entry, January 1, 20X4:
E(1)

Common Stock — Lake Company
Retained Earnings

140,000
175,000

Lake Company retained earnings, December 31, 20X3:
Balance, December 31, 20X2
Add: Net income for 20X3
Less: Stock dividend in 20X3
Cash dividend paid in 20X3
Balance, December 31, 20X3

$200,000
25,000
(40,000)
(10,000)
$175,000

9-18

220,500
94,500


E9-13 Sale of Subsidiary Shares by Parent
a.

Investment in Acme Concrete, January 1, 20X5:
Purchase price
Acme net income in 20X3 and 20X4
Dividends paid by Acme in 20X3 and 20X4
Proportion of stock held by Stable
Balance prior to sale of shares

b.

$360,000

48,000
$408,000

Journal entry recorded by Stable Home Builders for sale of shares:
Cash
Investment in Acme Stock
Additional Paid-in Capital
$102,000 = $408,000 x 4,000 /
[($200,000 / $10) x .80]

c.

$100,000
(40,000)
$ 60,000
x
.80

120,000

102,000
18,000

E(1)

Dividends Declared

30,000

E(2)

Dividends Declared

20,000

E(3)

Common Stock — Acme Concrete
Noncontrolling interest

200,000
310,000

12,000
18,000
8,000
12,000

306,000
204,000

E9-14 Purchase of Additional Shares from Nonaffiliate
a.

Purchase price, December 31, 20X7
Modern Products Company net income for 20X8
($230,000 + $20,000 - $200,000)
Proportion of stock held by Weal
Income from subsidiary
Dividend received from Modern Products Company
($20,000 x .60)
Balance in investment account, December 31, 20X8

9-19

$210,000
$50,000
x
.60

30,000
(12,000)
$228,000


E9-14 (continued)
b.

Purchase of additional shares on January 1, 20X9
Investment balance January 1, 20X9, after purchase
Modern Products Company net income for 20X9
($280,000 + $20,000 - $230,000)
Proportion of stock held by Weal
Less: Amortization of differential on stock
purchased January 1, 20X9: ($20,000 / 10
years)
Income from subsidiary
Dividend received from Modern Products
Company ($20,000 x .80)

c.

$228,000
96,000
$324,000
$70,000
x
.80
$56,000
(2,000)
54,000
(16,000)
$362,000

E(1)

Income from Modern Products Company
Dividends Declared
Investment in Modern Products
Company Stock

54,000

E(2)

Dividends Declared
$14,000 = $70,000 x .20

14,000

E(3)

Common Stock — Modern Products Company
Differential
Investment in Modern Products
Company Stock
Eliminate beginning investment balance:
$20,000 = $96,000 – ($380,000 x .20)
$76,000 = $380,000 x .20

E(4)

Patents
Amortization Expense
Differential
Assign differential and amortize for year:
$2,000 = $20,000 / 10 years

9-20

16,000
38,000

4,000
10,000

150,000
230,000
20,000
324,000
76,000

18,000
2,000

20,000


E9-15 Repurchase of Shares by Subsidiary from Nonaffiliate
a.

Book value of Quinn stock outstanding
Cost of treasury shares repurchased
Book value of remaining shares outstanding
Proportion of remaining shares held by
noncontrolling
Interest (2,000 / 8,000)
Adjusted book value of shares held
Book value of shares held before treasury stock
repurchase by Quinn ($500,000 x .20)
Reduction of noncontrolling interest
Consideration given by Quinn Manufacturing
Increase in equity attributable to parent

b.

Investment in Quinn Manufacturing Stock

c.

Common Stock — Quinn Manufacturing
Investment in Quinn Stock
Treasury Shares
$312,000 = .75($500,000 - $84,000)
$104,000 = .25($500,000 - $84,000)

9-21

$500,000
(84,000)
$416,000
x
.25
$104,000
(200,000)
$ 96,000
(84,000)
$ 12,000
12,000

100,000
150,000
250,000

12,000

312,000
104,000
84,000


E9-16 Sale of Shares by Subsidiary to Nonaffiliate
a.

Computation of change in book value of Schroeder Corporation shares held by
Browne Corporation:
Before
Sale
$150,000
50,000
400,000
$600,000

Common stock, $10 par value
Additional paid-in capital
Retained earnings
Total stockholders' equity of Schroeder
Proportion of stock held by Browne
Corporation:
11,000 / 15,000
11,000 / (15,000 + 5,000)
Book value of shares

After
Sale
$ 200,000
400,000
400,000
$1,000,000

x

.733

$440,000

Increase in book value of shares held by
Browne Corporation

x
.550
$ 550,000
$ 110,000

b.

Investment in Schroeder Stock

110,000

c.

Common Stock — Schroeder Corporation
Retained Earnings
Investment in Schroeder Stock
$450,000 = $1,000,000 x .45

200,000
400,000
400,000

9-22

110,000

550,000
450,000


SOLUTIONS TO PROBLEMS
P9-17 Multiple-Choice Questions on Preferred Stock Ownership
1.

d

Book value of shares held by noncontrolling interest:
Preferred stock ($100,000 x .30)
Common stock [($200,000 + $50,000) x .20]
Total book value

2.

b

Income to noncontrolling preferred
shareholders
[($100,000 x .10) x .30]
Income to noncontrolling common
shareholders:
Reported net income of Upland Company
Income to preferred shareholders
Income to common shareholders
Proportion of common stock owned by
noncontrolling interest
Total income to noncontrolling interest

3.

b

c

Controlling interest:
Common stock
Retained earnings
Total controlling interest
Noncontrolling interest: ($250,000 x .20) +
($100,000 x .30)
Total stockholders’ equity

$3,000
$30,000
(10,000)
$20,000
x

.20

4,000
$7,000

Reported net income of Upland Company
Operating income of Stacey Company
Less: Income to noncontrolling interest

4.

$30,000
50,000
$80,000

5.

a

$ 30,000
100,000
$130,000
(7,000)
$123,000

$ 300,000
350,000
$ 650,000

All preferred shares of the subsidiary are eliminated in preparing the
consolidated financial statements.

9-23

80,000
$730,000


P9-18 Multilevel Ownership with Differential
a.

Journal entries recorded by Corn Corporation on its investment in Bark Company:
(1)

(2)

Cash
Investment in Bark Company Stock
Record dividends from Bark Company:
$20,000 x .70

14,000

(3)

Income from Bark Company
$30,000 x .70

21,000

(4)

b.

Cash
Record purchase of Bark Company stock.

406,000

Amortize differential related to
buildings and equipment:
($30,000 / 10 years) x .70

2,100

406,000

14,000

21,000

2,100

Journal entries recorded by Purple Corporation on its investment in Corn
Corporation:
(1)

Cash
Investment in Corn Corporation Stock
Record dividends from Corn Corporation:
$25,000 x .80

20,000

(2)

Income from Corn Corporation
($60,000 + $18,900) x .80

63,120

(3)

trademark: ($50,000 / 5 years) x .80

9-24

8,000

20,000

63,120

8,000


P9-18 (continued)
c.

E(1)

Dividends Declared
Eliminate income from Bark Company.

E(2)

Dividends Declared
shareholders of Bark Company:
$8,100 = ($30,000 - $3,000) x .30
$6,000 = $20,000 x .30
$2,100 = $8,100 - $6,000

E(3)

Common Stock — Bark Company
Differential
Eliminate investment in Bark Company
stock:
$30,000 = $406,000 + $174,000 - $550,000

18,900

8,100

250,000
300,000
30,000

E(4)

Buildings and Equipment
Differential
Assign beginning differential.

30,000

E(5)

Depreciation Expense
Accumulated Depreciation
buildings and equipment:
$30,000 / 10 years

3,000

E(6)

Dividends Declared
Eliminate income from Corn Corporation.

55,120

E(7)

Dividends Declared
shareholders of Corn Corporation:
$13,780 = ($60,000 + $18,900 - $10,000) x .
20
$5,000 = $25,000 x .20
$8,780 = $13,780 - $5,000

13,780

9-25

14,000
4,900

6,000
2,100

406,000
174,000

30,000

3,000

20,000
35,120

5,000
8,780


P9-18 (continued)
E(8)

Common Stock — Corn Corporation
Differential
Eliminate investment in Corn
Corporation stock:
$270,000 = $200,000 + $35,000 + $35,000
$30,000 = $50,000 - $10,000 - $10,000
$560,000 = $520,000 + [($35,000 - $10,000)
x .80] x 2 years
$140,000 = $700,000 x .20

400,000
270,000
30,000

E(9)

Trademark
Differential
Assign beginning differential:
$50,000 - ($10,000 x 2 years)

30,000

E(10)

Amortization Expense
Trademark
trademark: $50,000 / 5 years

10,000

9-26

560,000
140,000

30,000

10,000


P9-19 Subsidiary Stock Dividend
Investment elimination entry, January 1, 20X8:
Alternative 1: Pound Manufacturing stock is split 2:1.
E(1)

Common Stock — Pound Manufacturing
Retained Earnings
Investment in Pound Mfg. Stock

100,000
70,000
280,000

306,000
144,000

Alternative 2: A stock dividend of 4,000 shares is issued.
E(1)

Retained Earnings

140,000
70,000
240,000

306,000
144,000

Alternative 3: A stock dividend of 1,500 shares is issued.
E(1)

Retained Earnings

9-27

115,000
130,000
205,000

306,000
144,000


P9-20 Subsidiary Preferred Stock Outstanding
a.

Eliminating entries, January 1, 20X5:
Preferred Stock — Pert Company
Retained Earnings
Investment in Pert Preferred Stock
Eliminate preferred stock:
$32,000 = ($200,000 x .08) x 2 years
Common Stock — Pert Company
Retained Earnings
Investment in Pert Common Stock
Eliminate common stock:
$168,000 = $200,000 - $32,000

b.

200,000
32,000

150,000
168,000

Consolidated net income and income to controlling
interest:
Operating income of Emerald Corporation
Net income of Pert
Income to noncontrolling interest:
Income from preferred stock of Pert Company
($16,000 x .60)
Income from common stock of Pert Company
[($34,000 - $16,000) x .30]
Income to noncontrolling interest
Alternate computation of income to controlling interest
Operating income of Emerald Corporation
Income from preferred stock of Pert Company
($16,000 x .40)
Income from common stock of Pert Company
[($34,000 - $16,000) x .70]

9-28

92,800
139,200

222,600
95,400

$ 80,000
34,000
$114,000
$ 9,600
5,400

(15,000)
$ 99,000

$80,000
6,400
12,600
$99,000


P9-21 Ownership of Subsidiary Preferred Stock
a.

Preferred stockholders' claim on net assets of Jacobs:
Liquidation value of preferred stock ($101 per share)
20X6 dividends in arrears ($200,000 x .10)
Total preferred stockholder claim, December 31, 20X6

b.

Book value of Jacobs common shares acquired by Presley:
Total Jacobs stockholders' equity, December 31, 20X6
Claim of preferred stockholders
Book value of Jacobs common stock
Portion acquired by Presley
Book value of common shares acquired by Presley

c.

$1,800,000
1,200,000
$3,000,000
(2,933,000)
$ 67,000

Income to noncontrolling interest, 20X7:
Jacobs net income
Less: impairment of goodwill
Less: 20X7 preferred dividends ($200,000 x .10)
Income accruing to common shareholders
Noncontrolling common shareholders' interest
Income to noncontrolling common shareholders
Preferred dividends to noncontrolling
shareholders ($20,000 x .80)
Total income to noncontrolling shareholders

e.

$3,155,000
(222,000 )
$2,933,000
x
.60
$1,759,800

Goodwill associated with acquisition of common shares:
Consideration given by Presley to acquire shares
Fair value of noncontrolling interest in common shares
Total fair value
Book value of common shares
Goodwill

d.

$202,000
20,000
$222,000

$280,000
(26,000)
(20,000)
$234,000
x
.40
$ 93,600
16,000
$109,600

Presley's income from investment in subsidiary common stock:
Jacobs net income
Less: 20X7 preferred dividends ($200,000 x .10)
Income accruing to common shareholders
Presley's proportionate share
Presley's share of income to common shareholders
Note: Basic equity method does not include adjustment for
Impairment of goodwill.

9-29

$280,000
(20,000)
$260,000
x
.60
$156,000


P9-21 (continued)
f.

Noncontrolling interest, December 31, 20X7:
Total amount assigned to noncontrolling interest:
Noncontrolling interest - common
Noncontrolling interest - preferred
Total noncontrolling interest

$1,289,600
161,600
$1,451,200

Assigned to noncontrolling interest - common
Jacobs stockholders' equity, January 1, 20X7
20X7 net income
Less: Preferred dividends
Less: Common dividends
Total Jacobs stockholders' equity, December 31, 20X7
Claim of preferred stockholders
Book value of Jacobs' common stock
Unimpaired goodwill at December 31, 20X7 ($67,000 - $26,000)
Total basis for common shareholders
Noncontrolling stockholders' interest
Noncontrolling interest — common

$3,155,000
280,000
(40,000)
(10,000)
$3,385,000
(202,000 )
$3,183,000
41,000
$3,224,000
x
.40
$1,289,600

Assigned to noncontrolling interest - preferred
Total Jacobs preferred stockholders' equity,
January 1, 20X7
Less: Dividends in arrears paid during 20X7
Jacobs preferred stockholders' equity,
December 31, 20X7
Noncontrolling stockholders' interest
Noncontrolling interest — preferred

9-30

$222,000
(20,000)
$202,000
x
.80
$161,600


P9-21 (continued)
g.

E(1)

Dividends Declared — Common
Investment in Jacobs Common Stock

E(2)

Dividend Income — Preferred
Eliminate dividend income from subsidiary
preferred stock: $40,000 x .20

E(3)

Dividends Declared — Common
$4,000 = $10,000 x .40
$32,000 = $40,000 x .80

E(4)

Common Stock — Jacobs Jacuzzi
Additional Paid-In Capital — Common
Premium on Preferred Stock
Goodwill
Investment in Jacobs Common Stock
Eliminate beginning investment in common
stock:
$3,000 = $5,000 - $2,000
$1,630,000 = $1,650,000 - $20,000

156,000

8,000

109,600

500,000
800,000
3,000 *
1,630,000 **
67,000

*Portion accruing to common shareholders
**Portion accruing to common shareholders after deducting
preferred dividends in arrears

9-31

6,000
150,000

8,000

4,000
32,000
73,600

1,800,000
1,200,000


P9-21 (continued)
E(5)

Goodwill Impairment Loss
Goodwill
Recognize goodwill impairment loss.

E(6)

Preferred Stock — Jacobs Jacuzzi
Premium on Preferred Stock
Investment in Jacobs Preferred Stock
Additional Paid-In Capital —
Retirement of Preferred Stock
Eliminate subsidiary preferred stock:
$2,000 = $5,000 - $3,000
$20,000 = $200,000 x .10
$2,400 = ($222,000 x .20) - $42,000
$177,600 = $222,000 x .8

26,000

200,000
2,000 *
20,000 **

26,000

42,000
2,400
177,600

*Portion representing call premium
**Portion relating to preferred dividends in arrears

P9-22 Consolidation Workpaper with Subsidiary Preferred Stock
a.

E(1)

Investment in White Common Stock

58,500

E(2)

Dividend Income

9,000

E(3)


12,500

E(4)

Common Stock — White Corporation
Investment in White Common Stock

100,000
250,000

E(5)

Preferred Stock — White Corporation
Investment in White Preferred Stock

200,000

E(6)

Dividends Payable
Dividends Receivable

9,000

9-32

9,000
49,500
9,000
6,000
1,000
5,500

315,000
35,000
120,000
80,000
9,000


P9-22 (continued)
b.

Brown Company and White Corporation
Consolidation Workpaper
December 31, 20X6
Brown
Item

Sales
Dividend Income
Credits
Cost of Goods Sold
Deprec. and Amort.
Other Expenses
Debits
Consolidated Net Income
Income, carry forward
Retained Earnings, Jan. 1
Income, from above
Dividends Declared
Preferred Stock
Common Stock
Ret. Earnings, Dec. 31,
carry forward
Cash
Accounts Receivable
Dividends Receivable
Inventory
Bldgs. and Equip. (net)
Investment in White Corp.:
Preferred Stock
Common Stock
Debits
Accounts Payable
Dividends Payable
Bonds Payable
Preferred Stock
Common Stock
Ret. Earnings, from above
Credits

Company

White
Corporatio
n

500,000
300,000
9,000
58,500
567,500
300,000
280,000
170,000
40,000
30,000
131,000
20,000
(451,000) (220,000)

116,500

80,000

435,000
116,500
551,500

250,000
80,000
330,000

Eliminations
Debit

435,000
116,500
551,500
(2)
(3)
(1)
(3)

(6)

120,000
364,500

300,000

(6)

9,000

200,000
491,500

200,000
100,000
305,000

(5) 200,000
(4) 100,000
330,000

1,091,500

690,000

639,000

9-33

(60,000)
491,500

9,000

(5) 120,000
(1) 49,500
(4) 315,000

690,000
70,000
15,000

9,000
6,000
9,000
1,000
25,000

330,000

200,000
270,000

100,000

800,000
450,000
70,000
151,000
(671,000)
129,000

(4) 250,000
80,000

100,000
120,000

1,091,500

800,000

(12,500)
116,500

305,000

58,000
80,000
9,000
100,000
360,000

idated

(3) 12,500
80,000

(10,000)

491,500

Credit

(2) 9,000
(1) 58,500

(15,000)
(60,000)

Consol-

158,000
200,000
300,000
630,000

1,288,000
170,000
6,000
300,000

200,000
25,000
491,500
(3) 5,500
(4) 35,000
(5) 80,000
120,500
639,000 1,288,000


P9-23 Subsidiary Stock Transactions
a.

(1)

(2)

Book value of Beta Company stock outstanding
Proportion of remaining shares held by noncontrolling
Interest (1,500 / 9,000)
Adjusted book value of shares held
repurchase by Beta Company ($500,000 x .25)
Reduction of noncontrolling interest
Consideration given by Beta Company
Decrease in equity attributable to parent

Investment in Beta Company Stock
$45,000 x .833

E(2)

$45,000 x .167

E(3)

Common Stock — Beta Company
Treasury Stock

(1)

(2)

(125,000 )
$ 53,000
(68,000)
$ (15,000)

15,000

15,000


E(1)

b.

x .1667
$ 72,000

Journal entry recorded by Apex Corporation:
Retained Earnings

(3)

$500,000
(68,000)
$432,000

37,500

37,500

7,500

7,500

100,000
80,000
320,000

Book value of Beta Company stock outstanding
Proportion of remaining shares held by noncontrolling
Interest (2,500 / 9,000)
Adjusted book value of shares held by noncontrolling
Interest
repurchase by Beta Company ($500,000 x .25)
Increase in equity attributable to parent

68,000
360,000
72,000
$500,000
(68,000)
$432,000
x

.2778

$120,000
(125,000)
$ 5,000

Journal entry recorded by Apex Corporation:
Cash

9-34

68,000

63,000
5,000


P9-23 (continued)
(3)


E(1)

$45,000 x .722

32,500

E(2)

$45,000 x .278

12,500

E(3)

Common Stock — Beta Company
Treasury Stock

100,000
80,000
320,000

32,500

12,500

68,000
312,000
120,000

P9-24 Sale of Subsidiary Shares
a.

E(1)

Gain on Sale of ENC Company Stock
Eliminate gain on sale of ENC shares:
$60,000 - ($250,000 x .20)

10,000

E(2)

Dividends Declared
Investment in ENC Company Stock
Eliminate income from subsidiary:
$18,000 = .60($170,000 - $140,000)

18,000

E(3)

Dividends Declared
$12,000 = .40($170,000 - $140,000)

12,000

E(4)

Common Stock — ENC Company
Investment in ENC Company Stock

9-35

100,000
20,000
130,000

10,000

6,000
12,000

4,000
8,000

150,000
100,000


P9-24 (continued)
b.

Penn Corporation and ENC Company
December 31, 20X4
Item

Sales
Gain on Sale of ENC
Company Stock
Credits
Cost of Goods Sold
Depreciation Expense
Other Expenses
Debits
Income, carry forward

Penn
Corp.
280,000

ENC
Company
170,000

10,000
18,000
_______
308,000
170,000
210,000
100,000
20,000
15,000
21,000
25,000
(251,000) (140,000)

320,000
47,000
367,000

362,000

150,000

170,000

30,000
70,000
120,000

35,000
50,000
100,000

65,000
120,000
220,000

650,000

230,000

880,000

Ret. Earnings, Dec. 31,
carry forward

Credits

450,000
310,000
35,000
46,000
(391,000)
59,000

(4)130,000
40,000

Dividends Declared

Accum. Depreciation
Accounts Payable
Bonds Payable
Common Stock
Additional Paid-In
Capital
Retained Earnings,
from above

(1) 10,000
(2) 18,000

130,000
30,000
160,000
(10,000)

320,000
57,000
377,000
(15,000)

Debits

450,000

(12,000)
47,000

30,000

Cash
Accounts Receivable
Inventory
Buildings and
Equipment
Investment in ENC
Company Stock

Consolidated

(3) 12,000
40,000

57,000

Retained Earnings,
January 1
Income, from above

Eliminations
Debit
Credit

(2)
(3)

162,000

6,000
4,000
10,000

(2) 12,000
(4) 150,000

1,032,000

415,000

170,000
50,000
200,000
200,000

95,000
20,000
30,000
100,000

(4)100,000

50,000

20,000

(4) 20,000

362,000

150,000

170,000

1,032,000

415,000

290,000

9-36

(15,000)
352,000

1,285,000
265,000
70,000
230,000
200,000

(1) 10,000

60,000

10,000
352,000
(3) 8,000
(4)100,000
108,000
290,000 1,285,000


P9-25 Sale of Shares by Subsidiary to Nonaffiliate
a.

E(1)

Common Stock — Delta Corporation
240,000
190,000
Retained Earnings
350,000
Investment in Delta Corporation Stock
Eliminate investment in common stock:
$240,000 = $200,000 + ($10 x 4,000 shares)
$190,000 = $50,000 + [($45 - $10) x 4,000 shares]
$520,000 = $780,000 x (16,000 shares / 24,000 shares)
$260,000 = $780,000 x (8,000 shares / 24,000 shares)

520,000
260,000

Journal entry recorded by Craft Corporation:
Investment in Delta Corporation Stock
Book value of shares held by Craft:
After sale $780,000 x (16,000 / 24,000)
Before sale $600,000 x (16,000 / 20,000)
Increase in book value

b.

40,000

40,000

$520,000
(480,000 )
$ 40,000

Craft Corporation and Delta Corporation
Consolidated Balance Sheet Workpaper
January 1, 20X3
Item

Cash
Accounts Receivable
Inventory
Buildings & Equipment
Investment in Delta
Corporation
Total Debits
Accumulated
Depreciation
Accounts Payable
Taxes Payable
Mortgages Payable
Common Stock
Additional Paid-In
Capital
Retained Earnings,
Noncontrolling
Interest
Total Credits

Craft
Corp.

Delta
Corp.

50,000
90,000
180,000
700,000

Eliminations
Debit
Credit

230,000
120,000
200,000
600,000

280,000
210,000
380,000
1,300,000

520,000
1,540,000 1,150,000
200,000
70,000

Consolidated

(1)520,000

240,000

(1)240,000

420,000
140,000
80,000
250,000
300,000

190,000
350,000

(1)190,000
(1)350,000

220,000
500,000

1,540,000 1,150,000

780,000

250,000
300,000
220,000
500,000

220,000
70,000
80,000

2,170,000

9-37

(1)260,000
780,000

260,000
2,170,000


P9-25 (continued)
c.

Craft Corporation and Subsidiary
Consolidated Balance Sheet
January 1, 20X3

Current Assets:
Cash
Accounts Receivable
Inventory
Noncurrent Assets:
Buildings and Equipment
Less: Accumulated Depreciation
Total Assets

$

280,000
210,000
380,000

$1,300,000
(420,000 )

Current Liabilities:
Accounts Payable
Taxes Payable
Mortgages Payable
Stockholders’ Equity:
Controlling Interest:
Common Stock
Retained Earnings
Total Controlling Interest
Total Stockholders’ Equity
Total Liabilities and Stockholders' Equity

$ 140,000
80,000

$ 300,000
220,000
500,000
$1,020,000
260,000

9-38

$

870,000

880,000
$1,750,000

$ 220,000
250,000

1,280,000
$1,750,000


P9-26 Sale of Additional Shares to Parent
a.

Eliminating entry:
E(1)

Common Stock — Tin Corporation
Retained Earnings
Investment in Tin Corporation
Eliminate investment balance:
$125,000 = $100,000 + (2,500 x $10)
$187,500 = computed below
Computation of debit to Additional Paid-In Capital
Balance reported by Tin Corporation prior to
sale of additional shares
Increase in paid-in capital from sale of shares
[$150,000 – (2,500 x $10)]
Noncontrolling interest after sale of shares
($500,000 x .20)
Noncontrolling interest before sale of shares
($350,000 x .25)
Increase in book value of noncontrolling interest
Debit to additional paid-in capital

125,000
187,500
200,000

412,500
100,000

$ 50,000
125,000
$100,000
(87,500)

12,500
$187,500

Journal entry recorded by Tin Corporation:
Cash
Common Stock

150,000

25,000
125,000

Journal entry recorded by Lane Manufacturing:
Investment in Tin Corporation Stock
Cash

9-39

150,000

150,000


P9-26 (continued)
b.

Lane Manufacturing Company and Tin Corporation
January 2, 20X1
Item

Cash
Accounts Receivable
Inventory
Buildings and
Equipment
Investment in Tin
Corporation Stock
Debits
Accum. Depreciation
Accounts Payable
Bonds Payable
Common Stock
Additional Paid-In
Capital
Retained Earnings,
Noncontrolling
Interest
Total Credits

Lane
Corp.

Tin
Corp.

Eliminations
Debit
Credit

Consolidated

77,500
60,000
100,000

210,000
100,000
180,000

287,500
160,000
280,000

600,000

600,000

1,200,000

412,500
1,250,000 1,090,000

(1)412,500

1,927,500

150,000
50,000
400,000
200,000

240,000
50,000
300,000
125,000

(1)125,000

390,000
100,000
700,000
200,000

50,000
400,000

175,000
200,000

(1)187,500
(1)200,000

37,500
400,000

1,250,000 1,090,000

512,500

9-40

(1)100,000
512,500

100,000
1,927,500


P9-27 Complex Ownership Structure
The overall ownership structure can be diagrammed as follows:

Consolidated net income of $98,800First
is reported:

Boston

Operating income of First Boston
Operating income of Gulfside
Operating income of.80
Paddock
Total earnings available
Income to noncontrolling interests:
Paddock .40[$50,000 + .10($30,000)]
Gulfside
Gulfside .20[$34,000 + .60($10,000)]
.60

9-41

$ 44,000
34,000
50,000
$128,000

.10
$21,200

Paddoc
8,000
k

(29,200)
$ 98,800

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