Chapter 10, Problem 10.27P

a.

To determine

Consolidation following acquisition:when a company purchases another company’s common stock, the subsidiary is viewed as being part of the consolidated entity only from the time stock is acquired. When a subsidiary is acquired during a fiscal period rather than at the beginning or at the end, the results of the subsidiary’s operations are included in the consolidated statements only for the portion of the year that the parent owned the stock. The subsidiary’s revenues, expenses, gains and losses for the portion of the fiscal period prior to acquisition is excluded from the consolidated financial statements.

Requirement 1

the journal entries recorded by F during 20X2 related to investment in S.

Answer to Problem 10.27P

	Debit $	Credit $
1. Record purchase of S company stock
Investment in S company stock	247,500
Common stock		80,000
Additional Paid-in capital		167,500
2. Record dividends received from S
Cash	9,000
Investment in S company stock		9,000
3. Record equity method income
Investment in S company stock	13,500
Income from Subsidiary		13,500

Explanation of Solution

1. Investment in S’s common stock is recorded by debiting to investment account and credit common stock $80,000 = $10 x 8,000 shares, additional paid in capital $247,500 - $80,000 = $167,500
2. Dividends from S company recorded $10,000 x .90 = $9,000
3. Equity method income is recognized $15,000 x .90 = $13,500

b.

To determine

Consolidation following acquisition: when a company purchases another company’s common stock, the subsidiary is viewed as being part of the consolidated entity only from the time stock is acquired. When a subsidiary is acquired during a fiscal period rather than at the beginning or at the end, the results of the subsidiary’s operations are included in the consolidated statements only for the portion of the year that the parent owned the stock. The subsidiary’s revenues, expenses, gains and losses for the portion of the fiscal period prior to acquisition is excluded from the consolidated financial statements.

Requirement 2

The consolidation entries for December 31, 20X2

Answer to Problem 10.27P

	Debit	Credit
1. Eliminate income from subsidiary
Income from Subsidiary	13,500
Dividends declared		9,000
Investment in S company common stock		4,500
2. Assignment of income to non-controlling interest:
Income to non-controlling interest	1,500
Dividends declared		1,000
Non-controlling interest		500
3. Eliminate beginning investment:
Common stock − S company	150,000
Retained earnings, January 1	100,000
Sales	205,000
Cost of goods sold		126,000
Depreciation expenses		16,000
Dividends declared		18,000
Investment in S company common stock		247,000
Non-controlling interest		27,500

Explanation of Solution

1. Income from subsidiary is eliminated by debiting and credit investment and dividends
2. Income assigned to non-controlling interest

   $1,500 = $15,000 x .10

   $1,000 = $10,000 x .10

3. Beginning investment eliminated by reversal entry.

c.

To determine

Consolidation following acquisition: when a company purchases another company’s common stock, the subsidiary is viewed as being part of the consolidated entity only from the time stock is acquired. When a subsidiary is acquired during a fiscal period rather than at the beginning or at the end, the results of the subsidiary’s operations are included in the consolidated statements only for the portion of the year that the parent owned the stock. The subsidiary’s revenues, expenses, gains and losses for the portion of the fiscal period prior to acquisition is excluded from the consolidated financial statements.

Requirement 3

The consolidation entries for December 31, 20X2

Answer to Problem 10.27P

Consolidated work sheet total for 20X2 $1,285,000

Explanation of Solution

			Eliminations
	F	S	Debit	Credit	Consolidation
Sales	390,000	250,000	205,000		435,000
Income from subsidiary	13,500		13,500
	403,500	250,000			435,000
Less: Cost of goods sold	(305,000)	(145,000)		126,000	(324,000)
Less: Depreciation expense	(25,000)	(20,000)		16,000	(29,000)
Less: Other expenses	(14,000)	(25,000)		18,000	(21,000)
Consolidated net income	59,500	60,000			61,000
Income from NCI			1,500		(1,500)
Controlling interest in net income	59,500	60,000	220,000	160,000	59,500
Statement of Retained earnings:
Retained earnings January 1	135,000	100,000	100,000		135,000
Net income	59,500	60,000	220,000	160,000	59,500
Less: dividends declared	(40,000)	(30,000)		9,000
				1,000
				20,000	(40,000)
Retained earnings Dec 31	154,500	130,000	320,000	190,000	154,500
Balance sheet
Cash	85,000	50,000			135,000
Accounts receivable	100,000	60,000			160,000
Inventory	150,000	100,000			250,000
Buildings and equipment	400,000	340,000			740,000
Investment in S stock	252,000			4,500
				247,500
Total assets	987,000	550,000			1,285,000
Accumulated depreciation	105,000	65,000			170,000
Accounts payable	40,000	50,000			90,000
Taxes payable	70,000	55,000			125,000
Bonds payable	250,000	100,000			350,000
Common stock	200,000	150,000	150,000		200,000
Additional paid-in capital	167,500				167,500
Retained earnings	154,500	130,000	320,000	190,000	154,500
Non-controlling interest				500
				27,500	28,000
Liabilities and Equity	987,000	550,000	470,000	470,000	1,285,000