Advanced Financial Accounting
12th Edition
ISBN: 9781259916977
Author: Christensen, Theodore E., COTTRELL, David M., Budd, Cassy
Publisher: Mcgraw-hill Education,
expand_more
expand_more
format_list_bulleted
Question
Chapter 5, Problem 5.11E
a
To determine
Introduction: The consolidation procedure used in the second year and the subsequent year is similar to that of the first. The equity method is used to evaluate the investment in the subsidiary. In order to determine consolidation entries, the change in the parent’s investment in the second or subsequent year is determined. Any differential arising is recognized and all the intercompany transactions are eliminated.
The entries by P during 20X2 on its books for its investment in S using equity method,
a
Expert Solution
Explanation of Solution
Equity method entries in P’s books
| Particulars | Debit $ | Credit $ |
| Investment in S corporation | 190,000 | |
| Cash | 190,000 | |
| (Initial investment in S Corporation recorded) | ||
| Common stock | 120,000 | |
| 80,000 | ||
| Investment in S Corporation | 160,000 | |
| Non-controlling interest in Net assets of S | 40,000 | |
| (Elimination of beginning investment in S) | ||
| Buildings | 32,000 | |
| 5,500 | ||
| Investment in S Corporation | 30,000 | |
| Non-controlling interest in Net assets of S | 7,500 | |
| (Excess differential reclassified) |
- Cash paid for purchase of investment in S corporation $190,000
- Elimination of investment in S
- Amortization of excess acquisition cost
Controlling interest on income from S recognized
b
To determine
Introduction: The consolidation procedure used in the second year and the subsequent year is similar to that of the first. The equity method is used to evaluate the investment in the subsidiary. In order to determine consolidation entries, the change in the parent’s investment in the second or subsequent year is determined. Any differential arising is recognized and all the intercompany transactions are eliminated.
The consolidation entries needed at December 31, 20X3.
b
Expert Solution
Explanation of Solution
Elimination entries
| Particulars | Debit $ | Credit $ |
| Investment in S corporation | 190,000 | |
| Cash | 190,000 | |
| (Initial investment in S Corporation recorded) | ||
| Investment in S corporation | 32,000 | |
| Income from S corporation | 32,000 | |
| (Income from subsidiary S for 20X2 recognized) | ||
| Income from S corporation | 3,200 | |
| Investment in S corporation | 3,200 | |
| (Amortization of excess acquisition price) | ||
| Common stock | 120,000 | |
| Retained earnings | 80,000 | |
| Income from S Corporation | 32,000 | |
| Non-controlling interest in net income of S Corporation | 8,000 | |
| Investment in S Corporation | 192,000 | |
| Non-controlling in net assets of S corporation | 48,000 | |
| (Elimination of investment in S corporation by reversal) | ||
| 4,000 | ||
| Income from S Corporation | 3,200 | |
| Non-controlling interest in net income of S Corporation | 800 | |
| (Amortization of differential in building) | ||
| Buildings | 32,000 | |
| Goodwill | 5,500 | |
| | 4,000 | |
| Investment in S Corporation | 26,800 | |
| Non-controlling interest in net assets of S | `6,700 | |
| (Excess differential reclassified) |
- Cash paid for purchase of investment in S corporation $190,000
- Controlling interest on income from S recognized
- Amortization of excess acquisition cost
- Elimination of investment in S Corporation
- Amortization of differential in buildings
- Excess differential reclassification
Want to see more full solutions like this?
Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
Phone Corporation acquired 70 percent of Smart Corporation’s common stock on December 31, 20X4, for $98,000. At that date, the fair value of the noncontrolling interest was $42,000. Data from the balance sheets of the two companies included the following amounts as of the date of acquisition:
Item
Phone Corporation
Smart Corporation
Cash
$ 52,300
$ 39,000
Accounts Receivable
99,000
59,000
Inventory
136,000
92,000
Land
66,000
49,000
Buildings & Equipment
417,000
268,000
Less: Accumulated Depreciation
(151,000)
(73,000)
Investment in Smart Corporation
98,000
Total Assets
$ 717,300
$ 434,000
Accounts Payable
$ 141,500
$ 27,000
Mortgage Payable
300,800
288,000
Common Stock
72,000
40,000
Retained Earnings
203,000
79,000
Total Liabilities & Stockholders’ Equity
$ 717,300
$ 434,000
At the date of the business combination, the book values of Smart’s assets and liabilities approximated fair value except for inventory, which had a fair value of…
Phone Corporation acquired 70 percent of Smart Corporation’s common stock on December 31, 20X4, for $98,000. At that date, the fair value of the noncontrolling interest was $42,000. Data from the balance sheets of the two companies included the following amounts as of the date of acquisition:
Item
Phone Corporation
Smart Corporation
Cash
$ 52,300
$ 39,000
Accounts Receivable
99,000
59,000
Inventory
136,000
92,000
Land
66,000
49,000
Buildings & Equipment
417,000
268,000
Less: Accumulated Depreciation
(151,000)
(73,000)
Investment in Smart Corporation
98,000
Total Assets
$ 717,300
$ 434,000
Accounts Payable
$ 141,500
$ 27,000
Mortgage Payable
300,800
288,000
Common Stock
72,000
40,000
Retained Earnings
203,000
79,000
Total Liabilities & Stockholders’ Equity
$ 717,300
$ 434,000
At the date of the business combination, the book values of Smart’s assets and liabilities approximated fair value except for inventory, which had a fair value of…
Phone Corporation acquired 70 percent of Smart Corporation’s common stock on December 31, 20X4, for $98,000. At that date, the fair value of the noncontrolling interest was $42,000. Data from the balance sheets of the two companies included the following amounts as of the date of acquisition:
Item
Phone Corporation
Smart Corporation
Cash
$ 52,300
$ 39,000
Accounts Receivable
99,000
59,000
Inventory
136,000
92,000
Land
66,000
49,000
Buildings & Equipment
417,000
268,000
Less: Accumulated Depreciation
(151,000)
(73,000)
Investment in Smart Corporation
98,000
Total Assets
$ 717,300
$ 434,000
Accounts Payable
$ 141,500
$ 27,000
Mortgage Payable
300,800
288,000
Common Stock
72,000
40,000
Retained Earnings
203,000
79,000
Total Liabilities & Stockholders’ Equity
$ 717,300
$ 434,000
At the date of the business combination, the book values of Smart’s assets and liabilities approximated fair value except for inventory, which had a fair value of…
Chapter 5 Solutions
Advanced Financial Accounting
Ch. 5 - Where is the balance assigned to the...Ch. 5 - Why must a noncontrolling interest be reported in...Ch. 5 - Prob. 5.3QCh. 5 - Prob. 5.4QCh. 5 - Prob. 5.5QCh. 5 - Prob. 5.6QCh. 5 - Prob. 5.7QCh. 5 - Prob. 5.8QCh. 5 - Prob. 5.9QCh. 5 - Prob. 5.10Q
Ch. 5 - Under what Circumstances would a parent company...Ch. 5 - Prob. 5.12QCh. 5 - Prob. 5.13QCh. 5 - Prob. 5.14AQCh. 5 - Prob. 5.15AQCh. 5 - Consolidation Worksheet Preparation The newest...Ch. 5 - Prob. 5.2CCh. 5 - Prob. 5.3CCh. 5 - Prob. 5.4CCh. 5 - Prob. 5.5CCh. 5 - Prob. 5.1.1ECh. 5 - Prob. 5.1.2ECh. 5 - Prob. 5.1.3ECh. 5 - Prob. 5.1.4ECh. 5 - Prob. 5.2.1ECh. 5 - Prob. 5.2.2ECh. 5 - Prob. 5.2.3ECh. 5 - Prob. 5.2.4ECh. 5 - Prob. 5.2.5ECh. 5 - Prob. 5.3ECh. 5 - Prob. 5.4ECh. 5 - Balance Sheet Worksheet Problem Company owns 90...Ch. 5 - Prob. 5.6ECh. 5 - Prob. 5.7ECh. 5 - Prob. 5.8.1ECh. 5 - Prob. 5.8.2ECh. 5 - Prob. 5.8.3ECh. 5 - Prob. 5.8.4ECh. 5 - Prob. 5.8.5ECh. 5 - Prob. 5.8.6ECh. 5 - Prob. 5.8.7ECh. 5 - Prob. 5.9ECh. 5 - Prob. 5.10ECh. 5 - Prob. 5.11ECh. 5 - Prob. 5.12ECh. 5 - Prob. 5.13ECh. 5 - Prob. 5.14ECh. 5 - Prob. 5.15ECh. 5 - Prob. 5.16ECh. 5 - Prob. 5.17AECh. 5 - Prob. 5.18AECh. 5 - Prob. 5.19PCh. 5 - Prob. 5.20PCh. 5 - Prob. 5.21.1PCh. 5 - Multiple-Choice Questions on Applying the Equity...Ch. 5 - Prob. 5.21.3PCh. 5 - Prob. 5.21.4PCh. 5 - Prob. 5.22PCh. 5 - Computation of Account Balances Pencil Company...Ch. 5 - Prob. 5.24PCh. 5 - Equity Entries with Differential On January 1,...Ch. 5 - Equity Entries with Differential Plug Corporation...Ch. 5 - Prob. 5.27PCh. 5 - Prob. 5.28PCh. 5 - Prob. 5.29P
Knowledge Booster
Similar questions
- Pawn Corporation acquired 70 percent of Shop Corporation's voting stock on January 1, 20OX2, for $416,500. The fair value of the noncontrolling interest was $178,500 at the date of acquisition. Shop reported common stock outstanding of $200,000 and retained earnings of $350,000. The differential is assigned to buildings with an expected life of 15 years at the date of acquisition. On December 31, 20X4, Pawn had $25,000 of unrealized profits on its books from inventory sales to Shop, and Shop had $40,000 of unrealized profit on its books from inventory sales to Pawn. All inventory held at December 31, 20X4, was sold during 20X5. On December 31, 20X5, Pawn had $14,000 of unrealized profit on its books from inventory sales to Shop, and Shop had unrealized profit on its books of $55,000 from inventory sales to Pawn. Pawn reported income from its separate operations (excluding income on its investment in Shop and amortization of purchase differential) of $118,000 in 20X5, and Shop reported…arrow_forwardPhone Corporation acquired 70 percent of Smart Corporation’s common stock on December 31, 20X4, for $97,300. At that date, the fair value of the noncontrolling interest was $41,700. Data from the balance sheets of the two companies included the following amounts as of the date of acquisition: Item Phone Corporation Smart Corporation Cash $ 58,300 $ 22,000 Accounts Receivable 109,000 49,000 Inventory 144,000 79,000 Land 73,000 36,000 Buildings & Equipment 426,000 266,000 Less: Accumulated Depreciation (166,000) (75,000) Investment in Smart Corporation 97,300 Total Assets $ 741,600 $ 377,000 Accounts Payable $ 142,500 $ 26,000 Mortgage Payable 331,100 233,000 Common Stock 68,000 39,000 Retained Earnings 200,000 79,000 Total Liabilities & Stockholders’ Equity $ 741,600 $ 377,000 At the date of the business combination, the book values of Smart’s assets and liabilities approximated fair value except for inventory, which had a fair value of…arrow_forwardJohannes Inc. acquired 80 percent of Corner Brook Ltd. common shares on January 1, Year 4, for $744,000. At that date, the fair value of the non-controlling Interest was $186,000. Corner Brook's balance sheet contained the following amounts at the time of the combination: Cash Accounts Receivable Inventory Construction Work in Progress Other Assets (net) Total Assets 66,000 140,000 40,000 Accounts Payable $ 106,000 Bonds Payable 610,000 950,000 Common Shares ($10 par value) Retained Earnings 400,000 530,000 450,000 $1,646,000 $ 1,646,000 Total Liabilities & Equities During each of the next three years, Corner Brook reported net income of $120,000 and paid dividends of $60,000. On January 1, Year 6, Johannes sold 8,800 of the Corner Brook shares for $260,000 in cash. Johannes used the equity method in accounting for its ownership of Corner Brook. Required: (a) Compute the balance in the Investment account reported by Johannes on January 1, Year 6, before its sale of shares. (Omit $ sign…arrow_forward
- On January 1, year 1, DEF Company purchased 80% of the stock of UVW for P4,000,000 cash. Prior to the acquisition, UVW had 100,000 shares of stock outstanding. On the date of acquisition, UVW's stock had fair value of P52 per share. During the year, UVW reported P280,000 in net income and paid dividends of P50,000. What is the balance in the noncontrolling interest account on DEF's balance sheet on December 31, year 1?arrow_forwardOn December 30, Draco, Inc. acquired a 100% ownership interest in Lamya Corporation at a cost of $300,000. Draco determined that Lamya’s inventory was undervalued by $20,000 on the acquisition date. Draco had retained earnings totaling $215,000, common stock totaling $60,000, total assets of $600,000, and total liabilities of $325,000 just before the consolidation. Lamya’s book value and fair market value of net assets were both $250,000 at the time of acquisition, with $50,000 reported as common stock and $200,000 reported as retained earnings.How much will Draco report as total stockholders' equity on its consolidated balance sheet immediately after the acquisition? Select one: A. $525,000 B. $285,000 C. $275,000 D. $575,000 PreviousSave AnswersNextarrow_forwardPisa Company acquired 75 percent of Siena Company on January 1, 20X3, for $712,500. The fair value of the noncontrolling interest was equal to 25 percent of book value. On the date of acquisition, Siena had common stock outstanding of $300,000 and a balance in retained earnings of $650,000. During 20X3, Siena purchased inventory for $35,000 and sold it to Pisa for $50,000. Of this amount, Pisa reported $20,000 in ending inventory in 20X3 and later sold it in 20X4. In 20X4, Pisa sold inventory it had purchased for $40,000 to Siena for $60,000. Siena sold $45,000 of this inventory in 20X4. Income and dividend information for Siena for 20X3 and 20X4 are as follows: Year Net Income Dividends 20X3 $ 150,000 $ 40,000 20X4 $ 200,000 $ 50,000 Pisa Company uses the fully adjusted equity method. Required: Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X3. Present the worksheet consolidation entries necessary to prepare…arrow_forward
- Paste Corporation acquired 70 percent of Stick Company's stock on January 1, 20X9, for $105,000. At that date, the fair value of the noncontrolling interest was equal to 30 percent of the book value of Stick Company. The companies reported the following stockholders’ equity balances immediately after the acquisition: Paste Corporation Stick Company Common Stock $ 120,000 $ 30,000 Additional Paid-in Capital 230,000 80,000 Retained Earnings 290,000 40,000 Total $ 640,000 $ 150,000 Paste and Stick reported 20X9 operating incomes of $90,000 and $35,000 and dividend payments of $30,000 and $10,000, respectively. Compute the reported balance in retained earnings at December 31, 20X9, for both companies. Compute consolidated retained earnings at December 31, 20X9.arrow_forwardPamrod Manufacturing acquired all the assets and liabilities of Stafford Industries on January 1, 20X2, in exchange for 4,000 shares of Pamrod's $20 par value common stock. Balance sheet data for both companies just before the merger are given as follows: Balance Sheet Items Assets Cash Accounts Receivable Inventory Land Buildings and Equipment Less: Accumulated Depreciation Total Assets Liabilities and Equities Accounts Payable Bonds Payable Common Stock: $20 par value $5 par value Additional Paid-In Capital Retained Earnings Total Liabilities and Equities Pamrod Manufacturing Book Value $ 70,000 100,000 200,000 50,000 600,000} (250,000) $ 779,000 $ 50,000 300,000 200,000 40,000 180,000 $ 770,000 Fair Value 70,000 100,000 375,000 80,000 540,000 $1,165,000 $ 50,000 310,000 Stafford Industries Book Value $ 30,000 60,000 100,000 40,000 400,000 (150,000) $ 480,000 $ 10,000 150,000 100,000 20,000 200,000 $ 480,000 Fair Value $ 30,000 60,000 160,000 30,000 350,000 $630,000 $ 10,000 145,000…arrow_forwardPaste Corporation acquired 70 percent of Stick Company's stock on January 1, 20X9, for $105,000. At that date, the fair value of the noncontrolling interest was equal to 30 percent of the book value of Stick Company. The companies reported the following stockholders’ equity balances immediately after the acquisition: Paste Corporation Stick Company Common Stock $ 120,000 $ 30,000 Additional Paid-in Capital 230,000 80,000 Retained Earnings 290,000 40,000 Total $ 640,000 $ 150,000 Paste and Stick reported 20X9 operating incomes of $90,000 and $35,000 and dividend payments of $30,000 and $10,000, respectively. Required: Compute the amount reported as net income by each company for 20X9, assuming Paste uses equity-method accounting for its investment in Stick. Compute consolidated net income for 20X9.arrow_forward
- On 1 January 20X0 Alpha Co purchased 90,000 ordinary $1 shares in Beta Co for $270,000. At that date Beta Co's retained earnings amounted to $90,000 and the fair values of Beta Co's assets at acquisition were equal to their book values. Three years later, on 31 December 20X2, the statements of financial position of the two companies were: Alpha Co Beta Co $ $ Sundry net assets 230,000 260,000 Shares in Beto 180,000 - Share capital Ordinary shares of $1 each 200,000…arrow_forwardOn 1 January 20X0 Alpha Co purchased 90,000 ordinary $1 shares in Beta Co for $270,000. At that date Beta Co's retained earnings amounted to $90,000 and the fair values of Beta Co's assets at acquisition were equal to their book values. Three years later, on 31 December 20X2, the statements of financial position of the two companies were: Alpha Co Beta Co $ $ Sundry net assets 230,000 260,000 Shares in Beto 180,000 - Share capital Ordinary shares of $1 each 200,000…arrow_forwardLivermore Corporation acquired 90 percent of Tiger Corporation's voting stock on January 1,20X2, for $450,000. The fair value of the noncontrolling interest was $50,000 at the date of acquisition. Tiger reported common stock outstanding of $100,000 and retained earnings of $280,000. The differential is assigned to buildings with an expected life of 15 years at the date of acquisition. On December 31,20X4, Livermore had $30,000 of unrealized profits on its books from inventory sales to Tiger, and Tiger had $40,000 of unrealized profit on its books from inventory sales to Livermore. All inventory held at December 31, 20X4, was sold during 20 x5. On December 31,20 X5, Livermore had $18,000 of unrealized profit on its books from inventory sales to Tiger, and Tiger had unrealized profit on its books of 45,000 from inventory sales to Livermore. In 20x5 Tiger reported net income of $225,000. The amount Livermore will report as income from Tiger Company for year 20x5would bearrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
