Chapter 9, Problem 9.13E

a. Calculate balance of investment.

To determine

Sale of subsidiary sales by parent:when parent sales share of subsidiary, parent has to recognize a gain or loss on the difference between selling price and the change in the carrying amount of its investment. Form consolidation viewpoint, when subsidiary reacquires its share from parent, the transaction represents an internal transfer and does not give rise to a gain or loss.

Because the gain or loss will be eliminated in consolidation process. A better approach is for the parent to adjust additional paid-in capital rather than record gain or loss on the transaction

Requirement 1

Computation of balance in the investment account reported by S on January 1, 20X5

b.Journal entry to record sale of shares

To determine

Sale of subsidiary sales by parent: when parent sales share of subsidiary, parent has to recognize a gain or loss on the difference between selling price and the change in the carrying amount of its investment. Form consolidation viewpoint, when subsidiary reacquires its share from parent, the transaction represents an internal transfer and does not give rise to a gain or loss.

Because the gain or loss will be eliminated in consolidation process. A better approach is for the parent to adjust additional paid-in capital rather than record gain or loss on the transaction

Requirement 2

The entries recorded by S when it sold the A’s shares

c.Consolidation entries

To determine

Consolidation entry: the basic consolidation entry removes the investment in parent company stock account and subsidiary’s stockholders equity accounts. Consolidation is the process of combining the financials of subsidiary with financials of parent company. This is typically done when parent holds more than 50 percent of shares of another entity.

Requirement 3

The preparation of consolidation entries for 20X5.