Chapter 9, Problem 9.21P

a. Computation of preferred stockholders claim on subsidiary assets.

To determine

Subsidiary preferred stock outstanding:many companies have more than one type of outstanding stock, each type of security serves particular purpose, subsidiary preferred shareholders have claim on the net assets of the subsidiary, and special attention must be given to that claim in the preparation of consolidated financial statements.

During the preparation of consolidated financial statements, the amount of subsidiary shareholders’ equity accruing to preferred shareholders must be determined before dealing with elimination of the intercompany common stock ownership, if the parent holds some of the subsidiary preferred stock, its portion of stock interest is eliminated. Any portion of subsidiary preferred stock interest not held by parent is assigned to non-controlling interest.

Requirement 1

Computation of amount of the preferred stockholders claim on JJ’s assets on December 31,20X6.

Answer to Problem 9.21P

Preferred stockholders claim on net assets of JJ is $222,000

Explanation of Solution

	$
Liquidation value of preferred stock 2,000 x $101	202,000
Dividends in arrears ($200,000 x .10	20,000
Total preferred stockholders claim, December 31, 20X6	222,000

b. Computation of book value

To determine

Subsidiary preferred stock outstanding: many companies have more than one type of outstanding stock, each type of security serves particular purpose, subsidiary preferred shareholders have claim on the net assets of the subsidiary, and special attention must be given to that claim in the preparation of consolidated financial statements.

During the preparation of consolidated financial statements, the amount of subsidiary shareholders’ equity accruing to preferred shareholders must be determined before dealing with elimination of the intercompany common stock ownership, if the parent holds some of the subsidiary preferred stock, its portion of stock interest is eliminated. Any portion of subsidiary preferred stock interest not held by parent is assigned to non-controlling interest.

Requirement 2

The computation of December 31 20X6 book value of JJ common stock by P

Answer to Problem 9.21P

Book value of common shares acquired by P is $1,759,800

Explanation of Solution

	$
Total stockholders equity of JJ December 31, 20X6	3,155,000
Claim of preferred stockholders	(222,000)
Book value of common stock	2,933,000
Portion acquired by P $2,933,000 x .60	1.759,800

c. Computation of goodwill.

To determine

Subsidiary preferred stock outstanding: many companies have more than one type of outstanding stock, each type of security serves particular purpose, subsidiary preferred shareholders have claim on the net assets of the subsidiary, and special attention must be given to that claim in the preparation of consolidated financial statements.

During the preparation of consolidated financial statements, the amount of subsidiary shareholders’ equity accruing to preferred shareholders must be determined before dealing with elimination of the intercompany common stock ownership, if the parent holds some of the subsidiary preferred stock, its portion of stock interest is eliminated. Any portion of subsidiary preferred stock interest not held by parent is assigned to non-controlling interest.

Requirement 3

Computation of amount goodwill associated with P acquisition of JJ common stock

Answer to Problem 9.21P

Goodwill associated with acquisition $67,000

Explanation of Solution

	$
Purchase consideration paid by P	1,800,000
Fair value of non-controlling interest held by JJ	1,200,000
Total value	3,000,000
Less: book value of common stock	(2,933,000)
Goodwill	67,000

d. Computation income to non-controlling interest.

To determine

Subsidiary preferred stock outstanding: many companies have more than one type of outstanding stock, each type of security serves particular purpose, subsidiary preferred shareholders have claim on the net assets of the subsidiary, and special attention must be given to that claim in the preparation of consolidated financial statements.

During the preparation of consolidated financial statements, the amount of subsidiary shareholders’ equity accruing to preferred shareholders must be determined before dealing with elimination of the intercompany common stock ownership, if the parent holds some of the subsidiary preferred stock, its portion of stock interest is eliminated. Any portion of subsidiary preferred stock interest not held by parent is assigned to non-controlling interest.

Requirement 4

Computation of amount income assigned to non-controlling interest in 20X7 consolidated income statement

Answer to Problem 9.21P

Non-controlling interest for 20X7 109,600.

Explanation of Solution

	$
JJ’s net income	280,000
Less: goodwill impairment	(26,000)
Less:20X7 preferred dividends ($200,000 x .10)	(20,000)
Income attributed to common stockholder	234,000
Non-controlling interest ($234,000 x .40)	93,600
Preferred dividends non-controlling interest ($20,000 x .80	16,000
Total income to non-controlling shareholders	109,600

e. Computation of income fully adjusted equity method.

To determine

Subsidiary preferred stock outstanding: many companies have more than one type of outstanding stock, each type of security serves particular purpose, subsidiary preferred shareholders have claim on the net assets of the subsidiary, and special attention must be given to that claim in the preparation of consolidated financial statements.

During the preparation of consolidated financial statements, the amount of subsidiary shareholders’ equity accruing to preferred shareholders must be determined before dealing with elimination of the intercompany common stock ownership, if the parent holds some of the subsidiary preferred stock, its portion of stock interest is eliminated. Any portion of subsidiary preferred stock interest not held by parent is assigned to non-controlling interest.

Requirement 5

Computation of amount of income from subsidiary recorded by P during 20X7 using fully adjusted equity method.

Answer to Problem 9.21P

P’s income from investment in subsidiary $156,000

Explanation of Solution

	$
JJ’s net income	280,000
Less: preferred dividends (200,000 x .10)	(20,000)
Income attributed to common stockholders	260,000
P’s share	X .60
P’s share income to common shareholders	156,000

f. Computation non-controlling interest.

To determine

Subsidiary preferred stock outstanding: many companies have more than one type of outstanding stock, each type of security serves particular purpose, subsidiary preferred shareholders have claim on the net assets of the subsidiary, and special attention must be given to that claim in the preparation of consolidated financial statements.

During the preparation of consolidated financial statements, the amount of subsidiary shareholders’ equity accruing to preferred shareholders must be determined before dealing with elimination of the intercompany common stock ownership, if the parent holds some of the subsidiary preferred stock, its portion of stock interest is eliminated. Any portion of subsidiary preferred stock interest not held by parent is assigned to non-controlling interest.

Requirement 6

Computation of amount of non-controlling interest in December 31, 20X7

Answer to Problem 9.21P

Non-controlling interest common stock $1,289,600 and Non-controlling interest preferred stock $161,600.

Explanation of Solution

Non-controlling interest common stock	$
JJ’s stockholder’s equity January 1 20X7	3,155,000
Net income 20X7	280,000
Less preferred dividends	(40,000)
Common dividends	(10,000)
JJ’s stockholder’s equity December 31, 20X7	3,385,000
Claim on preferred stockholders	(202,000)
Book value of common stock JJ	3,183,000
Goodwill at December 31, 20X7 ($67,000 - $26,000)	41,000
NCI common stock $3,224,000 x .40	1,289,600

Non-controlling interest preferred stock	$
JJ’s preferred stock January 1 20X7	222,000
Less dividends	(20,000)
JJ’s preferred stockholder’s equity	202,000
Non-controlling interest $202,000 x .80	161,600

g. Elimination entries.

To determine

Subsidiary preferred stock outstanding: many companies have more than one type of outstanding stock, each type of security serves particular purpose, subsidiary preferred shareholders have claim on the net assets of the subsidiary, and special attention must be given to that claim in the preparation of consolidated financial statements.

During the preparation of consolidated financial statements, the amount of subsidiary shareholders’ equity accruing to preferred shareholders must be determined before dealing with elimination of the intercompany common stock ownership, if the parent holds some of the subsidiary preferred stock, its portion of stock interest is eliminated. Any portion of subsidiary preferred stock interest not held by parent is assigned to non-controlling interest.

Requirement 1

Consolidation entries for worksheet of 20X7.

Answer to Problem 9.21P

	Debit	credit
1. liminate income from subsidiary
Income from subsidiary	156,000
Dividends declared − common		6,000
Investment in JJ common stock		150,000
2. Eliminate dividends income
Dividends income preferred	8,000
Dividends declared preferred stock		8,000
3. Assign income to non-controlling interest
Income to non-controlling interest	109,600
Dividends declared − common stock		4,000
Dividends declared preferred stock		32,000
Non-controlling interest		73,600
4. Eliminate beginning investment
Common stock JJ	500,000
Additional paid-in capital	800,000
Preferred stock premium	3,000
Retained earnings January 1	1,630,000
Goodwill	67,000
Investment in JJ common stock		1,800,000
Non-controlling interest		1,200,000
5. Recognize impairment loss
Goodwill impairment loss	26,000
Goodwill		26,000
6. Eliminate subsidiary preferred stock
Preferred stock JJ	200,000
Preferred stock premium	2,000
Retained earnings January 1	20,000
Investment in JJ preferred stock		42,000
Additional paid in capital retirement of preferred stock		2,400
Non-controlling interest		117,600

Explanation of Solution

1. Income from subsidiary eliminated by debiting income from subsidiary and credit dividends and investment in common stock
2. Dividends income and payable eliminated by setoff entry.
3. Income to non-controlling interest, common stock dividends $10,000 x. 40 = 4,000 and preferred dividends of $40,000 x .80 = 32,000 is credited and eliminated
4. Beginning investment eliminated

   Premium on preferred stock $3,000 = $5,000 − 2,000

   Retained earnings 1,650,000 − 20,000 = $1,630,000

5. Impairment loss on goodwill recognized by crediting to goodwill account
6. Subsidiary preferred stock eliminated as follows
Premium on preferred stock $2,000 = $5,000 - $3,000

Retained earnings $200,000 x .10 = 20,000

Retirement of preferred stock $2,400 = ($222,000 x.20) - $42,000

Non-controlling interest $222,000 x .80 = 177,600