Presentation is loading. Please wait.

Presentation is loading. Please wait.

EXERCISE 4-2: Park Company purchased 90% of the stock of Salt Company on January 1, 2009, for $465,000, an amount equal to $15,000 in excess of the book.

Similar presentations


Presentation on theme: "EXERCISE 4-2: Park Company purchased 90% of the stock of Salt Company on January 1, 2009, for $465,000, an amount equal to $15,000 in excess of the book."— Presentation transcript:

1 EXERCISE 4-2: Park Company purchased 90% of the stock of Salt Company on January 1, 2009, for $465,000, an amount equal to $15,000 in excess of the book value of equity acquired. This excess payment relates to an undervaluation of Salt Company’s land. On the date of purchase, Salt Company’s retained earnings balance was $50,000. The remainder of the stockholders’ equity consists of no- par common stock. During 2013, Salt Company declared dividends in the amount of $10,000, and reported net income of $40,000. The retained earnings balance of Salt Company on December 31, 2012, was $160,000. Park Company uses the cost method to record its investment. Required: Prepare in general journal form the workpaper entries that would be made in the preparation of a consolidated statements workpaper on December 31, 2013.

2 Computation and Allocation of Difference between Implied and Book Value Acquired ParentNon-Entire ShareControllingValue Share Purchase price and implied value 465,00051,667516,667 * Less: Book value of equity acquired:450,00050,000500,000 Difference (implied and book value)15,0001,66716,667 Allocated to undervalued land (15,000)(1,667)(16,667) Balance Equity acquired by the parent company 450,000 Equity acquired for the whole company 500,000 Common stock ?????? (450,000) RE. 1/1 (Given) 50,000

3 3-Common Stock (465-15) 450,000 Retained Earnings 1/1/13 160,000 Land 16,667 Investment ($465,000 + $99,000) 564,000 NCI ($51, ,000) 62,667 1-Investment in Salt Company99,000 Retained Earnings 1/1 - Park Company99,000 To establish reciprocity (.90 ( ($160,000 – $50,000)) 2-Dividend Income 9,000 Dividends Declared ($10000*.90)9,000

4 EXERCISE 4-3: At the beginning of 2009, Presidio Company purchased 95% of the common stock of Succo Company for $494,000. On that date, Succo Company’s stockholders’ equity consisted of the following: Common stock $300,000 Other contributed capital 100,000 Retained earnings 1/1/ ,000 Total $520,000 During 2017, Succo Company reported net income of $40,000 and distributed dividends in the amount of $19,000. Succo Company’s retained earnings balance at the end of 2016 amounted to $160,000. Presidio Company uses the equity method. Required: Prepare in general journal form the workpaper entries necessary in the compilation of consolidated financial statements on December 31, Explain why the partial and complete equity methods would result in the same entries in this instance.

5 Equity Income ($40,000)(.95)38,000 Investment in Succo Company 38,000 Investment in Succo Company Dividends Declared ($19,000)(.95) 18,050

6 The balance in the investment account at the beginning of the year is $532,000, which is computed as:[$494,000 + (.95 x ($160,000 – $120,000))] = $532,000 Common Stock 300,000 Other Contributed Capital 100,000 Retained Earnings 1/1/17 160,000 Investment (494, ,000) 532,000 Noncontrolling Interest * 28,000 * $520,000 x.05 + (.05 x ($160,000 - $120,000)) = 28,000

7 In this instance, the partial and complete equity methods result in the same entries because the amount paid for the acquisition of Succo is exactly 95% of Succo’s book value. Thus, there are no asset adjustments and no excess amortization or depreciation to consider. The equity income under the complete equity method is the same as under the partial equity method (95% of reported income of Succo).

8 EXERCISE 4-4: Poco Company purchased 85% of the outstanding common stock of Serena Company on December 31, 2009, for $310,000 cash. On that date, Serena Company’s stockholders’ equity consisted of the following: Common stock $240,000 Other contributed capital 55,000 Retained earnings 1/1/ ,000 $345,000 During 2012, Serena Company distributed a dividend in the amount of $12,000 and at year end reported a net loss of $10,000. During the time that Poco Company has held its investment in Serena Company, Serena Company’s retained earnings balance has decreased $29,500 to a net balance of $20,500 after closing on December 31, Serena Company did not declare or distribute any dividends in 2010 or The difference between book value and the value implied by the purchase price relates to goodwill. Required: A.Assume that Poco Company uses the equity method. Prepare in general journal form the entries needed in the preparation of a consolidated statements workpaper on December 31, Explain why the partial and complete equity methods would result in the same entries in this instance.

9 Part A – Workpaper entries 12/31/12 - Equity Method Investment in Serena Company (.85)*($12,000) Dividends declared Investment in Serena Company (.85)*($10,000 loss) 8500 Equity loss 8500

10 B. Assume that Poco Company uses the cost method. Prepare in general journal form the entries needed in the preparation of a consolidated statements workpaper on December 31, ParentNon-Entire ShareControllingValue Share Purchase price and implied value 310,00054,706364,706 * Less: Book value of equity acquired: 293,25051,750345,000 Difference IV & BV16,7502,95619,706 Goodwill (16,750)(2,956)(19,706) Balance

11 Common Stock 240,000 Other Contributed Capital 55,000 1/1/12 Retained Earnings 1/1/12 42,500 a Difference (IV&BV) 19,706 Investment in S ($310,000 – $6,375*) 303,625 NCI ( ) 53,581 a $42,500 = $20,500 at year-end plus 2012 loss of $10,000 plus 2012 dividends of $12,000 [($50,000 - $42,500) x.85] = 6,375 [($50,000 - $42,500) x.15] = 1125

12 Goodwill19,706 Difference (IV&BV) 19,706 The partial equity and the complete equity methods result in the same entries because the excess of the cost over fair value of net assets is allocated to goodwill, a non- amortizable asset. If any of this excess is allocated to depreciable assets or intangible assets with limited lives (subject to amortization), additional expenses will be recorded under the complete equity method.

13 Part B – Workpaper entries 12/31/09 - Cost Method Under Cost method, before elimination of the investment account, a workpaper entry is made to the investment account and P Company’s beginning retained earnings to recognize P’s share of the cumulative undistributed income or loss of S Company from the date of acquisition to the beginning of the current year as follows: Retained Earnings 1/1 - Poco Company6,375 Investment in Serena Company6,375 To establish reciprocity (.85 ( ($50,000 – $42,500)) Investment in Serena Company (.85)*($12,000) 10,200 Dividends Declared - Serena Company10,200 (In the normal position, the entry will be from cash to dividends income, but because of the loss occurred in the year the entry will be from cash to investment.)

14 Common Stock 240,000 Other Contributed Capital 55,000 Retained Earnings 1/1/12 42,500 Difference (IV&BV) 19,706 Investment ($310,000 – $6,375)303,625 NCI ( )53,581 Goodwill19,706 Difference (IV&BV)19,706

15 EXERCISE 4-5: On January 1, 2009, Plate Company purchased a 90% interest in the common stock of Set Company for $650,000, an amount $20,000 in excess of the book value of equity acquired. The excess relates to the understatement of Set Company’s land holdings. Excerpts from the consolidated retained earnings section of the consolidated statements workpaper for the year ended December 31, 2009, follow: Set Company Consolidated Balances 1/1/09 retained earnings 190, ,000 Net income from above 132, ,000 Dividends declared (50,000) (88,000) 12/31/09 retained earnings 272,000 1,212,000 Set Company’s stockholder’s equity is composed of common stock and retained earnings only. Required: A. Prepare the eliminating entries required for the preparation of a consolidated statements workpaper on December 31, 2009, assuming the use of the cost method.

16 A. Workpaper Entries: Cost of investment $ 650,000 Less: excess cost allocated to land 20,000 Book value acquired (90%) $ 630,000 Total stockholders’ equity ($630,000/.90) 700,000 Less: Retained earnings 1/1/09 190,000 Common stock 1/1/09 $ 510,000 Computation and Allocation of Difference between Implied and Book Value Acquired ParentNon-Entire ShareControllingValue Share Purchase price and implied value $650,000 72, ,222 * Less: Book value of equity acquired: 630,000 70, ,000 Difference (IV&BV): 20,000 2,222 22,222 Goodwill (20,000) (2,222) (22,222) Balance

17 Part A:Eliminating entries – cost method Dividend Income (.90)($50,000)45,000 Dividends Declared - Set Company45,000 Common Stock ($700,000 – $190,000)510,000 Retained Earnings 1/1/09 190,000 Difference (IB&BV) 22,222 Investment in Salt Company650,000 Noncontrolling Interest72,222 Land 22,222 Difference (IV&BV)22,222

18 B. Prepare the eliminating entries required for the preparation of a consolidated statements workpaper on December 31, 2009, assuming the use of the equity method. Equity Income Investment (.90)($132,000) Investment 45,000 dividends declared (.90)($50,000) 45,000 Common Stock - Set Company510,000 Retained Earnings 1/1/06 - Set Company190,000 Difference (IV&BV) 22,222 Investment in Salt Company650,000 Noncontrolling Interest 72,222

19 Land 22,222 Difference (IV&BV)22,222 C. Determine the total noncontrolling interest that will be reported on the consolidated balance sheet on December 31, How does the noncontrolling interest differ between the cost method and the equity method? 1- $72,222 + (.1 ( $132,000) - (.1 ( $50,000) = 80, The noncontrolling interest will be the same regardless of the method used to account for the investment on Plate Company’s books.

20 EXERCISE 4-8 : On May 1, 2010, Peters Company purchased 80% of the common stock of Smith Company for $50,000. Additional data concerning these two companies for the years 2010 and 2011 are: Peters Smith Peters Smith Common stock $100,000 $25,000 $100,000 $25,000 Other contributed capital 40,000 10,000 40,000 10,000 Retained earnings, 1/1 80,000 10, ,000 53,000 Net income (loss) 64,000 45,000 37,500 (5,000) Cash dividends (11/30) 15,000 2,000 5,000 —0— Any difference between book value and the value implied by the purchase price relates to Smith Company’s land. Peters Company uses the cost method to record its investment. Required: A. Prepare the workpaper entries that would be made on a consolidated statements workpaper for the years ended December 31, 2010 and 2011 for Peters Company and its subsidiary, assuming that Smith Company’s income is earned evenly throughout the year. (Use the full-year reporting alternative.) B. Calculate consolidated net income and consolidated retained earnings for 2010 and 2011.

21 Part A:Workpaper Entries 2010 Dividend Income (.80 ( $2,000)1,600 Dividends Declared - Smith Company1,600 Common Stock – Smith 25,000 Other Contributed Capital – Smith 10,000 Retained Earnings 1/1/10 - Smith 10,000 Difference between Implied and Book Value 2,500 Subsidiary Income Purchased * 15,000 Investment in Smith Company 50,000 Noncontrolling Interest 12,500 Land 2,500 Difference (IV&BV)2,500

22 Computation and Allocation of Difference between Implied and Book Value Acquired ParentNon-Entire ShareControllingValue Share Purchase price and implied value 50,00012,50062,500 * Less: Book value of equity acquired: Equity36,0009,00045,000 Subsidiary Income purchased**12,0003,00015,000 Total book value48,00012,00060,000 Difference (IV&BV)2, ,500 Goodwill (2,000)(500)(2,500) Balance *$50,000/.80 **Subsidiary Income Purchased (4/12* $45,000) = 15,000

23 2011 Estimated Retained Earnings of Smith on date of acquisition** Retained earnings, 1/1/2010 $ 10,000 Smith earnings to 1/5/2010 = (4/12)($45,000 from net income) 15,000 Retained earnings, 1/5/2010 $ 25,000 Investment in Smith22,400 Retained Earnings 1/1 Peters22,400 To establish reciprocity (.80 ( ($53,000 – $25,000**) Common Stock - Smith 25,000 Other Contributed Capital - Smith 10,000 Retained Earnings 1/1/11 – Smith 53,000 Land 2,500 Investment ($50,000 + $22,400)72,400 Noncontrolling Interest ( ) 18,100

24 EXERCISE 4-9: Using the data presented in Exercise 4-8, prepare workpaper elimination entries for 2010 assuming use of the partial-year reporting alternative.

25 Exercise 4-9 Workpaper Entries - Cost Method 2010 Dividend Income (.80)($2,000)1,600 Dividends Declared - Smith Company1,600 Common Stock – Smith25,000 Other Contributed Capital – Smith10,000 Retained Earnings 5/1/07 – Smith *25,000 Difference between Implied and Book Value 2,500 Investment in Smith Company50,000 Noncontrolling Interest 12,500 Land2,500 Difference (IV&BV)2,500


Download ppt "EXERCISE 4-2: Park Company purchased 90% of the stock of Salt Company on January 1, 2009, for $465,000, an amount equal to $15,000 in excess of the book."

Similar presentations


Ads by Google