29 Jun Question 1. It is common for a parent firm to
Question
1. It is common for a parent firm to record its investment in a subsidiary under either the cost or simple equity method to expedite the elimination process. This does create some complications, however, when all or a portion of the investment is sold. Assume that in each of the following cases, the parent sells its investment midway through its fiscal year.
(1) The parent owned an 80% interest and sold all of its holdings.
(2) The parent owned an 80% interest and sold a 20% interest to reduce its ownership percentage to 60%.
(3) The parent owned an 80% interest and sold a 60% interest to reduce its ownership percentage to 20%.
Required:
a. For each of the above cases, comment on the procedures necessary to record the sale, where the investment is carried under simple equity, and the impact on consolidated income of the sale.
b. For each of the above cases, state the added procedures that would be necessary if the investment was recorded under the cost method.
7-10
Chapter 7
7-11
Chapter 7
2. A subsidiary company may have preferred stock as part of its equity structure. Further, suppose that the preferred stock is cumulative and in arrears on dividends.
Required:
a. What is the impact of the preferred stock on the excess of cost over book value on the original controlling investment in common stock?
b. What is the impact of the preferred stock on the annual distribution of income?
c. What is the theory followed in consolidated reporting when the parent purchases a portion of the subsidiary’s preferred stock?
3. Company P purchased 10% of the outstanding stock of Company S. on January 1, 20X3, for $75,000. Any excess of cost is attributable to goodwill. On January 1, 20X5, Company P acquired an additional 60% interest in Company S. for $500,000. At the time of the second purchase, equipment with a 5-year remaining life was undervalued by $50,000. Any remaining excess was attributable to goodwill. The following stockholders’ equities existed for Company S:
………………..
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