Question 1. A parent company owns a

29 Jun Question 1. A parent company owns a

Question
1. A parent company owns a 100% interest in a subsidiary. Recently, the subsidiary paid a 10% stock dividend. The dividend should be recorded on the books of the parent

a. at the par value or stated value of the shares received.

b. at the market value of the shares on the date of declaration.

c. at the market value of the shares on the date of distribution.

d. merely as a memo entry indicating that the cost of the original investment now is allocated to a greater number of shares.

2. Company P purchased a 80% interest in the Company S on January 1, 20X1, for $600,000. Any excess of cost is attributed to the Company’s building with a 20-year life. The equity balances of Company S are as follows:

Common stock, $10 par..

January 1, 20X1

December 31, 20X4

$100,000

$140,000

Other paid-in capital..

200,000

280,000

Retained earnings……

250,000

450,000

The only change in paid-in capital is a result of a 40% stock dividend paid in 20X3. The cost to simple equity conversion to bring the investment account to its December 31, 20X4, balance is __________.

a. $30,000

b. $136,000

c. $160,000

d. $256,000

3. When the parent purchases some newly issued shares of a subsidiary, any adjustments resulting from the subsidiary stock sales should be made

a. at the end of the current fiscal year when the worksheet is prepared.

b. at the time of the sale when the equity method is used.

c. at the time of the sale if the cost method is used.

d. retroactively to the start of the current fiscal year.

4. A subsidiary stock sale of new shares to a noncontrolling interest may be viewed so that any increase in parent’s interest is viewed as generating additional paid-in capital and any decrease is viewed as a reduction first in paid-in capital in excess of par if it exists; otherwise, parent retained earnings is reduced. This is a(n)

a. parent company concept.

b. proportionate consolidation concept.

c. economic unit concept.

d. equity method.

Chapter 8

5. Paris LTD. owned a 75% interest in Scott Company prior to January 1, 20X3. On January 1, 20X1, Paris LTD. paid $600,000 for its interest when Scott Company had total equity of $550,000. On January 1, 20X3, Scott Company had the following stockholders’ equity:

Common stock, $10

par……………

$100,000

Other paid-in capital……………

200,000

Retained earnings……………….

350,000

On January 2, 20X3, Scott Company sold 2,500 additional shares of stock for $80 each in a private offering to noncontrolling shareholders. As a result of this sale, which of the following changes would appear in the 20X3 consolidated statements?

a. $50,000 gain

b. $22,500 gain

c. $50,000 increase in controlling paid-in capital

d. $22,500 increase in controlling paid-in capital

ANS: D DIF: M OBJ: 2

6. Paris LTD. owned a 75% interest in Scott Company prior to January 1, 20X3. On January 1, 20X1, Paris LTD. paid $600,000 for its interest when Scott Company had total equity of $550,000. On January 1, 20X3, Scott Company had the following stockholders’ equity:

Common stock, $10

par……………

$100,000

Other paid-in capital……………

200,000

Retained earnings……………….

350,000

On January 2, 20X3, Scott Company sold 2,500 additional shares of stock for $35 each in a private offering to noncontrolling shareholders. As a result of this sale, which of the following changes would appear in the 20X3 consolidated statements?

30.$45,000 loss

31.$21,875 loss

32.$45,000 decrease in controlling paid-in capital

33.$21,875 decrease in controlling paid-in capital