29 Jun Question 1. Two types of intercompany stock purchases significantly complicate the consolidation process. The first occurs when the subsidiary issues added shares of stock in a public issue and t
Question
1. Two types of intercompany stock purchases significantly complicate the consolidation process. The first occurs when the subsidiary issues added shares of stock in a public issue and the parent buys a portion of the shares. The second occurs when the subsidiary purchases outstanding shares of the parent company.
Required:
a. Discuss the current theoretical consolidation procedure for situations in which the parent buys a portion of the newly issued subsidiary shares that is (1) equal to its existing ownership percentage, (2) greater than its existing ownership percentage, and (3) less than its existing ownership percentage.
b. Discuss the most widely supported, current theoretical consolidation procedures used when the subsidiary purchases outstanding common stock shares of the parent.
8-10
Chapter 8
2. Company P owned an 80% interest in Company S on January 1, 20X6, when Company S had the following stockholders’ equity:
Common stock ($20 par)…………………………..
$180,000
Paid-in capital in excess of par………………….
350,000
Retained earnings……………………………….
220,000
Total stockholders’ equity……………………..
$750,000
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On July 1, 20X6, Company S sold 1,000 additional shares to minority shareholders in a public offering for $50 per share. Company S’s net income for 20X6 was $80,000, and the income was earned evenly during the year.
Company P uses the simple equity method to record the investment in Company S. Summary entries are made each December 31 to record the year’s activity.
Required:
Prepare Company P’s equity adjustments for 20X6 that result from changes in the investment in Company S account. Assume Company P has $500,000 of paid-in capital in excess of par.
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