Question 1

On January 1, 2017, Puma Corporation acquired 30 percent of Slume Company's stock for $150,000. On the acquisition date, Slume reported net assets of $450,000 valued at historical cost and $500,000 stated at fair value. The difference was due to the increased value of buildings with a remaining life of 10 years. During 2017 Slume reported net income of $25,000 and paid dividends of $10,000. Puma uses the equity method. What will be the balance in the Investment account as of Dec 31, 2017?

Accepted Answer

The balance in the Investment account as of Dec 31, 2017, can be calculated as follows:1. Initial investment: $150,0002. Share of net income (30% of $25,000): $7,5003. Share of excess depreciation on buildings: The fair value adjustment for buildings is $50,000 ($500,000 fair value - $450,000 historical cost). The excess depreciation is $50,000 / 10 years = $5,000 per year. Puma's share is 30% of $5,000 = $1,500.4. Less share of dividends received (30% of $10,000): $3,000Therefore, the calculation is $150,000 + $7,500 - $1,500 - $3,000 = $153,000.

Question 2

P Company purchased 80% of the outstanding common stock of S Company on May 1, 2017, for a cash payment of $318,000. During the calendar year 2017, S Company earned $210,000 evenly throughout the year and declared a dividend of $75,000 on November 1. What is the amount needed to establish reciprocity under the cost method in the preparation of a consolidated workpaper on December 31, 2017?

Accepted Answer

The amount needed to establish reciprocity under the cost method is the difference between the parent's investment in the subsidiary and the parent's share of the subsidiary's net income. In this case, the parent's investment in the subsidiary is $318,000, and the parent's share of the subsidiary's net income is $210,000 x 80% = $168,000. Therefore, the amount needed to establish reciprocity is $318,000 - $168,000 = $52,000.

Question 3

Pendleton Company acquired a 70% interest in Sunflower Company on December 31, 2016, for $380,000. During 2017 Sunflower had a net income of $30,000 and paid a cash dividend of $10,000. Applying the cost method would give a debit balance in the Investment in Stock of Sunflower Company account at the end of 2017 of:

Accepted Answer

Under the cost method, the investment account remains at the original cost of acquisition, which is $380,000, regardless of the subsidiary's net income or dividends.

Question 4

Two methods are available to account for interim acquisitions of a subsidiary's stock at the end of the first year. Describe the two methods of accounting for interim acquisitions.

Accepted Answer

The answer of Two methods are available to account for...

Question 5

Prime Industries acquired an 80 percent interest in Sands Company by purchasing 24,000 of its 30,000 outstanding shares of common stock at book value of $105,000 on January 1, 2016. Sands reported net income in 2016 of $45,000 and in 2017 of $60,000 earned evenly throughout the respective years. Prime received $12,000 dividends from Sands in 2016 and $18,000 in 2017. Prime uses the equity method to record its investment. Prime should record investment income from Sands during 2017 of:

Accepted Answer

The answer of Prime Industries acquired an 80 percent interest...

Question 6

On January 1, 2017, Prince Company purchased an 80% interest in the common stock of Sivet Company for $1,040,000, which was $60,000 greater than the book value of equity acquired. The difference between implied and book value relates to the subsidiary's land.
The following information is from the consolidated retained earnings section of the consolidated statements workpaper for the year ended December 31, 2017:  Sivet's stockholders' equity includes only common stock and retained earnings.
Required:
A. Prepare the workpaper eliminating entries for a consolidated statements workpaper on December 31, 2017. Prince uses the cost method.
B. Compute the total noncontrolling interest to be reported on the consolidated balance sheet on December 31, 2017.

Accepted Answer

The answer of On January 1, 2017, Prince Company purchased...

Question 7

P Company purchased 90% of the outstanding common stock of S Company on January 1, 2015. S Company's stockholders' equity at various dates was:  The workpaper entry to establish reciprocity under the cost method in the preparation of a consolidated statements workpaper on December 31, 2017 should include a credit to P Company's retained earnings of:

Accepted Answer

The answer of P Company purchased 90% of the outstanding...

Question 8

Pell Company purchased 90% of the stock of Salton Company on January 1, 2007, for $1,860,000, an amount equal to $60,000 in excess of the book value of equity acquired. All book values were equal to fair values at the time of purchase (i.e., any excess payment relates to subsidiary goodwill). On the date of purchase, Salton Company's retained earnings balance was $200,000. The remainder of the stockholders' equity consists of no-par common stock. During 2017, Salton Company declared dividends in the amount of $40,000, and reported net income of $160,000. The retained earnings balance of Salton Company on December 31, 2016 was $640,000. Pell Company uses the cost method to record its investment. No impairment of goodwill was recognized between the date of acquisition and December 31, 2017.
Required:
Prepare in general journal form the workpaper entries that would be made in the preparation of a consolidated statements workpaper on December 31, 2017.

Accepted Answer

The answer of Pell Company purchased 90% of the stock...

Question 9

Prune Company purchased 80% of the outstanding common stock of Selma Company on January 2, 2016, for $680,000. The composition of Selma Company's stockholders' equity on January 2, 2016, and December 31, 2017, was:  During 2017, Selma Company earned $210,000 net income and declared a $60,000 dividend. Any difference between implied and book value relates to land. Prune Company uses the cost method to record its investment in Selma Company.
Required:
A. Prepare any journal entries that Prune Company would make on its books during 2017 to record the effects of its investment in Selma Company.
B. Prepare, in general journal form, all workpaper entries needed for the preparation of a consolidated statements workpaper on December 31, 2017.

Accepted Answer

The answer of Prune Company purchased 80% of the outstanding...

Question 10

On October 1, 2017, Pamela Company purchased 90% of the common stock of Shingle Company for $290,000. Additional information for both companies for 2017 follows: 
 Any difference between implied and book value relates to Shingle's land. Pamela uses the cost method to record its investment in Shingle. Shingle Company's income was earned evenly throughout the year.
Required:
A. Prepare the workpaper entries that would be made on a consolidated statements workpaper on December 31, 2017. Use the full year reporting alternative.
B. Calculate the controlling interest in consolidated net income for 2017.

Accepted Answer

The answer of On October 1, 2017, Pamela Company purchased...

Question 11

P Company purchased 90% of the common stock of S Company on January 2, 2017 for $900,000. On that date, S Company's stockholders' equity was as follows: 
 During 2017, S Company earned $200,000 and declared a $100,000 dividend. P Company uses the partial equity method to record its investment in S Company. The difference between implied and book value relates to land.
Required:
Prepared, in general journal form, all eliminating entries for the preparation of a consolidated statements workpaper on December 31, 2017.

Accepted Answer

The answer of P Company purchased 90% of the common...

Question 12

On January 1, 2017, Pantera Company purchased 40% of Stratton Company's 30,000 shares of voting common stock for a cash payment of $1,800,000 when 40% of the net book value of Stratton Company was $1,740,000. The payment in excess of the net book value was attributed to depreciable assets with a remaining useful life of six years. As a result of this transaction Pantera has the ability to exercise significant influence over Stratton Company's operating and financial policies. Stratton's net income for the ended December 31, 2017 was $600,000. During 2017, Stratton paid $325,000 in dividends to its shareholders. The income reported by Pantera for its investment in Stratton should be: What is the ending balance in Pantera's investment account as of December 31, 2017?

Accepted Answer

The answer of On January 1, 2017, Pantera Company purchased...

Question 13

On January 1, 2017, Panda Company purchased 25% of Skill Company's common stock; no goodwill resulted from the acquisition. Panda Company appropriately carries the investment using the equity method of accounting and the balance in Panda's investment account was $190,000 on December 31, 2017. Skill reported net income of $120,000 for the year ended December 31, 2017 and paid dividends on its common stock totaling $48,000 during 2017. How much did Panda pay for its 25% interest in Skill?

Accepted Answer

Panda's share of Skill's net income for 2017 would be 25% of $120,000, which is $30,000. Panda's share of the dividends paid by Skill would be 25% of $48,000, which is $12,000. The dividends received would decrease the balance in Panda's investment account. The ending balance in the investment account is $190,000, after accounting for Panda's share of Skill's net income and dividends paid. Therefore, the beginning balance of Panda's investment account would be $190,000 - $30,000 (share of net income) + $12,000 (dividends received) = $172,000. This means Panda paid $172,000 for its 25% interest in Skill.

Question 14

Which one of the following describes a difference in how the equity method is applied under GAAP than under IFRS?

Accepted Answer

IFRS requires that an investor apply uniform accounting policies for similar transactions and other events in similar circumstances, whereas GAAP does not have this specific requirement for the equity method of accounting. This difference emphasizes the IFRS focus on comparability across entities.

Question 15

On January 1, 2017, Puma Corporation acquired 30 percent of Slume Company's stock for $150,000. On the acquisition date, Slume reported net assets of $450,000 valued at historical cost and $500,000 stated at fair value. The difference was due to the increased value of buildings with a remaining life of 10 years. During 2017 Slume reported net income of $25,000 and paid dividends of $10,000. Puma uses the equity method. What amount of investment income will be reported by Puma for the year 2017?

Accepted Answer

Puma's investment income from Slume for 2017 is calculated as follows: Puma owns 30% of Slume, so it would recognize 30% of Slume's net income ($25,000) which is $7,500. However, the fair value of Slume's net assets was $50,000 more than the book value, attributable to buildings with a 10-year life. This excess value of $50,000 is amortized over 10 years, resulting in an annual amortization of $5,000. Puma must recognize 30% of this amortization as a reduction in its investment income, which is $1,500 ($5,000 * 30%). Therefore, Puma's investment income from Slume is $7,500 (initial share of net income) - $1,500 (share of amortization) = $6,000.

Question 16

Prime Industries acquired an 80 percent interest in Sands Company by purchasing 24,000 of its 30,000 outstanding shares of common stock at book value of $105,000 on January 1, 2016. Sands reported net income in 2016 of $45,000 and in 2017 of $60,000 earned evenly throughout the respective years. Prime received $12,000 dividends from Sands in 2016 and $18,000 in 2017. Prime uses the equity method to record its investment. The balance of Prime's Investment in Sands account at December 31, 2017 is:

Accepted Answer

The balance of Prime's Investment in Sands account at December 31, 2017 is $159,000. This is calculated as follows:Beginning balance: $105,000Add: Share of Sands' net income (80% x $45,000) = $36,000Add: Share of Sands' net income (80% x $60,000) = $48,000Less: Dividends received = $30,000Ending balance: $159,000

Question 17

On January 1, 2017, Pantera Company purchased 40% of Stratton Company's 30,000 shares of voting common stock for a cash payment of $1,800,000 when 40% of the net book value of Stratton Company was $1,740,000. The payment in excess of the net book value was attributed to depreciable assets with a remaining useful life of six years. As a result of this transaction Pantera has the ability to exercise significant influence over Stratton Company's operating and financial policies. Stratton's net income for the ended December 31, 2017 was $600,000. During 2017, Stratton paid $325,000 in dividends to its shareholders. The income reported by Pantera for its investment in Stratton should be:

Accepted Answer

The answer of On January 1, 2017, Pantera Company purchased...

Question 18

There are three levels of influence or control by an investor over an investee which determine the appropriate accounting treatment. Identify and briefly describe the three levels and their accounting treatment.

Accepted Answer

The answer of There are three levels of influence or...

Question 19

On January 1, 2017, Pioneer Company purchased 80% of the common stock of Shipley Company for $600,000. At that time, Shipley's stockholders' equity consisted of the following: 
 During 2017, Shipley distributed a dividend in the amount of $120,000 and at year-end reported a $320,000 net income. Any difference between implied and book value relates to subsidiary goodwill. Pioneer Company uses the equity method to record its investment. No impairment of goodwill is observed in the first year.
Required:
A. Prepare on Pioneer Company's books journal entries to record the investment related activities for 2017.
B. Prepare the workpaper eliminating entries for a workpaper on December 31, 2017.

Accepted Answer

The answer of On January 1, 2017, Pioneer Company purchased...

Question 20

Pure Company acquired 80% of the outstanding common stock of Saxxon Company on January 2, 2016 for $675,000. At that time, Saxxon's total stockholders' equity amounted to $1,000,000. Saxxon Company reported net income and dividends for the last two years as follows:  Required:
Prepare journal entries for Pure Company for 2016 and 2017 assuming Pure uses:
A. The cost method to record its investment
B. The complete equity method to record its investment. The difference between implied value and the book value of equity acquired was attributed solely to a building, with a 20-year expected life.

Accepted Answer

The answer of Pure Company acquired 80% of the outstanding...

Quiz 4: Consolidated Financial Statements After Acquisition

Two methods are available to account for interim acquisitions of a subsidiary's stock at the end of the first year. Describe the two methods of accounting for interim acquisitions.

Which one of the following describes a difference in how the equity method is applied under GAAP than under IFRS?

There are three levels of influence or control by an investor over an investee which determine the appropriate accounting treatment. Identify and briefly describe the three levels and their accounting treatment.