Package Title: Test Bank Questions

Course Title: Advanced Accounting, 6e

Chapter Number: 8

Question Type: Multiple Choice

1) When the parent company sells a portion of its investment in a subsidiary, the workpaper entry to adjust
for the current year’s income sold to noncontrolling stockholders includes a:

a) debit to Subsidiary Income Sold.

b) debit to Equity in Subsidiary Income.
c) credit to Equity in Subsidiary Income.
d) credit to Subsidiary Income Sold.

Answer: d

Question Title: Test Bank (Multiple Choice) Question 01

Difficulty: Easy
Learning Objective: 3 Explain how the parent reports the difference between selling price and book value
when shares are sold subsequent to acquisition.
Section Reference: 8.3

2) Which one of the following statements regarding IFRS and accounting for step acquisitions is most
correct?

a) Under IFRS goodwill is identified and net assets remeasured to fair value for all subsequent transactions,
both increasing and decreasing the ownership percentage, after control is achieved.
b) IFRS requires the recording of additional goodwill on subsequent increases in the parent’s ownership
percentage.
c) Under IFRS acquisition accounting is applied only at the date that control is achieved.
d) IFRS requires the non-controlling interest to be measured at fair value.

Answer: c

Question Title: Test Bank (Multiple Choice) Question 02

Difficulty: Easy
Learning Objective: 2 Describe the process needed when the parent acquires subsidiary shares through
multiple open market purchases.
Section Reference: 8.2

3) If a portion of an investment is sold, the value of the shares sold is determined by using the:

a) first-in, first-out method.

b) average cost method.
c) specific identification method.
d) first-in, first-out method; and specific identification method.

Answer: d
Question Title: Test Bank (Multiple Choice) Question 03
Difficulty: Medium
Learning Objective: 3 Explain how the parent reports the difference between selling price and book value
when shares are sold subsequent to acquisition.
Section Reference: 8.3

4) If a parent company acquires additional shares of its subsidiary’s stock directly from the subsidiary for a
price less than their book value:

a) total noncontrolling book value interest increases.

b) the controlling book value interest increases.
c) the controlling book value interest decreases.
d) total noncontrolling book value interest increases; and the controlling book value interest decreases.

Answer: b

Question Title: Test Bank (Multiple Choice) Question 04

Difficulty: Medium
Learning Objective: 5 Describe the effect on the eliminating process when the subsidiary issues new shares
entirely to the parent, and the parent pays either more or less than the book value of the subsidiary shares.
Section Reference: 8.6

5) If a subsidiary issues new shares of its stock to noncontrolling stockholders, the book value of the
parent’s interest in the subsidiary may:

a) increase.
b) decrease.
c) remain the same.
d) increase, decrease, or remain the same.

Answer: d

Question Title: Test Bank (Multiple Choice) Question 05

Difficulty: Medium
Learning Objective: 5 Describe the effect on the eliminating process when the subsidiary issues new shares
entirely to the parent, and the parent pays either more or less than the book value of the subsidiary shares.
Section Reference: 8.6

6) The purchase by a subsidiary of some of its shares from noncontrolling stockholders results in the parent
company’s share of the subsidiary’s net assets:

a) increasing.
b) decreasing.
c) remaining unchanged.
d) increasing, decreasing, or remaining unchanged.

Answer: d
Question Title: Test Bank (Multiple Choice) Question 06
Difficulty: Medium
Learning Objective: 1 Identify the types of transactions that change the parent company’s ownership interest
in a subsidiary., 5 Describe the effect on the eliminating process when the subsidiary issues new shares
entirely to the parent, and the parent pays either more or less than the book value of the subsidiary shares.
Section Reference: 8.6

7) The computation of noncontrolling interest in net assets is made by multiplying the noncontrolling
interest percentage at the:

a) beginning of the year times subsidiary stockholders’ equity amounts.

b) beginning of the year times consolidated stockholders’ equity amounts.
c) end of the year times subsidiary stockholders’ equity amounts.
d) end of the year times consolidated stockholders’ equity amounts.

Answer: c

Question Title: Test Bank (Multiple Choice) Question 07

Difficulty: Easy
Learning Objective: 2 Describe the process needed when the parent acquires subsidiary shares through
multiple open market purchases.
Section Reference: 8.2

8) Under the partial equity method, the workpaper entry that reverses the effect of subsidiary income for the
year includes a:

a) credit to Equity in Subsidiary Income.

b) debit to Subsidiary Income Sold.
c) debit to Equity in Subsidiary Income.
d) credit to Equity in Subsidiary Income and debit to Subsidiary Income Sold.

Answer: c

Question Title: Test Bank (Multiple Choice) Question 08

Difficulty: Easy
Learning Objective: 2 Describe the process needed when the parent acquires subsidiary shares through
multiple open market purchases.
Section Reference: 8.4

9) Parr Company owned 24,000 of the 30,000 outstanding common shares of Solomon Company on January
1, 2016. Parr’s shares were purchased at book value when the fair values of Solomon’s assets and liabilities
were equal to their book values. The stockholders’ equity of Solomon Company on January 1, 2016,
consisted of the following:

Common stock, $15 par value $ 450,000

Other contributed capital 337,500
Retained earnings 712,500
Total $1,500,000
Solomon Company sold 7,500 additional shares of common stock for $90 per share on January 2, 2016. If
Parr Company purchased all 7,500 shares, the book entry to record the purchase should increase the
Investment in Solomon Company account by:

a) $562,500.
b) $590,625.
c) $675,000.
d) $150,000.

Answer: c

Question Title: Test Bank (Multiple Choice) Question 09

Difficulty: Easy
Learning Objective: 2 Describe the process needed when the parent acquires subsidiary shares through
multiple open market purchases.
Section Reference: 8.2

10) Parr Company owned 24,000 of the 30,000 outstanding common shares of Solomon Company on
January 1, 2016. Parr’s shares were purchased at book value when the fair values of Solomon’s assets and
liabilities were equal to their book values. The stockholders’ equity of Solomon Company on January 1,
2016, consisted of the following:

Common stock, $15 par value $ 450,000

Other contributed capital 337,500
Retained earnings 712,500
Total $1,500,000

Solomon Company sold 7,500 additional shares of common stock for $90 per share on January 2, 2016. If
all 7,500 shares were sold to noncontrolling stockholders, the workpaper adjustment needed each time a
workpaper is prepared should increase (decrease) the Investment in Solomon Company by:

a) ($140,625).
b) $140,625.
c) ($112,500).
d) $192,000.

Answer: d

Question Title: Test Bank (Multiple Choice) Question 10

Difficulty: Hard
Learning Objective: 5 Describe the effect on the eliminating process when the subsidiary issues new shares
entirely to the parent, and the parent pays either more or less than the book value of the subsidiary shares.
Section Reference: 8.6

11) On January 1, 2012, Parent Company purchased 32,000 of the 40,000 outstanding common shares of
Sub Company for $1,520,000. On January 1, 2016, Parent Company sold 4,000 of its shares of Sub
Company on the open market for $90 per share. Sub Company’s stockholders’ equity on January 1, 2012,
and January 1, 2016, was as follows:

1/1/12 1/1/16
 Common stock, $10 par value $400,000 $ 400,000
Other contributed capital 400,000 400,000
Retained earnings 800,000 1,400,000
$1,600,000 $2,200,000

The difference between implied and book value is assigned to Sub Company’s land. The amount of the gain
on sale of the 4,000 shares that should be recorded on the books of Parent Company is:

a) $68,000.
b) $170,000.
c) $96,000.
d) $200,000.

Answer: b

Question Title: Test Bank (Multiple Choice) Question 11

Difficulty: Easy
Learning Objective: 3 Explain how the parent reports the difference between selling price and book value
when shares are sold subsequent to acquisition.
Section Reference: 8.3

12) On January 1, 2012, Pine Corporation purchased 24,000 of the 30,000 outstanding common shares of
Summit Company for $1,140,000. On January 1, 2016, Pine Corporation sold 3,000 of its shares of Summit
Company on the open market for $90 per share. Summit Company’s stockholders’ equity on January 1,
2012, and January 1, 2016, was as follows:

1/1/12 1/1/16
Common stock, $10 par value $300,000 $ 300,000
Other contributed capital 300,000 300,000
Retained earnings 600,000 1,050,000
$1,200,000 $1,650,000

The difference between implied and book value is assigned to Summit Company’s land. As a result of the
sale, Pine Corporation’s Investment in Summit account should be credited for:

a) $165,000.
b) $206,250.
c) $120,000.
d) $142,500.

Answer: d

Question Title: Test Bank (Multiple Choice) Question 12

Difficulty: Easy
Learning Objective: 3 Explain how the parent reports the difference between selling price and book value
when shares are sold subsequent to acquisition.
Section Reference: 8.3

13) On January 1, 2012, Panda Company purchased 16,000 of the 20,000 outstanding common shares of
Simian Company for $760,000. On January 1, 2016, Panda Company sold 2,000 of its shares of Simian
Company on the open market for $90 per share. Simian Company’s stockholders’ equity on January 1, 2012,
and January 1, 2016, was as follows:

1/1/09 1/1/13
Common stock, $10 par value $200,000 $200,000
Other contributed capital 200,000 200,000
Retained earnings 400,000 700,000
$800,000 $1,100,000

The difference between implied and book value is assigned to Simian Company’s land. Assuming no other
equity transactions, the amount of the difference between implied and book value that would be added to
land on a workpaper for the preparation of consolidated statements on December 31, 2016, would be:

a) $120,000.
b) $115,000.
c) $105,000.
d) $84,000.

Answer: c

Question Title: Test Bank (Multiple Choice) Question 13

Difficulty: Medium
Learning Objective: 3 Explain how the parent reports the difference between selling price and book value
when shares are sold subsequent to acquisition.
Section Reference: 8.3

14) On January 1 2016, Paulus Company purchased 75% of Sweet Corporation for $500,000. Sweet’
stockholders’ equity on that date was equal to $600,000 and Sweet had 60,000 shares issued and outstanding
on that date. Sweet Corporation sold an additional 15,000 shares of previously unissued stock on December
31, 2016.

Assuming that Paulus Company purchased the additional shares, what would be their current percentage
ownership on December 31, 2016?

a) 92%
b) 87%
c) 80%
d) 100%

Answer: c

Question Title: Test Bank (Multiple Choice) Question 14

Difficulty: Easy
Learning Objective: 4 Compute the controlling interest in income after the parent sells some shares of the
subsidiary company.
Section Reference: 8.4, 8.5

15) On January 1 2016, Pounder Company purchased 75% of Sludge Company for $500,000. Sludge
Company’s stockholders’ equity on that date was equal to $600,000 and Sludge Company had 60,000 shares
issued and outstanding on that date. Sludge Company Corporation sold an additional 15,000 shares of
previously unissued stock on December 31, 2016.

Assume Sludge Company sold the 15,000 shares to outside interests, Pounder Company’s percent ownership
would be:

a) 33 1/3%
b) 60%
c) 75%
d) 80%

Answer: b

Question Title: Test Bank (Multiple Choice) Question 15

Difficulty: Easy
Learning Objective: 6 Describe the impact on the parent’s investment account when the subsidiary issues
new shares and either the new shares are purchased ratably by the parent and noncontrolling shareholders or
entirely by the noncontrolling shareholders.
Section Reference: 8.6

16) P Corporation purchased an 80% interest in S Corporation on January 1, 2016, at book value for
$300,000. S’s net income for 2016 was $90,000 and no dividends were declared. On May 1, 2016, P
reduced its interest in S by selling a 20% interest, or one-fourth of its investment for $90,000. What will be
the Consolidated Gain on Sale and Subsidiary Income Sold for 2016?

a) Consolidated Gain on Sale, $9,000; Subsidiary Income Sold, $6,000

b) Consolidated Gain on Sale, $9,000; Subsidiary Income Sold, $15,000
c) Consolidated Gain on Sale, $15,000; Subsidiary Income Sold, $6,000
d) Consolidated Gain on Sale, $15,000; Subsidiary Income Sold, $15,000

Answer: a

Question Title: Test Bank (Multiple Choice) Question 16

Difficulty: Hard
Learning Objective: 3 Explain how the parent reports the difference between selling price and book value
when shares are sold subsequent to acquisition.
Section Reference: 8.3

17) P Corporation purchased an 80% interest in S Corporation on January 1, 2016, at book value for
$300,000. S’s net income for 2016 was $90,000 and no dividends were declared. On May 1, 2016, P
reduced its interest in S by selling a 20% interest, or one-fourth of its investment for $90,000. What would
be the balance in the Investment of S Corporation account on December 31, 2016?

a) $300,000.
b) $225,000.
c) $279,000.
d) $261,000.

Answer: c
Question Title: Test Bank (Multiple Choice) Question 17
Difficulty: Hard
Learning Objective: 2 Describe the process needed when the parent acquires subsidiary shares through
multiple open market purchases.
Section Reference: 8.2

18) The purchase by a subsidiary of some of its shares from the noncontrolling stockholders results in an
increase in the parent’s percentage interest in the subsidiary. The parent company’s share of the subsidiary’s
net assets will increase if the shares are purchased:

a) at a price equal to book value.

b) at a price below book value.
c) at a price above book value.
d) will not show an increase.

Answer: b

Question Title: Test Bank (Multiple Choice) Question 18

Difficulty: Easy
Learning Objective: 6 Describe the impact on the parent’s investment account when the subsidiary issues
new shares and either the new shares are purchased ratably by the parent and noncontrolling shareholders or
entirely by the noncontrolling shareholders.
Section Reference: 8.6

19) On January 1, 2012, Pharma Company purchased 16,000 of the 20,000 outstanding common shares of
Sludge Company for $760,000. On January 1, 2016, Pharma Company sold 2,000 of its shares of Sludge
Company on the open market for $90 per share. Sludge Company’s stockholders’ equity on January 1, 2012,
and January 1, 2016, was as follows:

1/1/12 1/1/16
Common stock, $10 par value $ 200,000 $ 200,000
Other contributed capital 200,000 200,000
Retained earnings 400,000 700,000
$800,000 $1,100,000

The difference between implied and book value is assigned to Sludge Company’s land. The amount of the
gain on sale of the 2,000 shares that should be recorded on the books of Pharma Company is:

a) $34,000.
b) $85,000.
c) $48,000.
d) $100,000.

Answer: b

Question Title: Test Bank (Multiple Choice) Question 19

Difficulty: Hard
Learning Objective: 3 Explain how the parent reports the difference between selling price and book value
when shares are sold subsequent to acquisition.
Section Reference: 8.3
20) On January 1, 2012, Pharma Company purchased 16,000 of the 20,000 outstanding common shares of
Sludge Company for $760,000. On January 1, 2016, Pharma Company sold 2,000 of its shares of Sludge
Company on the open market for $90 per share. Sludge Company’s stockholders’ equity on January 1, 2012,
and January 1, 2016, was as follows:

1/1/12 1/1/16
Common stock, $10 par value $ 200,000 $ 200,000
Other contributed capital 200,000 200,000
Retained earnings 400,000 700,000
$800,000 $1,100,000

The difference between implied and book value is assigned to Sludge Company’s land. As a result of the
sale, Pharma Company’s Investment in Sludge account should be credited for:

a) $110,000.
b) $137,500.
c) $80,000.
d) $95,000.

Answer: d

Question Title: Test Bank (Multiple Choice) Question 20

Difficulty: Hard
Learning Objective: 3 Explain how the parent reports the difference between selling price and book value
when shares are sold subsequent to acquisition.
Section Reference: 8.3

21) On January 1, 2012, Pharma Company purchased 16,000 of the 20,000 outstanding common shares of
Sludge Company for $760,000. On January 1, 2016, Pharma Company sold 2,000 of its shares of Sludge
Company on the open market for $90 per share. Sludge Company’s stockholders’ equity on January 1, 2012,
and January 1, 2016, was as follows:

1/1/12 1/1/16
Common stock, $10 par value $ 200,000 $ 200,000
Other contributed capital 200,000 200,000
Retained earnings 400,000 700,000
$800,000 $1,100,000

The difference between implied and book value is assigned to Sludge Company’s land. Assuming no other
equity transactions, the amount of the difference between implied and book value that would be added to
land on a work paper for the preparation of consolidated statements on December 31, 2016 would be:

a) $120,000.
b) $115,000.
c) $105,000.
d) $84,000.

Answer: c
Question Title: Test Bank (Multiple Choice) Question 21
Difficulty: Hard
Learning Objective: 3 Explain how the parent reports the difference between selling price and book value
when shares are sold subsequent to acquisition.
Section Reference: 8.3

22) On January 1, 2016, P Corporation purchased 75% of S Corporation for $500,000. S’s stockholders’
equity on that date was equal to $600,000 and S had 40,000 shares issued and outstanding on that date. S
Corporation sold an additional 8,000 shares of previously unissued stock on December 31, 2016.

Assume that P Corporation purchased the additional shares what would be their current percentage
ownership on December 31, 2016?

a) 62 1/2%.
b) 75%
c) 79 1/6%
d) 100%

Answer: c

Question Title: Test Bank (Multiple Choice) Question 22

Difficulty: Easy
Learning Objective: 6 Describe the impact on the parent’s investment account when the subsidiary issues
new shares and either the new shares are purchased ratably by the parent and noncontrolling shareholders or
entirely by the noncontrolling shareholders.
Section Reference: 8.6

23) On January 1, 2016, P Corporation purchased 75% of S Corporation for $500,000. S’s stockholders’
equity on that date was equal to $600,000 and S had 40,000 shares issued and outstanding on that date. S
Corporation sold an additional 8,000 shares of previously unissued stock on December 31, 2016.

Assume S sold the 8,000 shares to outside interests, P’s percent ownership would be:

a) 56 1/4%
b) 62 1/2%
c) 75%
d) 79 1/6%

Answer: b

Question Title: Test Bank (Multiple Choice) Question 23

Difficulty: Easy
Learning Objective: 6 Describe the impact on the parent’s investment account when the subsidiary issues
new shares and either the new shares are purchased ratably by the parent and noncontrolling shareholders or
entirely by the noncontrolling shareholders.
Section Reference: 8.6

Question Type: Essay

24) A parent’s ownership percentage in a subsidiary may change for several reasons. Identify three reasons
the ownership percentage may change.

Answer: A parent’s ownership percentage in a subsidiary may change because (a) additional shares of the
subsidiary may be purchased on the open market, (b) some of the shares held by the parent company may be
sold; or (c) the subsidiary may enter into capital transactions with the parent or outside parties that change
the parent’s ownership percentage.

Question Title: Test Bank (Essay) Question 24

Difficulty: Easy
Learning Objective: 1 Identify the types of transactions that change the parent company’s ownership interest
in a subsidiary.
Section Reference: 8.1

25) A parent company’s equity interest in a subsidiary may change as the result of the issuance of additional
shares of stock by the subsidiary. Describe the effect on the parent’s investment account when the new
shares are (a) purchased ratably by the parent and noncontrolling shareholders or (b) entirely by the
noncontrolling shareholders.

Answer: (a) If the shares issued by the subsidiary are purchased ratably by the parent and noncontrolling
stockholders the percentage of stock owned by the parent and noncontrolling stockholders after the new
issue would be the same as their respective interests prior to the issue.

(b) If the new shares are purchased entirely by the noncontrolling shareholders, the parent’s ownership
percentage is reduced. The book value of the parent’s interest in the subsidiary may increase, decrease, or
remain the same depending on the relationship of the issue price to book value per share of stock.

Question Title: Test Bank (Essay) Question 25

Difficulty: Medium
Learning Objective: 1 Identify the types of transactions that change the parent company’s ownership interest
in a subsidiary., 5 Describe the effect on the eliminating process when the subsidiary issues new shares
entirely to the parent, and the parent pays either more or less than the book value of the subsidiary shares.
Section Reference: 8.1

26) Pizza Company purchased Salt Company common stock through open-market purchases as follows:
Acquired
Date Shares Cost
1/1/15 1,500 $ 50,000
1/1/16 3,300 $ 90,000
1/1/17 6,600 $250,000

Salt Company had 12,000 shares of $20 par value common stock outstanding during the entire period. Salt
had the following retained earnings balances on the relevant dates:

January 1, 2015 $ 90,000

January 1, 2016 30,000
January 1, 2017 150,000
December 31, 2017 300,000
Salt Company declared no dividends in 2015 or 2016 but did declare and pay $60,000 of dividends in 2017.
Any difference between cost and book value is assigned to subsidiary land. Pizza uses the equity method to
account for its investment in Salt.

Required:
A. Prepare the journal entries Pizza Company will make during 2016 and 2017 to account for its investment
in Salt Company.
B. Prepare workpaper eliminating entries necessary to prepare a consolidated statements workpaper on
December 31, 2017.

Answer:
A. 2016
Retained Earnings [0.125 × (90,000 – 30,000)] 7,500
Investment in Salt Company 7,500

Investment in Salt Company

[0.40 × (150,000 – 30,000)] 48,000
Equity in Salt Company Income 48,000

2017
Cash (60,000 × 0.95) 57,000
Investment in Salt Company 57,000

Investment in Salt Company

[0.95 × (300,000 + 60,000 – 150,000)] 199,500
Equity in Subsidiary Income 199,500

B. Equity in Subsidiary Income 199,500

Dividends Declared—Salt 57,000
Investment in Salt Company 142,500

Common Stock 240,000

1/1 Retained Earnings—Salt 150,000
Difference Between Implied and Book Value 60,000
Investment in Salt Company 430,500
Noncontrolling Interest in Equity 19,500

Land 60,000
Difference Between Implied and Book Value 60,000

Question Title: Test Bank (Problem) Question 8-1

Difficulty: Hard
Learning Objective: 2 Describe the process needed when the parent acquires subsidiary shares through
multiple open market purchases.
Section Reference: 8.2

27) On January 1, 2014, Panel Company acquired 90% of the common stock of Singapore Company for
$650,000. At that time, Singapore had common stock ($5 par) of $500,000 and retained earnings of
$200,000.
On January 1, 2016, Singapore issued 20,000 shares of its unissued common stock, with a market value of
$7 per share, to noncontrolling stockholders. Singapore’s retained earnings balance on this date was
$300,000. Any difference between cost and book value relates to Singapore’s land. No dividends were
declared in 2016.

Required:
A. Prepare the entry on Panel’s books to record the effect of the issuance assuming the cost method.
B. Prepare the elimination entries for the preparation of a consolidated statements workpaper on December
31, 2016 assuming the cost method.

Answer:
A. Loss from Subsidiary Issuance of Shares 15,000*
Investment in Singapore Company 15,000*

Panel Company’s share of Singapore Company’s equity

before the new issue (0.90 × 800,000) $720,000
Panel Company’s share of Singapore Company’s equity
after the new issue 0.75 × (800,000 + 140,000) 705,000
Decrease in Panel Company’s interest $ 15,000

B. Investment in Singapore Company

(300,000 – 200,000) × 0.90 90,000
1/1 Retained Earnings—Panel 90,000

Common Stock 600,000

Other Contributed Capital 40,000
Retained Earnings 300,000
Difference Between Implied and Book Value 20,000
Investment in Singapore Company
(650,000 – 15,000 + 90,000) 725,000
Noncontrolling Interest in Equity 235,000

Land 20,000
Difference Between Implied and
Book Value 20,000

Question Title: Test Bank (Problem) Question 8-2

Difficulty: Hard
Learning Objective: 6 Describe the impact on the parent’s investment account when the subsidiary issues
new shares and either the new shares are purchased ratably by the parent and noncontrolling shareholders or
entirely by the noncontrolling shareholders.
Section Reference: 8.6

28) Pratt Company purchased 40,000 shares of Silas Company’s common stock for $860,000 on January 1,
2016. At that time Silas Company had $500,000 of $10 par value common stock and $300,000 of retained
earnings. Silas Company’s income earned and increase in retained earnings during 2016 and 2017 were:

2016 2017
Income earned $260,000 $360,000
Increase in Retained Earnings 200,000 300,000
Silas Company income is earned evenly throughout the year.

On September 1, 2017, Pratt Company sold on the open market, 12,000 shares of its Silas Company stock
for $460,000. Any difference between cost and book value relates to Silas Company land. Pratt Company
uses the cost method to account for its investment in Silas Company.

Required:
A. Compute Pratt Company’s reported gain (loss) on the sale.
B. Prepare all consolidated statements workpaper eliminating entries for a workpaper on December 31,
2017.

Answer:
A. Selling price $460,000
Carrying value sold ($860,000 × 12,000/40,000) 258,000
Gain on sale of investment $202,000

B. Investment in Silas Company (0.56 × $200,000) 112,000

1/1 Retained Earnings—Pratt Company 112,000

Gain on Sale of Investments 48,000

1/1 Retained Earnings—Pratt Company
0.8 × $200,000 × 12/40 48,000

Gain on Sale of Investments 57,600

Subsidiary Income Sold
(8/12 × $360,000 = $240,000 × 0.8 × 12/40) 57,600

Common Stock—Silas Company 500,000

1/1 Retained Earnings—Silas Company 500,000
Difference Between Implied and Book Value
(28/40 × $220,000) 154,000
Investment in Silas Company 714,000
Noncontrolling Interest in Equity 440,000

Land 154,000
Difference Between Implied and
Book Value 154,000

Question Title: Test Bank (Problem) Question 8-3

Difficulty: Hard
Learning Objective: 3 Explain how the parent reports the difference between selling price and book value
when shares are sold subsequent to acquisition.
Section Reference: 8.3

29) Poole made the following purchases of Smarte Company common stock:

Date Shares Cost

1/1/16 70,000 (70%) $1,000,000
1/1/17 10,000 (10%) 160,000
Stockholders’ equity information for Smarte Company for 2016 and 2017 follows:

2016 2017
Common stock, $10 par value $1,000,000 $1,000,000

1/1 Retained earnings 300,000 380,000

Net income 110,000 140,000
Dividends declared, 12/15 (30,000) (40,000)
Retained earnings, 12/31 380,000 480,000
Total stockholders’ equity, 12/31 $1,380,000 $1,480,000

On July 1, 2017, Poole sold 14,000 shares of Smarte Company common stock on the open market for $22
per share. The shares sold were purchased on January 1, 2016. Smarte notified Poole that its net income for
the first six months was $70,000. Any difference between cost and book value relates to subsidiary land.
Poole uses the cost method to account for its investment in Smarte Company.

Required:
A. Prepare the journal entry made by Poole to record the sale of the 14,000 shares on July 1, 2017.
B. Prepare the workpaper eliminating entries needed for a consolidated statements workpaper on December
31, 2017.
C. Compute the amount of noncontrolling interest that would be reported on the consolidated balance sheet
on December 31, 2017.

Answer:
A. Cash (14,000 × $22) 308,000
Investment in Smarte Company 200,000*
Gain on Sale of Investments 108,000
*14,000/70,000 × $1,000,000

B. Investment in Smarte Company 44,800

Retained Earnings 1/1—Poole 44,800
[0.7 × 0.8 × ($380,000 - $300,000)]

Gain on Sale of Investments 11,200

Retained Earnings 1/1—Poole 11,200
($80,000 × 0.7 × 0.2)

Gain on Sale of Investments ($70,000 × 0.7 × 0.2) 9,800

Subsidiary Income Sold 9,800

Dividend Income (0.66 × $40,000) 26,400

Dividends Declared—Smarte 26,400

Common Stock—Smarte 1,000,000

Retained Earnings—Smarte 380,000
Difference Between Implied and Book Value 94,000
Investment in Smarte Company 1,004,800
*$1,000,000 + 160,000 - $200,000 + $44,800
Noncontrolling Interest in Equity 469,200

Land 94,000
 Difference Between Implied and
Book Value 94,000

C. $1,480,000 × 0.34 = $503,200 noncontrolling interest

Question Title: Test Bank (Problem) Question 8-4

Difficulty: Hard
Learning Objective: 3 Explain how the parent reports the difference between selling price and book value
when shares are sold subsequent to acquisition.
Section Reference: 8.3

30) P Company purchased 96,000 shares of the common stock of S Company for $1,200,000 on January 1,
2013, when S’s stockholders’ equity consisted of $5 par value, Common Stock at $600,000 and Retained
Earnings of $800,000. The difference between cost and book value relates to goodwill.

On January 2, 2016, S Company purchased 20,000 of its own shares from noncontrolling interests for cash
of $300,000 to be held as treasury stock. S Company’s retained earnings had increased to $1,000,000 by
January 2, 2016. S Company uses the cost method in regards to its treasury stock and P Company uses the
equity method to account for its investment in S Company.

Required:
Prepare all determinable workpaper entries for the preparation of consolidated statements on December 31,
2016.

Answer:
A. Percentage on 1/1/2013 96,000 / 120,000 = 80%
Percentage on 1/2/2016 96,000 / 100,000 = 96%

P Company’s share of S Company’s equity:

Before reacquisition of treasury stock (80% × $1,600,000) =

$1,280,000
After reacquisition of treasury stock [96% × ($1,600,000 - $300,000)= 1,248,000
Decrease in P Company’s share $ 32,000

Elimination entries determinable:

Common Stock—S 600,000
Retained Earnings—S 1,000,000
Difference Between Cost and Book Value 112,000
Treasury Stock—S (96% × $300,000) 288,000
Investment in S Company
($1,200,000 + $160,000) 1,360,000
Noncontrolling Interest in Equity 64,000
(600,000 + 1,000,000) x .04

Goodwill* 112,000
Difference Between Implied and
Book Value 112,000

*Original difference $1,200,000 – (80% × $1,400,000) = $80,000

Plus: Decrease from treasury stock transaction 32,000
 $112,000

Question Title: Test Bank (Problem) Question 8-5

Difficulty: Hard
Learning Objective: 2 Describe the process needed when the parent acquires subsidiary shares through
multiple open market purchases., 6 Describe the impact on the parent’s investment account when the
subsidiary issues new shares and either the new shares are purchased ratably by the parent and
noncontrolling shareholders or entirely by the noncontrolling shareholders.
Section Reference: 8.2, 8.4, 8.6

31) Pamela Company acquired 80% of the outstanding common stock of Silt Company on January 1, 2014,
for $396,000. At the date of purchase, Silt Company had a balance in its $2 par value common stock
account of $360,000 and retained earnings of $90,000. On January 1, 2016, Silt Company issued 45,000
shares of its previously unissued stock to noncontrolling stockholders for $3 per share. On this date, Silt
Company had a retained earnings balance of $152,000. The difference between cost and book value relates
to subsidiary land. No dividends were paid in 2016. Silt Company reported income of $30,000 in 2016.

Required:
A. Prepare the journal entry on Pamela’s books to record the effect of the issuance assuming the equity
method.
B. Prepare the eliminating entries needed for the preparation of a consolidated statements workpaper on
December 31, 2016, assuming the equity method.

Answer:
A. Investment in Silt Company* 4,480
Gain from Issuance of Subsidiary Shares 4,480

B. Equity Income ($30,000 × 0.64) 19,200

Investment in Silt Company 19,200

Common Stock—Silt Company 450,000

Other Contributed Capital—Silt Company 45,000
Retained Earnings—Silt 152,000
Difference Between Implied and Book Value 36,000
Investment in Silt Company 450,080
Noncontrolling Interest in Equity 232,920

Land 36,000
Difference Between Implied and Book Value 36,000

*Pamela Company’s share of Silt Company’s equity:

Before sale to noncontrolling shareholders (0.8 × $512,000) $409,600
After sale to noncontrolling shareholders (0.64* × ($512,000 + $135,000) 414,080
Increase in Pamela Company’s share $ 4,480
*(0.80 × 180,000) / (180,000 + 45,000) = 0.64

Question Title: Test Bank (Problem) Question 8-6

Difficulty: Hard
Learning Objective: 6 Describe the impact on the parent’s investment account when the subsidiary issues
new shares and either the new shares are purchased ratably by the parent and noncontrolling shareholders or
entirely by the noncontrolling shareholders.
Section Reference: 8.4, 8.6

32) Partner Company acquired 85% of the common stock of Simplex Company in two separate cash
transactions. The first purchase of 108,000 shares (60%) on January 1, 2015, cost $735,000. The second
purchase, one year later, of 45,000 shares (25%) cost $330,000. Simplex Company’s stockholders’ equity
was as follows:

December 31 December 31
2015 2016

Common Stock, $5 par $ 900,000 $ 900,000

Retained Earnings, 1/1 262,000 302,000
Net Income 69,000 90,000
Dividends Declared, 9/30 (30,000) (38,000)
Retained Earnings, 12/31 301,000 354,000
Total Stockholders’ Equity, 12/31 $1,201,000 $1,254,000

On April 1, 2016, after a significant rise in the market price of Simplex Company’s stock, Partner Company
sold 32,400 of its Simplex Company shares for $390,000. Simplex Company notified Partner Company that
its net income for the first three months was $22,000. The shares sold were identified as those obtained in
the first purchase. Any difference between cost and book value relates to goodwill. Partner uses the partial
equity method to account for its investment in Simplex Company.

Required:
A. Prepare the journal entries Partner Company will make on its books during 2015 and 2016 to account for
its investment in Simplex Company.
B. Prepare the workpaper eliminating entries needed for a consolidated statements workpaper on December
31, 2016.

Answer:
A. 2015
Investment in Simplex Company 735,000
Cash 735,000

Cash 18,000
Investment in Simplex Company (0.60 × $30,000
subsidiary dividend) 18,000

Investment in Simplex Company 41,400

Equity in Subsidiary Income (0.60 × $69,000
subsidiary income) 41,400

2016
Investment in Simplex Company 330,000
Cash 330,000

Investment in Simplex Company 18,700

Equity in Subsidiary Income
 (0.85 × $22,000 income for 1st three months) 18,700

Cash 390,000
Investment in Simplex Company* 231,480
Gain on Sale of Investment 158,520

*Cost of first purchase (60%) $735,000

2015 subsidiary income (0.60 × $69,000) 41,400
2015 subsidiary dividends (0.60 × $30,000) (18,000)
2016 subsidiary income to April 1 (0.60 × $22,000) 13,200
Total 771,600
Portion sold (32,400 ÷ 108,000) × 0.30
Carrying value of investment sold $231,480

Cash 25,460
Investment in Simplex Company (0.67* ×
$38,000 subsidiary dividend) 25,460
**0.67 = (108,000 + 45,000 - 32,400)  180,000

Investment in Simplex Company 45,560

Equity in Subsidiary Income [0.67 × ($90,000 –
$22,000)] 45,560

B. Equity in Subsidiary Income ($18,700 + $45,560) 64,260

Subsidiary Income Sold ($22,000 × 0.60 × 0.30) 3,960
Dividends Declared—Simplex ($38,000 × 0.67) 25,460
Investment in Simplex Company 34,840

Common Stock—Simplex 900,000

1/1 Retained Earnings—Simplex 302,000
Difference Between Implied and Book Value 55,540
Investment In Simplex Company 860,880
Noncontrolling Interest in Equity 396,660

Land 55,540
Difference Between Implied and Book Value 55,540

Question Title: Test Bank (Problem) Question 8-7

Difficulty: Hard
Learning Objective: 2 Describe the process needed when the parent acquires subsidiary shares through
multiple open market purchases., 3 Explain how the parent reports the difference between selling price and
book value when shares are sold subsequent to acquisition., 4 Compute the controlling interest in income
after the parent sells some shares of the subsidiary company.
Section Reference: 8.2, 8.4