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.

Accepted Answer

The investor must not record income when stock dividends are received but must acknowledge the true impact of the transaction, which is that nothing of substance has been given or received. Thus, the investor merely makes a memo entry indicating that the cost of the original investment now is allocated to a greater number of shares.

Question 2

Company P owns 80% of the 10,000 outstanding common stock of Company S. If Company S issues 2,500 added shares of common stock, and Company P purchases some of the newly issued shares, which of the following statements is true?
A)Other than recording the purchase, there is no adjustment to the controlling interest if the parent purchases all the shares issued.
B)Other than recording the purchase, there is no adjustment to the controlling interest if the parent does not purchase any of the shares issued.
C)Other than recording the purchase, there is no adjustment to the controlling interest if the parent purchases 80% of the shares issued.
D)There is a new excess of cost over book value or excess of book value over cost if the parent purchases 80% of the newly issued shares.

Accepted Answer

Other than recording the purchase, there is no adjustment to the controlling interest if the parent purchases 80% of the shares issued. Since the parent owns 80% of the existing shares, the ownership percentage does not change.

Question 3

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:  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

Accepted Answer

11eb11de_92e6_99e3_ad38_0360a7f30e99_TB2014_00

Question 4

On January 1, 20X1, Paul, Inc. acquired a 90% interest in Stephan Company. The $45,000 excess of purchase price (parent's share only) was attributable to goodwill. On January 1, 20X3, Stephan Company had the following stockholders' equity:  On January 2, 20X3, Stephan sold 2,000 additional shares in a private offering. Stephan issued the new shares for $80 per share; Paul, Inc. purchased all the shares. What is the journal entry that Paul will prepare to record this investment?

Accepted Answer

The answer of On January 1, 20X1, Paul, Inc. acquired...

Question 5

On January 1, 20X1, Paris Ltd. paid $600,000 for its 75% interest in the Scott Company when Scott had total equity of $550,000. Any excess of cost over book value was attributed to equipment with a 10-year life. On January 1, 20X3, Scott Company had the following stockholders' equity:  On January 2, 20X3, Scott Company sold 2,500 additional shares of stock for $90 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)$7,500 gain
B)$37,500 loss
C)$7,500 increase in controlling paid-in capital
D)$37,500 decrease in controlling paid-in capital

Accepted Answer

11eb11de_92e7_0f15_ad38_854826d1e49f_TB2014_00 
 11eb11de_92e7_3626_ad38_f508b61a1a29_TB2014_00 *7,500 / (10,000 + 2,500) = 60%

Question 6

On January 1, 20X1, Paul, Inc. acquired a 90% interest in Stephan Company. The $45,000 excess of purchase price (parent's share only) was attributable to goodwill. On January 1, 20X3, Stephan Company had the following stockholders' equity:  On January 2, 20X3, Stephan sold 2,000 additional shares in a private offering. Stephan issued the new shares for $70 per share; Paul, Inc. purchased 600 of the shares. As a result of this sale, there is a(n)
A)gain on the consolidated income statement of $5,000.
B)decrease in the controlling interest paid-in excess of $5,000.
C)increase in the controlling interest paid-in capital in excess of par of $5,000
D)increase in the controlling interest Retained Earnings of $5,000

Accepted Answer

11eb11de_92e8_e3de_ad38_871e68246e45_TB2014_00 ¹(9,000 + 600) ÷ (10,000 + 2,000) = 9,600 ÷ 12,000 = 80.00% ² Debit investment account; credit cash

Question 7

Apple Inc. purchased a 70% interest in the Banana Company for $490,000 on January 1, 20X3, when Banana Company had the following stockholders' equity:  At the time of Apple's purchase, Banana Company was an 80% owner of the Carrot Company. Also on that date, Carrot Company has a machine that has a market value in excess of book value of $20,000. There is no difference between book and market value for any Banana Company assets. The goodwill that would result from this purchase is ____.
A)$184,000
B)$180,000
C)$140,000
D)$126,000

Accepted Answer

11eb11de_92e9_f554_ad38_0706324488e7_TB2014_00

Question 8

When a parent purchases a portion of the newly issued stock of its subsidiary and the parent's percentage of ownership interest remains the same,
A)any difference between the change in equity and the price paid is the excess of cost or book value attributable to the new block.
B)any difference between the change in equity and the price paid is viewed as a gain or loss on the sale of an interest.
C)any difference between the change in equity and the price paid is viewed as a change in paid-in capital or retained earnings.
D)there will be no adjustment to parent's paid-in capital

Accepted Answer

No new disparity between cost and underlying equity is created when a parent purchases a portion of the newly issued stock of its subsidiary and the parent's ownership interest remains the same. As a result, no additional equity adjustment is needed when the parent maintains its ownership interest and the same price is paid by all buyers.

Question 9

When a parent purchases a portion of the newly issued stock of its subsidiary in a private offering and the ownership interest decreases,
A)any difference between the change in equity and the price paid is the excess of cost or book value attributable to the new block.
B)any difference between the change in equity and the price paid is viewed as a gain or loss on the sale of an interest.
C)any difference between the change in equity and the price paid is viewed as a change in paid-in capital or retained earnings.
D)there will be no adjustment.

Accepted Answer

When a parent purchases a portion of the newly issued stock of its subsidiary and the ownership interest increases or decreases, the difference between the change in equity and the price paid is viewed as a change in paid-in capital in excess of par, or in some cases, retained earnings.

Question 10

When a parent purchases a portion of the newly issued stock of its subsidiary and the ownership interest increases,
A)any difference between the change in equity and the price paid is the excess of cost or book value attributable to the new block.
B)any difference between the change in equity and the price paid is viewed as a gain or loss on the sale of an interest.
C)any difference between the change in equity and the price paid is viewed as a change in paid-in capital or retained earnings.
D)there will be no adjustment.

Accepted Answer

When a parent purchases a portion of the newly issued stock of its subsidiary and the ownership interest increases or decreases, the difference between the change in equity and the price paid is viewed as a change in paid-in capital in excess of par, or in some cases, retained earnings.

Question 11

Pepper Company owned 60,000 of Salt Company's 100,000 outstanding shares. On January 2, 20X3, Salt purchased 20,000 of its outstanding shares from the NCI for $70,000. Pepper purchased its shares on January 1, 20X1, at which time the fair value of Salt exceeded its book value by $50,000. This difference was due to machinery that was undervalued and had a remaining life of 5 years. On December 31, 20X2, Salt Company had the following stockholders' equity:
Common stock, $1 par
$100,000
Paid-in capital in excess of par
50,000
Retained earnings
270,000
Assuming Pepper uses the equity method to account for its investment in Salt, the adjustment to the Pepper's books would include:
A)a credit to Retained Earnings
B)a credit to Paid-in Capital in Excess of Par
C)a credit to Investment of
D)a debit to Paid-in Capital in Excess of Par

Accepted Answer

11eb11de_92e9_31ff_ad38_73afc432572c_TB2014_00

Question 12

Which of the following situations is viewed as the parent having treasury stock?
A)A owns 80% of B, and B owns 70% of C.
B)A owns 80% of B and 20% of C; B owns 70% of C.
C)A owns 80% of B, and B owns 20% of A.
D)None of the above.

Accepted Answer

The subsidiary may purchase shares of the parent. When this occurs the subsidiary is viewed as the parent's agent purchasing treasury shares for the parent.

Question 13

Able Company owns an 80% interest in Barns Company and a 20% interest in Carns Company. Barns owns a 40% interest in Carns Company.
A)Carn will not be included in the consolidation process
B)Carn will be included in the consolidation process; 20% of prior period amortizations will be distributed to Retained Earnings-Carns
C)Carn will be included in the consolidation process; 40% of prior period amortizations will be distributed to Retained Earnings-Carns
D)Carn will be included in the consolidation process; NCI will be allocated 6.4% of prior-period profits originated by Carns

Accepted Answer

Prior period amortizations will be distributed as follows:
- 40% (NCI%) to Carns retained earnings (Able and Barns own 60% in total)- 8% (20% NCI x 40% interest) to Barns retained earnings
- 52% [(80% interest x 40% Barns company interest) + 20% interest in Carns] to the controlling interest (Able)

Question 14

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.

Accepted Answer

A parent company using either the simple or sophisticated equity method usually will need to make an adjustment to its investment account when its subsidiary sells additional shares of stock to NCI shareholders.

Question 15

On January 1, 20X1, Paris Ltd. paid $600,000 for its 75% interest in the Scott Company when Scott had total equity of $550,000. Any excess of cost over book value was attributed to equipment with a 10-year life. On January 1, 20X3, Scott Company had the following stockholders' equity:  On January 2, 20X3, Scott Company sold 2,500 additional shares of stock for $60 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)$7,500 loss
B)$37,500 loss
C)$37,500 decrease in controlling paid-in capital
D)$7,500 decrease in controlling paid-in capital

Accepted Answer

11eb11de_92e7_5d38_ad38_e7d0ded39752_TB2014_00 
 11eb11de_92e7_8449_ad38_39eccb7053d9_TB2014_00 *7,500 / (10,000 + 2,500) = 60%

Question 16

Consolidated statements for X, Y, and Z are proper if
A)X owns 100% of the outstanding common stock of Y and 49% of Z; M owns 51% of Z.
B)X owns 100% of the outstanding common stock of Y and 75% of Z; X bought the stock of Z one month before the statement date and sold it 6 weeks later.
C)X owns 100% of the outstanding stock of Y; Y owns 75% of Z.
D)There is no interrelation of financial control among X, Y, and Z; however, they are contemplating the joint purchase of 100% of the outstanding stock of D.

Accepted Answer

A parent company may own a controlling interest in a subsidiary that, in turn, owns a controlling interest in another company. In this case, all three would be consolidated.

Question 17

Pepper Company owns 60,000 of Salt Company's 100,000 outstanding shares. This year, Salt purchased 20,000 of its outstanding shares from the NCI for $70,000. Pepper's interest after the treasury stock purchase is:
A)60%.
B)80%.
C)50%.
D)75%.

Accepted Answer

60,000 / (100,000 - 20,000) = 75%

Question 18

Pepper Company owned 60,000 of Salt Company's 100,000 outstanding shares. On January 2, 20X3, Salt purchased 20,000 of its outstanding shares from the NCI for $70,000. Pepper purchased its shares on January 1, 20X1, at which time the fair value of Salt exceeded its book value by $50,000. This difference was due to machinery that was undervalued and had a remaining life of 5 years. On December 31, 20X2, Salt Company had the following stockholders' equity:  The amount of the adjustment to Pepper's equity would be a:
A)$15,000 increase
B)$3,000 increase
C)$10,500 increase
D)$15,000 decrease

Accepted Answer

11eb11de_92e9_5911_ad38_c5b4827d01a5_TB2014_00

Question 19

Apple Inc. owns a 90% interest in Banana Company. Banana Company, in turn, owns a 80% interest in Carrot Company. During 20X4, Carrot Company sold $50,000 of merchandise to Apple Inc. at a gross profit of 20%. Of this merchandise, $10,000 was still unsold by Apple Inc. at year end. The adjustment to the controlling interest in consolidated net income for 20X4 is ____.
A)$560
B)$1,440
C)$1,600
D)$1,800

Accepted Answer

11eb11de_92e9_a732_ad38_11e876407129_TB2014_00

Question 20

Able Company owns an 80% interest in Barns Company and a 20% interest in Carns Company. Barns owns a 40% interest in Carns Company. The reported income of Carns is $20,000 for 20X4. Which of the following shows how it will be distributed?

Accepted Answer

The answer of Able Company owns an 80% interest in...

Quiz 8: Subsidiary Equity Transactions, Indirect Subsidiary Ownership, and Subsidiary Ownership of Parent Shares

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

Company P owns 80% of the 10,000 outstanding common stock of Company S. If Company S issues 2,500 added shares of common stock, and Company P purchases some of the newly issued shares, which of the following statements is true?

When a parent purchases a portion of the newly issued stock of its subsidiary and the parent's percentage of ownership interest remains the same,

When a parent purchases a portion of the newly issued stock of its subsidiary in a private offering and the ownership interest decreases,

When a parent purchases a portion of the newly issued stock of its subsidiary and the ownership interest increases,

Which of the following situations is viewed as the parent having treasury stock?

Able Company owns an 80% interest in Barns Company and a 20% interest in Carns Company. Barns owns a 40% interest in Carns Company.

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

Consolidated statements for X, Y, and Z are proper if

Pepper Company owns 60,000 of Salt Company's 100,000 outstanding shares. This year, Salt purchased 20,000 of its outstanding shares from the NCI for $70,000. Pepper's interest after the treasury stock purchase is:

Able Company owns an 80% interest in Barns Company and a 20% interest in Carns Company. Barns owns a 40% interest in Carns Company. The reported income of Carns is $20,000 for 20X4. Which of the following shows how it will be distributed?