On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for $300,000. Any excess of cost over book value on this date is attributed to a patent, to be amortized over 10 years.
On this date, Subsidiary had total shareholders' equity as follows:
The 8% preferred stock is cumulative, non-participating, and has a liquidating value of par plus dividends in arrears. There were no preferred dividends in arrears on January 1, 20X1.
During 20X1, Subsidiary had a net loss of $10,000 and paid no dividends. In 20X2, Subsidiary had net income of $20,000, but paid no dividends. In 20X3, Subsidiary had net income of $100,000 and paid dividends, on preferred and common, totaling $50,000.
On January 1, 20X2, Parent purchased $50,000 par value of Subsidiary's preferred stock for $52,000. At year end, the preferred is still held as an investment.
Required:
a.) Prepare Parent's journal entries for its investment in the subsidiary's preferred stock for 20X2 and 20X3.
b.) Calculate the increase in equity resulting from the retirement of preferred stock.
c.) Prepare the entries needed to eliminate the parent's investment in the subsidiary's preferred stock for the 20X3 consolidated worksheet.

Question

On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for $300,000. Any excess of cost over book value on this date is attributed to a patent, to be amortized over 10 years.
On this date, Subsidiary had total shareholders' equity as follows:  
The 8% preferred stock is cumulative, non-participating, and has a liquidating value of par plus dividends in arrears. There were no preferred dividends in arrears on January 1, 20X1.
During 20X1, Subsidiary had a net loss of $10,000 and paid no dividends. In 20X2, Subsidiary had net income of $20,000, but paid no dividends. In 20X3, Subsidiary had net income of $100,000 and paid dividends, on preferred and common, totaling $50,000.
On January 1, 20X2, Parent purchased $50,000 par value of Subsidiary's preferred stock for $52,000. At year end, the preferred is still held as an investment.
Required: 
a.) Prepare Parent's journal entries for its investment in the subsidiary's preferred stock for 20X2 and 20X3.
b.) Calculate the increase in equity resulting from the retirement of preferred stock.
c.) Prepare the entries needed to eliminate the parent's investment in the subsidiary's preferred stock for the 20X3 consolidated worksheet.

Quizplus · Accepted Answer

The Answer of On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for $300,000. Any excess of cost over book value on this date is attributed to a patent, to be amortized over 10 years.
On this date, Subsidiary had total shareholders' equity as follows:  
The 8% preferred stock is cumulative, non-participating, and has a liquidating value of par plus dividends in arrears. There were no preferred dividends in arrears on January 1, 20X1.
During 20X1, Subsidiary had a net loss of $10,000 and paid no dividends. In 20X2, Subsidiary had net income of $20,000, but paid no dividends. In 20X3, Subsidiary had net income of $100,000 and paid dividends, on preferred and common, totaling $50,000.
On January 1, 20X2, Parent purchased $50,000 par value of Subsidiary's preferred stock for $52,000. At year end, the preferred is still held as an investment.
Required: 
a.) Prepare Parent's journal entries for its investment in the subsidiary's preferred stock for 20X2 and 20X3.
b.) Calculate the increase in equity resulting from the retirement of preferred stock.
c.) Prepare the entries needed to eliminate the parent's investment in the subsidiary's preferred stock for the 20X3 consolidated worksheet.

On January 1, 20X1, Parent Company Purchased 80% of the Common