Question 1

Apple Inc.owns a 90% interest in Banana Company.Banana Company, in turn, owns a 80% interest in Carrot Company.During 2019, 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 2019 is ____.
A)​$560
B)​$1,440
C)​$1,600
D)​$1,800

Accepted Answer

The adjustment to the controlling interest in consolidated net income for 2019 involves eliminating the unrealized profit from the intra-group sale of merchandise that remains unsold at year-end. The gross profit on the $50,000 of merchandise sold by Carrot Company to Apple Inc. is 20%, which equals $10,000 ($50,000 * 20%). Since $10,000 of merchandise was still unsold by Apple Inc. at year-end, the entire $2,000 gross profit on this unsold inventory ($10,000 * 20%) is unrealized from the group's perspective and must be eliminated. However, the adjustment only affects the controlling interest's share of consolidated net income. Apple Inc.'s effective interest in Carrot Company is 90% * 80% = 72%. Therefore, the adjustment to the controlling interest in consolidated net income is 72% of the $2,000 unrealized profit, which is $1,440 ($2,000 * 72%).

Question 2

On January 1, 2016, 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, 2018, Scott Company had the following stockholders' equity: 
$\begin{array}{lr}
\text { Common stock, } \$ 10 \text { par } & \$ 100,000 \
\text { Other paid-in capital } & 200,000 \
\text { Retained earnings } & 350,000
\end{array}$
 On January 2, 2018, Scott Company sold 2,500 additional shares of stock for $60 each in a private offering to non-controlling shareholders.As a result of this sale, which of the following changes would appear in the 2018 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

The sale of additional shares to non-controlling shareholders dilutes the controlling interest, resulting in a decrease in controlling paid-in capital. The calculation is based on the difference between the book value per share and the sale price per share, multiplied by the number of shares sold.

Question 3

Company P purchased an 80% interest in the Company S on January 1, 2016, 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: ?

$$\begin{array} { l r r } 
& \text { January } 1,2016 & \text { December } 31,2019 \
\text { Common stock, } \$ 10 \text { par } & \$ 100,000 & \$ 140,000 \
 \text { Other paid-in capital } & 200,000 & 280,000 \
\text { Retained earnings }& 250,000 & 450,000
\end{array}$$
 The only change in paid-in capital is a result of a 40% stock dividend paid in 2018.The cost to simple equity conversion to bring the investment account to its December 31, 2019, balance is ____.
A)$30,000
B)$136,000
C)$160,000
D)$256,000

Accepted Answer

The cost to simple equity conversion involves adjusting the investment account to reflect the investor's share of the investee's equity changes. Here's the calculation:1. Initial investment: $600,000 for an 80% interest.2. Equity at purchase (January 1, 2016): Common stock ($100,000) + Other paid-in capital ($200,000) + Retained earnings ($250,000) = $550,000.3. Equity at December 31, 2019: Common stock ($140,000) + Other paid-in capital ($280,000) + Retained earnings ($450,000) = $870,000.4. Increase in equity: $870,000 - $550,000 = $320,000.5. 80% of the increase in equity attributable to the investor: $320,000 * 80% = $256,000.Therefore, the cost to simple equity conversion to bring the investment account to its December 31, 2019, balance is $256,000.

Question 4

Pepper Company owned 60,000 of Salt Company's 100,000 outstanding shares.On January 2, 2018, Salt purchased 20,000 of its outstanding shares from the NCI for $70,000.Pepper purchased its shares on January 1, 2016, 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, 2017, Salt Company had the following stockholders' equity:

$\begin{array}{lr}
\text { Common stock, } \$ 1 \text { par } & \$ 100,000 \
\text { Paid-in capital in excess of par } & 50,000 \
\text { Retained earnings } & 270,000
\end{array}$
 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

The correct answer is A because the adjustment to Pepper's equity would be a $15,000 increase. This is because Pepper owns 60% of Salt Company, and Salt Company purchased 20,000 of its outstanding shares from the NCI for $70,000. This means that Pepper's share of the repurchase is $42,000 (60% x $70,000). Pepper's equity would therefore increase by $42,000.

Question 5

On January 1, 2016, 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, 2018, Scott Company had the following stockholders' equity: ?

$\begin{array}{lr}
\text { Common stock, } \$ 10 \text { par } & \$ 100,000 \
\text { Other paid-in capital } & 200,000 \
\text { Retained earnings } & 350,000
\end{array}$
 On January 2, 2018, Scott Company sold 2,500 additional shares of stock for $90 each in a private offering to non-controlling shareholders.As a result of this sale, which of the following changes would appear in the 2018 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

The sale of additional shares to non-controlling shareholders will not affect consolidated net income, so options A and B can be eliminated. 
The sale of shares will increase the total amount of paid-in capital of Scott Company, which means an increase in the controlling interest's proportionate share of paid-in capital. 
Therefore, option C is the correct answer. Option D is incorrect because the controlling interest's paid-in capital would increase rather than decrease.

Question 6

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

When the equity method is used, any adjustments resulting from the subsidiary stock sales should be made at the time of the sale. This is because under the equity method, the parent company recognizes its share of the subsidiary's net income or loss in the period it is earned or incurred, rather than waiting until dividends are received. Therefore, any changes to the subsidiary's equity affecting the parent's investment should also be recorded in the same period.

Question 7

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 company's ownership interest in a subsidiary decreases due to the subsidiary issuing new stock, any difference between the change in equity and the price paid is typically accounted for as a change in paid-in capital or retained earnings, not as a gain or loss.

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

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, there will be no adjustment to the parent's paid-in capital because the transaction does not change the parent's overall ownership percentage in the subsidiary.

Question 9

Apple Inc.purchased a 70% interest in the Banana Company for $490,000 on January 1, 2018, when Banana Company had the following stockholders' equity: 
$$\begin{array} { l r } 
\text { Common stock, } \$ 10 \text { par } & \$ 100,000 \
\text { Paid-in capital in excess of par } & 250,000 \
\text { Retained earnings } & 150,000
\end{array}$$
 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

The goodwill resulting from this purchase is calculated as follows: First, determine the total equity of Banana Company, which is the sum of common stock ($100,000), paid-in capital in excess of par ($250,000), and retained earnings ($150,000), totaling $500,000. Apple Inc. purchased a 70% interest, so the implied total value of Banana Company based on the purchase price is $490,000 / 0.70 = $700,000. The book value of the equity interest purchased is 70% of Banana Company's total equity, which is 0.70 * $500,000 = $350,000. The fair value adjustment for the machine in Carrot Company (which is 80% owned by Banana Company) is $20,000, and Apple's share of that adjustment is 70% of 80% of $20,000 = $11,200. Therefore, the adjusted book value of the equity interest purchased is $350,000 + $11,200 = $361,200. The goodwill is the excess of the purchase price over the adjusted book value of the equity interest purchased, which is $490,000 - $361,200 = $128,800. However, since none of the provided options match this calculation exactly and considering the calculation approach, there might have been an oversight in the calculation steps provided. The correct approach involves recognizing the implied total value and the book value of the equity interest, but without specific adjustments or corrections, the closest match based on the provided options and typical calculation methods would be option A, acknowledging a potential discrepancy in the calculation process.

Question 10

On January 1, 2016, 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, 2018, Stephan Company had the following stockholders' equity: 
$\begin{array}{lr}
\text { Common stock, } \$ 10 \text { par } & \$ 100,000 \
\text { Other paid-in capital } & 200,000 \
\text { Retained earnings } & 300,000
\end{array}$

On January 2, 2018, 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

The sale of new shares for $70 per share resulted in an increase in paid-in capital in excess of par, since the par value of the shares was not stated. Since Paul, Inc. purchased 600 of the shares, their share of the increase would be 90% of $5,000, or $4,500. This represents an increase in controlling interest paid-in capital in excess of par of $5,000. There is no gain on the consolidated income statement, and there is no decrease in controlling interest paid-in excess or increase in Retained Earnings.

Question 11

Pepper Company owned 60,000 of Salt Company's 100,000 outstanding shares.On January 2, 2018, Salt purchased 20,000 of its outstanding shares from the NCI for $70,000.Pepper purchased its shares on January 1, 2016, 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, 2017, Salt Company had the following stockholders' equity: ?

$\begin{array}{lr}
\text { Common stock, } \$ 1 \text { par } & \$ 100,000 \
\text { Paid-in capital in excess of par } & 50,000 \
\text { Retained earnings } & 270,000
\end{array}$
 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

The answer of Pepper Company owned 60,000 of Salt Company's...

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

Treasury stock refers to shares that were issued and later reacquired by the issuing company. In the context of parent and subsidiary relationships, a situation resembling treasury stock occurs when a parent company owns a subsidiary, and that subsidiary owns shares in the parent company. Choice C describes such a scenario, where A owns 80% of B, and B owns 20% of A, effectively making B's ownership in A akin to A holding its own stock, similar to treasury stock.

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

Carn is a subsidiary of Barns, which is a subsidiary of Able. Therefore, Carn is a sub-subsidiary of Able and must be included in the consolidation process. Since Able owns 20% of Carns directly and 40% of Carns indirectly through Barns, Able's total ownership interest in Carns is 60%. Therefore, 40% of Carns' prior period amortizations will be distributed to Retained Earnings-Carns.

Question 14

On January 1, 2016, 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, 2018, Stephan Company had the following stockholders' equity: ?
$\begin{array}{lr}
\text { Common stock, } \$ 10 \text { par } & \$ 100,000 \
\text { Other paid-in capital } & 200,000 \
\text { Retained earnings } & 300,000
\end{array}$
 On January 2, 2018, 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?
?
a.
$\begin{array}{lcr}
\text { Investment in Stephan } & 160,000 & \
\quad \text { Cash } & & 160,000 \\end{array}$
b.$\begin{array}{lcr}\text { Investment in Stephan } & 156,692 & \
\quad \text { Paid-in Capital in Excess of Par-Paul } & & 3,308 \
\text { Cash } & & 160,000
\end{array}$
c.
$\begin{array}{lrc}
\text { Investment in Stephan } & 157,527 & \
\text { Paid-in Capital in Excess of Par-Paul } & 2,473 & \
\quad \text { Cash } & & 160,000 \\end{array}$
d.
$\begin{array}{lrc}\text { Investment in Stephan } & 160,000 & \
\quad \text { Paid-in Capital in Excess of Par-Paul } & & 2,829 \
\quad \text { Cash } & & 157,171
\end{array}$

Accepted Answer

Since Paul, Inc. already owns a 90% interest in Stephan Company, any additional investment would be considered a purchase of additional shares. The purchase of 2,000 shares at $80 per share results in total consideration of $160,000. The par value of the shares is not given, but it can be assumed to be lower than $80 since the company is issuing shares at a premium. Therefore, the excess amount paid over the par value represents additional paid-in capital. The entry to record the investment would be:

Investment in Stephan: $157,527
Paid-in Capital in Excess of Par-Paul: $2,473
Cash: $160,000

Question 15

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

Since the parent company owns a 100% interest in the subsidiary, the stock dividend does not result in any change in ownership or a cost to the parent company. Therefore, the dividend should only be recorded as a memo entry indicating that the cost of the original investment is now allocated to a greater number of shares. The choice A, B, and C are incorrect as they involve recording the dividend at a value that implies a cost or benefit to the parent company.

Question 16

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

If Company P purchases 80% of the newly issued shares (2,000 out of 2,500), it maintains its 80% ownership in Company S. Therefore, there's no adjustment to the controlling interest, aside from recording the purchase.

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

The answer of Pepper Company owns 60,000 of Salt Company's...

Question 18

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

Consolidated statements are appropriate when there is a parent-subsidiary relationship, where the parent company owns more than 50% of the subsidiary. In option C, X indirectly controls Z through Y, making it appropriate for consolidation.

Question 19

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 company increases its ownership in a subsidiary by purchasing newly issued stock, any difference between the change in equity and the price paid is typically accounted for as a change in paid-in capital or retained earnings, reflecting the additional investment in the subsidiary.

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 2019.Which of the following shows how it will be distributed? ?
$\begin{array}{ccc}
&\text { Barns} & \text {  Carns }\
\text { Controlling } & \text { Non- } & \text { Non- } \
\text { Interest } & \text { Controlling } & \text { Controlling }
\end{array}$
A)$\begin{array}{lrr}
 \$ 10,400 &&&& \$ 1,600 &&& \$ 8,000 \\end{array}$
B)$\begin{array}{lrr} \$ 2,000 &&&& \$ 8,000 &&&& \$ 8,000 \\end{array}$
C)$\begin{array}{lrr} \$ 12,000 &&& \$ 0 &&&&&& \$ 8,000 \\end{array}$
D)$\begin{array}{lrr}\$ 10,400 &&& \$ 9,600 &&&& \$ 0
\end{array}$

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

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

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 parent's percentage of ownership interest remains the same,

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.

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?

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:

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

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