Advanced Accounting 11th Edition by Paul Fischer,William Tayler, Rita Cheng

Exercise 4

Stock dividend, subsidiary stock sales, equity method. On January 1, 2011, Wells Corporation acquires 8,000 shares of Towne Company stock and 18,000 shares of Sara Company stock for $176,000 and $240,000, respectively. Each investment is acquired at a price equal to the subsidiary's book value, resulting in no excesses. Towne Company and Sara Company have the following stockholders' equities immediately prior to Wells's purchases:
Additional information is as follows:
a. Net income for Towne Company and Sara Company for 2011 and 2012 follows (income is assumed to be earned evenly throughout the year):
b. No cash dividends are paid or declared by Towne or Sara during 2011 and 2012.
c. Towne Company distributes a 10% stock dividend on December 31, 2011. Towne stock is selling at $25 per share when the stock dividend is declared.
d. On July 1, 2012, Towne Company sells 2,750 shares of stock at $35 per share. Wells Corporation purchases none of these shares.
e. Sara Company sells 5,000 shares of stock on July 1, 2011, at $25 per share. Wells Corporation purchases 3,700 of these shares.
f. On January 1, 2012, Sara Company purchases 5,000 shares of its common stock from noncontrolling interests at $20 per share.
Assume Wells Corporation uses the simple equity method for its investments in subsidiaries. For 2011 and 2012, record each of the adjustments to the investment accounts. Provide all supporting calculations in good form.