On January 1,20X7,Pisa Company acquired 80 percent of Siena Company by purchasing 40,000 shares of Siena's common stock.There was no differential related to this transaction.The noncontrolling interest had a fair value equal to 20 percent of book value.The book value of Siena on December 31,20X7 was as follows:
On January 1,20X8,Pisa purchased an additional 12,500 shares directly from Siena for $25 per share.
-Based on the preceding information,the elimination entry to prepare the consolidated financial statements on December 31,20X7 would include a:

Question

On January 1,20X7,Pisa Company acquired 80 percent of Siena Company by purchasing 40,000 shares of Siena's common stock.There was no differential related to this transaction.The noncontrolling interest had a fair value equal to 20 percent of book value.The book value of Siena on December 31,20X7 was as follows:
  On January 1,20X8,Pisa purchased an additional 12,500 shares directly from Siena for $25 per share.
-Based on the preceding information,the elimination entry to prepare the consolidated financial statements on December 31,20X7 would include a:

Quizplus · Accepted Answer

The elimination entry is necessary to remove the intercompany assets and liabilities between the parent company and subsidiary company. As there was no differential related to the acquisition, the elimination entry will include the following:
- Debit Investment in Siena Co. for the total cost of investment: 80% x $1,200,000 (40,000 shares x $30/share) = $960,000
- Credit Siena Co. equity accounts: common stock ($500,000) and retained earnings ($400,000) = $900,000
- Credit NCI in the net assets of Siena Co. for the fair value of noncontrolling interest: 20% x $900,000 = $180,000

Therefore, the correct choice is C, credit to Investment in Siena Co. for $976,500, which is the sum of $960,000 and $16,500 (the fair value of NCI in the net assets of Siena Co.). The other choices are not relevant for the elimination entry.

On January 1,20X7,Pisa Company Acquired 80 Percent of Siena Company