Chapter 8 Subsidiary Equity Transactions, Indirect Subsidiary Ownership, and Subsidiary Ownership of Parent Shares

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. 2. 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: January 1, 20X1 December 31, 20X4 Common stock, $10 par $100,000 $140,000 Other paid-in capital 200,000 280,000 Retained earnings 250,000 450,000 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 3. 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. 4. 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: Common stock, $10 par Other paid-in capital Retained earnings $100,000 200,000 350,000

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

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: Common stock, $10 par Other paid-in capital Retained earnings $100,000 200,000 350,000

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 6. When a parent purchases a portion of the newly issued stock of its subsidiary and the parents 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 parents paid-in capital

7. 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.

8. 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.

9. On January 1, 20X1, Paul, Inc. acquired a 90% interest in Stephan Company. The $45,000 excess of purchase price (parents share only) was attributable to goodwill. On January 1, 20X3, Stephan Company had the following stockholders' equity: Common stock, $10 par $100,000 Other paid-in capital 200,000 Retained earnings 300,000 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? A. Investment in Stephan 160,000 Cash 160,000 B. Investment in Stephan 156,692 Paid-in Capital in Excess of Par-Paul 3,308 Cash 160,000 C. Investment in Stephan 157,527 Paid-in Capital in Excess of Par-Paul 2,473 Cash 160,000 D. Investment in Stephan 160,000 Paid-in Capital in Excess of Par-Paul 2,829 Cash 157,171 10. 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. 11. On January 1, 20X1, Paul, Inc. acquired a 90% interest in Stephan Company. The $45,000 excess of purchase price (parents share only) was attributable to goodwill. On January 1, 20X3, Stephan Company had the following stockholders' equity: Common stock, $10 par $100,000 Other paid-in capital 200,000 Retained earnings 300,000 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 12. Pepper Company owns 60,000 of Salt Companys 100,000 outstanding shares. This year, Salt purchased 20,000 of its outstanding shares from the NCI for $70,000. Peppers interest after the treasury stock purchase is: A. 60%. B. 80%. C. 50%. D. 75%.

13. Pepper Company owned 60,000 of Salt Companys 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 Paid-in capital in excess of par Retained earnings $100,000 50,000 270,000

Assuming Pepper uses the equity method to account for its investment in Salt, the adjustment to the Peppers 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 14. Pepper Company owned 60,000 of Salt Companys 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 Paid-in capital in excess of par Retained earnings The amount of the adjustment to Peppers equity would be a: A. $15,000 increase B. $3,000 increase C. $10,500 increase D. $15,000 decrease 15. 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. $100,000 50,000 270,000

16. 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

17. 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: Common stock, $10 par Paid-in capital in excess of par Retained earnings $100,000 250,000 150,000

At the time of Apples 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 18. 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 19. 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? Barns NonControlling $1,600 $8,000 $0 $9,600 Carns NonControlling $8,000 $8,000 $8,000 $0

Controlling Interest A. $10,400 B. $ 2,000 C. $12,000 D. $10,400

20. 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. 21. When a subsidiary owns shares of the parent, the subsidiarys investment account A. should be accounted for using the equity method. B. is not eliminated so the subsidiarys investment in the parent is displayed on the balance sheet. C. is maintained at its original cost since the shares have no claim on income. D. may be accounted for using the cost, equity or sophisticated equity method.

22. When a subsidiary purchases shares of the parent, on a consolidated basis: A. a determination and distribution schedule must be completed to determine if goodwill is present. B. it is considered to be the parents purchase of treasury stock. C. an elimination entry must be made for the subsidiarys share of the parents income. D. None of the above is correct. 23. Plum Inc. acquired 90% of the capital stock of Sterling Co. on 1/1/X1 at a cost of $540,000. On this date Sterling had equipment (10-year life) carried at $200,000 under market and total equity amounting to $350,000. On 1/1/X1 Sterling acquired 5% (10,000 shares) of Plums outstanding common stock for $3 per share. Internally generated net income was $50,000 for Plum and $40,000 for Sterling. Consolidated net income for 20X2 is A. $90,000 B. $86,000 C. $83,500 D. $70,000 24. Plum Inc. acquired 90% of the capital stock of Sterling Co. on 1/1/X1 at a cost of $540,000. On this date Sterling had equipment (10-year life) carried at $200,000 under market and total equity amounting to $350,000. On 1/1/X1 Sterling acquired 5% (10,000 shares) of Plums outstanding common stock for $3 per share. Internally generated net income was $50,000 for Plum and $40,000 for Sterling. The noncontrolling interest in consolidated net income is A. $2,000 B. $18,000 C. $7,500 D. $6,800 25. Company P had 300,000 shares of common stock outstanding. It owned 80% of the outstanding common stock of S. S owned 20,000 shares of P common stock. In the consolidated balance sheet, Company P's outstanding common stock may be shown as A. 285,000 shares. B. 300,000 shares. C. 300,000 shares, less 20,000 shares of treasury stock. D. 300,000 shares, footnoted to indicate that S holds 20,000 shares. 26. A owns 80% of B and 20% of C. B owns 32% of C, and C owns 10% of A. Which interest will be considered NCI in the consolidated balance sheet? A. 20% of B and 48% of C B. 10% of A C. 10% of A and 48% of C D. There will not be a noncontrolling interest. 27. Manke Company owns a 90% interest in Neske Company. Neske, in turn, owns a 10% interest in Manke. Neske has 10,000 common stock shares outstanding, and Manke has 20,000 common stock shares outstanding. How many shares would each firm show as outstanding in the consolidated balance sheet, under the treasury stock method? A. Manke, 20,000 B. Manke, 20,000; Neske, 1,000 C. Manke, 18,000; Neske, 1,000 D. Manke, 18,000