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B. Woods Chapter 04 Electronic
B. Woods Chapter 04 Electronic
Chapter 4
W-1 The method used by a parent company in accounting for its subsidiary
can be determined by examining the separate financial statements of the
parent company and the subsidiary. If the cost method is used, the parent
company will report dividend income from the subsidiary and the investment
account will be stated at original cost. If the equity method is used, the
parent company will report investment income from the subsidiary, and the
investment account will reflect subsidiary income since acquisition. When the
equity method is used but the difference between investment cost and book
value acquired has not been amortized on the parent company's books, the
difference between the investment balance and underlying book value at any
statement date will reflect the difference between the investment cost and
underlying book value at the time of acquisition.
W-2 When the cost method is used, reciprocity between the investment
account balance and the underlying subsidiary equity is established by
adjusting the parent company's investment and retained earnings accounts
for the parent's share of the change in subsidiary retained earnings between
the dates the subsidiary was acquired and the beginning of the current year.
86 Consolidation Techniques and Procedures
W-3
1 Cost method
Cash $30,000
Dividend income $30,000
To record receipt of dividends ($40,000 x 75%).
2 Cost method
3 Equity method
Investment in S’Brain $45,000
Income from S’Brain $45,000
To record share of S’Brain's net income ($60,000 x 75%).
Cash $30,000
Investment in S’Brain $30,000
To record receipt of dividends ($40,000 x 75%).
1 a
2 d
3 d
4 d
5 c
W-5
Cost method
Equity method
W-6
1 Pane Company
Balance Sheet
at December 31, 2003
Sales $190,000
Cost of goods sold 80,000
Gross profit 110,000
Operating expenses 65,000
Total consolidated net income 45,000
Less: Minority interest incomeb 4,000
Consolidated net income $ 41,000
b
Minority interest income is 20% of Sizzle's $20,000 income.
W-7
W-8
Preliminary computations
Investment cost $100,000
Book value acquired ($100,000 x 70%) 70,000
Excess cost over book value acquired $ 30,000
W-8 (continued)
W-8 (continued)
W-8 (continued)
W-9
Supporting computations
Amortization Unamortized at
2005 2006 December 31, 2006
Machinery $30,000/4 years $7,500 $7,500 $15,000
Patents $35,000/10 years 3,500 3,500 28,000
*On December 31, 2005 the investment in Scot is $204,000 on an equity basis
and $200,000 on the cost basis. The $4,000 difference is the result of
applying the cost rather than the equity method in 2005. A working paper
entry for $4,000 is needed to increase the investment in Scot and the
beginning retained earnings of Puff to an equity basis. This working paper
entry adjusts Puff's beginning retained earnings of $112,000 to $116,000, the
correct amount of beginning consolidated retained earnings.
Chapter 4 97
W-9 (continued)
W-9 (continued)
W-10
Preliminary computations
W-10 (continued)
W-10 (continued)