Advanced Accounting, 11e (Beams/Anthony/Bettinghaus/Smith)
Chapter 9 Indirect and Mutual Holdings
Multiple Choice Questions
1) Pallet Corporation owns 80% of Adelt Corporation and Adelt owns 60% of Bajo Inc. Which of the following is correct?
A) Bajo should not be consolidated because noncontrolling interests hold 52%.
B) Bajo should be consolidated because the 60% of Bajo stock is held in the affiliate structure.
C) Pallet has 8% indirect ownership of Bajo.
D) Pallet has 80% indirect ownership of Bajo.
Answer: B
Objective: LO1
Difficulty: Moderate
2) Page Corporation acquired a 60% interest in Ace Corporation at a price $40,000 in excess of book value and fair value on January 1, 2010. On the same date, Ace acquired a 70% interest in Bader Corporation at a price $30,000 in excess of book value and fair value. The excess purchase cost paid by Page and Ace was attributed to goodwill. Separate net incomes (excluding investment income) for the three affiliates for 2010 are as follows: Page, $500,000, Ace, $300,000, and Bader, $400,000.
Page's controlling interest share of consolidated net income for 2010 is
A) $808,000.
B) $848,000.
C) $920,000.
D) $960,000.
Answer: B
Objective: LO1
Difficulty: Moderate
Use the following information to answer the question(s) below.
Paint Corporation owns 82% of Achille Corporation and Achille Corporation owns 80% of Badrack Corporation. For the current year, the separate net incomes (excluding investment income) of Paint, Achille, and Badrack are $120,000, $100,000, and $50,000, respectively. The cost of each investment was equal to the book value of the investment, which was also equal to the fair value.
3) Noncontrolling interest share for Badrack is
A) $9,000.
B) $10,000.
C) $20,000.
D) $40,000.
Answer: B
Explanation: B) (0.20 × $50,000 = $10,000)
Objective: LO1
Difficulty: Moderate
4) Noncontrolling interest share for Achille is
A) $18,000.
B) $25,200.
C) $36,200.
D) $72,000.
Answer: B
Explanation: B) [$100,000 + (0.80) × ($50,000)] × 18% = $25,200
Objective: LO1
Difficulty: Moderate
5) Controlling interest share of consolidated net income for Paint Corporation and Subsidiaries is:
A) $234,800.
B) $244,800.
C) $260,000.
D) $270,000.
Answer: A
Explanation: A)
Paint Achille Badrack
Separate incomes $120,000 $100,000 $50,000
Allocate 80% of Badrack to Achille _______ 40,000 (40,000)
Subtotal 120,000 140,000 10,000
Allocate 82% of Achille to Paint 114,800 (114,800)
Controlling interest share of cons. net income $234,800 _______ _______
Noncontrolling interest share $25,200 $10,000
Objective: LO1
Difficulty: Moderate
6) Pabari Corporation owns an 80% interest in Alders Corporation and Alders owns a 60% interest in Babao Corporation. Both interests were acquired at a cost equal to book value equal to fair value. During 2010, Alders sells land to Babao at a profit of $12,000. Babao still holds the land at December 31, 2010. Net income(loss) of the three companies (excluding investment income) for 2010 are:
Pabari Corporation $180,000
Alders Corporation 72,000
Babao Corporation (30,000)
Controlling interest share of consolidated net income and noncontrolling interest share, respectively, for 2010 are
A) $211,200 and ($1,200).
B) $211,200 and ($3,600).
C) $213,600 and ($1,200).
D) $213,600 and ($3,600).
Answer: D
Explanation: D)
Noncont. interest share: $8,400 Profit + ($12,000) Loss
Pabari Alders Babao
Separate incomes $180,000 $72,000 $(30,000)
Less: Unrealized profit on land _______ (12,000) _______
Subtotal $180,000 $60,000 (30,000)
Allocate Babao's net loss to
Alders ($30,000) × 60% _______ (18,000) 18,000
Subtotal 180,000 42,000 (12,000)
Allocate 80% of Alders
income to Pabari 33,600 (33,600)
Controlling interest share of consolidated
net income $213,600 _______ _______
Noncontrolling interest share $8,400 $12,000
Objective: LO1
Difficulty: Moderate
7) Pablo Corporation acquired 60% of Abagia Corporation on January 1, 2010, at a cost of $20,000 in excess of book value. Also, on July 1, 2010, Pablo acquired 60% of Babin Corporation at book value. On January 1, 2011, Abagia acquired a 20% interest in Babin at a cost of $10,000 in excess of book value. The excess purchase costs paid by Pablo and Abagia were attributed to goodwill.
On July 1, 2011, Pablo sold land with a book value of $20,000 to Abagia for $40,000. The $20,000 unrealized gain is included in Pablo's separate income. Separate net incomes for the affiliated companies (excluding investment income) for 2011 are:
Pablo $250,000
Abagia 70,000
Babin 100,000
Controlling interest share of consolidated net income for 2011 is
A) $304,000.
B) $324,000.
C) $344,000.
D) $364,000.
Answer: C
Explanation: C)
Pablo Abagia Babin
Separate incomes $250,000 $70,000 $100,000
Less: Unrealized profit on land (20,000) ________ ________
Separate realized incomes $230,000 $70,000 $100,000
Allocate Babin's income:
60% to Pablo 60,000 (60,000)
20% to Abagia ________ 20,000 (20,000)
Subtotal 290,000 90,000 20,000
Allocate Abagia's net income
60% to Pablo 54,000 (54,000)
Controlling interest share
of consolidated net income $344,000 ________ ________
Noncontrolling interest share $36,000 $20,000
Objective: LO1
Difficulty: Moderate
8) Paglia Corporation owns 80% of Aburn Corporation and has separate net income of $200,000 for 2010. Aburn Corporation has separate net income of $100,000 and owns 70% of the outstanding stock of Badley Corporation. Badley Corporation has separate net income of $80,000. (Separate net incomes exclude investment income.) The cost of each investment was equal to book value and fair value. The controlling interest share of consolidated net income for 2010 is
A) $324,800.
B) $328,800.
C) $344,800.
D) $344,800.
Answer: A
Explanation: A)
Paglia Aburn Badley
Separate incomes $200,000 $100,000 $80,000
Allocate Badley's income:
70% to Aburn _______ 56,000 (56,000)
Subtotal $200,000 $156,000 $24,000
Allocate Aburn's income:
80% to Paglia 124,800 (124,800) _______
Controlling interest share
of consolidated net income $324,800
Noncontrolling interest share $31,200 $24,000
Objective: LO1
Difficulty: Moderate
Use the following information to answer the question(s) below.
Pace Corporation owns 70% of Abaza Corporation and 60% of Babon Corporation. Abaza Corporation owns 20% of Babon Corporation. Pace's investment in Abaza was consummated in one transaction at a purchase price $20,000 in excess of the book value. Pace's purchase of Babon was made in one transaction at a price $30,000 above book value. Abaza's investment in Babon was completed in one transaction at a purchase price $10,000 in excess of the book value. The purchase price differential for all three investments was attributable to goodwill. (There were no fair value/book value differences in assets and liabilities for each investment.) Pace's separate net income for the current year is $100,000. Abaza's separate net income is $190,000, which includes a $10,000 unrealized loss on the sale of land to Pace. Babon's separate net income is $150,000. Separate net incomes exclude investment income.
9) The controlling interest share of consolidated net income for the current year is
A) $341,000.
B) $348,400.
C) $351,000.
D) $355,000.
Answer: C
Explanation: C)
Pace Abaza Babon
Separate incomes $100,000 $190,000 $150,000
Plus: Unrealized loss on
land sale to Pace ________ 10,000 ________
Separate realized incomes $100,000 $200,000 $150,000
Allocate Babon's income:
60% to Pace 90,000 (90,000)
20% to Abaza ________ 30,000 (30,000)
Subtotal 190,000 230,000 30,000
Allocate Abaza's net income
to Pace $230,000 × 70% 161,000 (161,000)
Controlling interest share
of consolidated net income $351,000 ________ ________
Noncontrolling interest share $69,000 $30,000
Objective: LO1
Difficulty: Moderate
10) The amount of noncontrolling interest share for the current year is
A) $69,000.
B) $85,000.
C) $95,000.
D) $99,000.
Answer: D
Explanation: D) ($69,000 + 30,000 = $99,000)
Objective: LO1
Difficulty: Moderate
Use the following information to answer the question(s) below.
Pahm Corporation owns 80% of the outstanding voting common stock of Abussi Corporation, which was purchased for $60,000 over Abussi's book value. The excess purchase price was attributable to goodwill. Abussi Corporation owns 60% of the outstanding common stock of Badock Corporation, which was purchased at book value. The separate net incomes of Pahm, Abussi, and Badock (excluding investment income) for the year are $200,000, $240,000, and $260,000, respectively. There were no fair value/book value differences in the assets and liabilities of Pahm, Abussi and Badock.
11) Controlling interest share of consolidated net income for the current year is
A) $504,800.
B) $516,800.
C) $545,200.
D) $557,200.
Answer: B
Explanation: B) ($200,000 + (80%) × [$240,000 + (60%) × (260,000)] = $516,800)
Objective: LO1
Difficulty: Moderate
12) The amount of income for the current year assigned to the noncontrolling shareholders of Badock Corporation is
A) $100,000.
B) $104,000.
C) $120,000.
D) $140,000.
Answer: B
Explanation: B) (40% × $260,000 = $104,000)
Objective: LO1
Difficulty: Moderate
13) The amount of income for the current year assigned to the noncontrolling shareholders of Abussi Corporation is
A) $48,000.
B) $53,200.
C) $74,000.
D) $79,200.
Answer: D
Explanation: D) (20% × $240,000) + (20% × $156,000) = $79,200
Pahm Abussi Badock
Separate incomes $200,000 $240,000 $260,000
Allocate Badock's income:
60% to Abussi ________ 156,000 (156,000)
Subtotal $200,000 $396,000 $104,000
Allocate Abussi's net income to
Pahm $396,000 × 80% 316,800 (316,800)
Controlling interest share
of consolidated net income $516,800 ________ ________
Noncontrolling interest share $79,200 $104,000
Objective: LO1
Difficulty: Moderate
14) The net income reported for Pahm Corporation for the current year is
A) $504,800.
B) $516,800.
C) $545,200.
D) $557,200.
Answer: B
Explanation: B) Pahm's net income is the same as the controlling interest share of consolidated net income.
Objective: LO2
Difficulty: Moderate
Use the following information to answer the question(s) below.
Paiva Corporation owns 80% of Ackroyd Corporation's outstanding common stock and Ackroyd owns 80% of the outstanding common stock of Bailey Corporation. Bailey Corporation owns 10% of the outstanding common stock of Ackroyd Corporation. The cost of the investments was equal to book value and there were not fair value/book value differences for the investments. The separate net incomes for the three affiliated companies for the year ended December 31, 2011 (excluding investment income) are as follows: Paiva Corporation, $100,000, Ackroyd Corporation, $50,000, and Bailey Corporation, $30,000. Use the conventional approach.
Symbols used:
P = Income of Paiva on a consolidated basis
A = Income of Ackroyd on a consolidated basis
B = Income of Bailey on a consolidated basis
15) The equation, in a set of simultaneous equations, that computes Paiva Corporation income on a consolidated basis is
A) P = $50,000 + 0.8B.
B) P = $30,000 + 0.2A.
C) P = $100,000 + 0.2A.
D) P = $100,000 + 0.8A.
Answer: D
Objective: LO1
Difficulty: Moderate
16) Ackroyd's noncontrolling interest share for 2011 is
A) $ 7,609.
B) $ 8,044.
C) $15,652.
D) $23,696.
Answer: B
Explanation: B)
P = $100,000 + 0.8A
A = $50,000 + 0.8B
B = $30,000 + 0.1A
A = $50,000 + 0.8 × ($30,000 + 0.1A)
A = $50,000 + $24,000 + 0.08A
0.92A = $74,000
A = $80,435 (rounded)
Noncontrolling interest share
Ackroyd: $80,435 × 10% outside interest $8,044
Objective: LO2
Difficulty: Moderate
17) Bailey's noncontrolling interest share for 2011 is
A) $7,609.
B) $8,044.
C) $15,652.
D) $23,696.
Answer: A
Explanation: A) (20% × $38,044)
Objective: LO2
Difficulty: Moderate
18) When mutually-held stock involves subsidiaries holding the stock of each other, the ________ method is not used.
A) equity
B) cost
C) conventional
D) treasury stock
Answer: D
Objective: LO2
Difficulty: Moderate
19) Raymond Company owns 90% of Rachel Company. Rachel Company owns 10% of Raymond Company. The treasury stock method is used. On the books of Rachel Company, we maintain the Investment in Raymond using the ________ method. The ending balance in Investment in Raymond is ________ stockholders' equity in the consolidated balance sheet.
A) equity; deducted from
B) cost; deducted from
C) treasury stock; deducted from
D) conventional; added to
Answer: B
Objective: LO2
Difficulty: Moderate
20) On January 1, 2012, Pauline Company acquired 90% of Stephen Company at a cost of $90,000. On January 1, 2012, Stephen Company acquired 10% of Pauline Company at a cost of $10,000.
On January 1, 2012, the following data is available:
Stephen Company Pauline Company
Common Stock $50,000 Common Stock $50,000
Retained Earnings $50,000 Retained Earnings $50,000
Assets fair value $100,000 Assets fair value $100,000
Assets book value $100,000 Assets book value $100,000
Liabilities $0 Liabilities $0
At December 31, 2012, the following data is available:
January 1, 2012 December 31, 2012
On Pauline Books:
Investment in Stephen $90,000 $105,000
On Stephen Books:
Investment in Pauline $10,000 $10,000
Assuming the treasury stock method is used, what elimination entry is needed for the Investment in Pauline at December 31, 2012?
A)
Retained earnings | 5,000 |
Common stock | 5,000 |
Investment in Pauline | 10,000 |
B)
Investment in Stephen | 10,000 |
Investment in Pauline | 10,000 |
C)
Income from Pauline | 10,000 |
Investment in Pauline | 10,000 |
D)
Treasury stock | 10,000 |
Investment in Pauline | 10,000 |
Answer: D
Objective: LO2
Difficulty: Moderate
Exercises
1) Paice Corporation owns 80% of the voting common stock of Accardi Corporation. Paice owns 60% of the voting common stock of Badger Corporation. Accardi owns 20% of the voting common stock of Badger. There are no cost/book value/fair value differentials to consider. The separate net incomes (excluding investment income) of these affiliated companies for 2011 are:
Paice $300,000
Accardi 160,000
Badger 120,000
Required:
Calculate controlling interest share of consolidated net income and noncontrolling interest shares for Paice Corporation and Subsidiaries for 2011.
Answer:
Paice Corporation and Subsidiaries
Income Allocation Schedule
For the year 2011
Paice Accardi Badger
Separate earnings $300,000 $160,000 $120,000
Allocate Badger's income:
60% to Paice 72,000 (72,000)
20% to Accardi ________ 24,000 (24,000)
Subtotal $372,000 $184,000 $24,000
Allocate Accardi's income:
80% to Paice 147,200 (147,200)
Controlling interest share
of consolidated net income $519,200 ________ ________
Noncontrolling interest share $36,800 $24,000
Objective: LO1
Difficulty: Moderate
2) Pacini Corporation owns an 80% interest in Abdoo Corporation, acquired on January 1, 2010 for $700,000 when Abdoo's stockholders' equity consisted of $600,000 of Capital Stock and $200,000 of Retained Earnings.
Abdoo Corporation acquired a 60% interest in Bach Corporation on July 1, 2010 for $180,000 when Bach had Capital Stock of $200,000 and Retained Earnings of $50,000. On January 1, 2011, Abdoo acquired a 70% interest in Cabo Corporation for $270,000 when Cabo had Capital Stock of $250,000 and Retained Earnings of $100,000.
No change in outstanding stock of any of the affiliated companies has occurred since the investments were made. All cost-book value differentials are goodwill. There are no fair value/book value differentials. The stockholders' equity section of the separate balance sheets of Abdoo, Bach, and Cabo at December 31, 2011 are as follows:
Abdoo Bach Cabo
Capital Stock $600,000 $200,000 $250,000
Retained Earnings 280,000 140,000 130,000
Total stockholders' equity $880,000 $340,000 $380,000
Required:
1. Compute the amount at which goodwill should be shown in the consolidated balance sheet of Pacini Corporation and Subsidiaries at December 31, 2011.
2. Pacini and Abdoo have applied the equity method correctly. Determine the balances of the three investment accounts at December 31, 2011.
Answer:
Requirement 1
Pacini's investment in Abdoo:
Implied fair value ($700,000/0.8) $875,000
Total stockholders' equity 800,000
Goodwill $75,000
Abdoo's investment in Bach:
Implied fair value ($180,000/0.6) $300,000
Total stockholders' equity 250,000
Goodwill $50,000
Abdoo's investment in Cabo:
Implied fair value ($270,000/0.7) $385,714
Total stockholders' equity 350,000
Goodwill $35,714
Total Goodwill ($35,714 + $75,000 + $50,000) $160,714
Requirement 2
Pacini Abdoo's books
Equity Equity Equity
in Abdoo in Bach in Cabo
Investment cost $700,000 180,000 $270,000
Investors' share of equity
since acquisition:
Abdoo: ($80,000 × 80%) 64,000
Bach: ($90,000 × 60%) 54,000
Cabo: ($30,000 × 70%) 21,000
Investment account balance $764,000 234,000 $291,000
Objective: LO1
Difficulty: Moderate
3) Paik Corporation owns 80% of Acdol Corporation and 60% of Ben Corporation. Acdol Corporation owns 10% of Ben Corporation. All subsidiary investments were acquired at book value. There are no fair value/book value differentials associated with each investment. Separate net incomes (excluding investment income) of the affiliated companies for 2011 are:
Paik: $600,000 which includes $60,000 unrealized losses on inventory items sold to Ben
Acdol: $360,000
Ben: $340,000 which includes $100,000 unrealized profit on land sold to Acdol
Required:
Determine controlling interest share of consolidated net income and noncontrolling interest shares for Paik Corporation and Subsidiaries for 2011.
Answer:
Paik Acdol Ben
Separate incomes $600,000 $360,000 $340,000
Plus: Unrealized loss on
inventory sales to Ben 60,000
Less: Unrealized profits
on land sold to Acdol ________ ________ (100,000)
Separate realized incomes 660,000 360,000 240,000
Allocate Ben:
60% to Paik 144,000 (144,000)
10% to Acdol ________ 24,000 (24,000)
Subtotal $804,000 $384,000 $72,000
Allocate Acdol:
80% to Paik 307,200 (307,200) ________
Controlling interest share
of consolidated net income $1,111,200
Noncontrolling interest share $76,800 $72,000
Objective: LO1
Difficulty: Moderate
4) Packer Corporation owns 100% of Abel Corporation, Abel Corporation owns 95% of Bacon Corporation and Bacon Corporation owns 80% of Cab Corporation. The separate net incomes (excluding investment income) of Packer, Abel, Bacon, and Cab are $300,000, $100,000, $200,000, and $300,000, respectively. All of the investments were made at times when the investee's book values were equal to their fair values. There were no cost/book value differentials for each investment.
Required:
Determine the controlling interest share of consolidated net income and noncontrolling interest shares for Packer Corporation and Subsidiaries for the current year.
Answer: Packer Abel Bacon Cab
Separate incomes $300,000 $100,000 $200,000 $300,000
Allocate Cab's income:
80% to Bacon ________ ________ 240,000 (240,000)
Subtotal 300,000 100,000 440,000 60,000
Allocate Bacon's income:
95% to Abel ________ 418,000 (418,000)
Subtotal 300,000 518,000 22,000 60,000
Allocate Abel's income:
100% to Packer 518,000 (518,000)
Controlling interest
share of consolidated
net income $818,000 ________ ________ ________
Noncontrolling interest
share $0 $22,000 $60,000
Objective: LO1
Difficulty: Moderate
5) On January 1, 2011 Paki Inc. bought 75% interest in Adam Corporation. At the time of purchase, Adam owned 80% of Baird Company. In all acquisitions, the book value equals the fair value, which equals the acquisition cost. Separate earnings (loss) (excluding investment income) for the three affiliates for 2011 are as follows:
Separate
Earnings (Loss) Dividends
Paki Company $400,000 $150,000
Adam Inc (50,000) 90,000
Baird Company 100,000 35,000
Required:
Compute controlling interest share of consolidated net income and noncontrolling interest shares for Paki and affiliates for 2011.
Answer:
Paki Adam Baird
Separate incomes $400,000 $(50,000) $100,000
Allocate Baird 80% ________ 80,000 (80,000)
Subtotal $400,000 $30,000 $20,000
Allocate Adam 75% 22,500 (22,500)
Controlling interest share
of consolidated net
income $422,500
Noncontrolling interest share $7,500 $20,000
Noncontrolling interest share in Baird $20,000
Noncontrolling interest share in Adam 7,500
Noncontrolling interest shares $27,500
Objective: LO1
Difficulty: Moderate
6) Paco Corporation owns 90% of Aber Corporation, Aber Corporation owns 85% of Back Corporation, and Back Corporation owns 5% of Aber Corporation. The separate net incomes (excluding investment income) of Paco, Aber, and Back are $100,000, $40,000, and $55,000, respectively. Assume the investments were acquired at a cost equal to the book value of each investment, which also equals the fair value.
Required:
1. Calculate revised net incomes for Paco, Aber, and Back by using the conventional method.
2. Determine the controlling interest share of consolidated net income and the noncontrolling interest shares.
Answer:
Requirement 1
Paco $181,541
Aber $90,601
Back $59,530
Requirement 2
Controlling interest share of consolidated net income = $181,541
Noncontrolling interest share (in Aber) $90,601 × 5% = $4,530
Noncontrolling interest share (in Back) $59,530 × 15% = $8,929
Total consolidated net income $195,000
Check: Total separate income= $100,000 + $40,000 + $55,000 = $195,000
Equations:
P = Income of Paco on a consolidated basis
A = Income of Aber on a consolidated basis
B = Income of Back on a consolidated basis
P = $100,000 + 0.90A
A = $ 40,000 + 0.85B
B = $ 55,000 + 0.05A
A = $40,000 + (0.85) × ($55,000 + 0.05A)
A = $40,000 + $46,750 + 0.0425A
A = $90,601
B = $55,000 + (0.05) × ($90,601)
B = $59,530
P = $100,000 + (0.9) × ($90,601)
P = $100,000 + $81,541
P = $181,541
Objective: LO2
Difficulty: Moderate
7) Paine Corporation owns 90% of Achan Corporation, Achan Corporation owns 85% of Badge Corporation, and Badge Corporation owns 5% of Achan Corporation. The separate net incomes (excluding investment income) of Paine, Achan, and Badge are $400,000, $160,000, and $220,000, respectively. Assume the investments were acquired at a cost equal to the book value of each investment, which also equals the fair value.
Required:
1. Calculate revised net incomes for Paine, Achan, and Badge by using the conventional method.
2. Determine the controlling interest share of consolidated net income and the noncontrolling interest shares.
Answer:
Equations:
P = Income of Paine on a consolidated basis
A = Income of Achan on a consolidated basis
B = Income of Badge on a consolidated basis
P = $400,000 + 0.90A
A = $160,000 + 0.85B
B = $220,000 + 0.05A
A = $160,000 + 0.85 × ($220,000 + 0.05A)
A = $160,000 + $187,000 + 0.0425A
0.9575A = $347,000
A = $362,402
B = $220,000 + 0.05($362,402) = $238,120
P = $400,000 + 0.9($362,402) = $726,162
Requirement 1
Paine $726,162
Achan $362,402
Badge $238,120
Requirement 2
Controlling interest share in consolidated net income $726,162
Noncontrolling interest share (from Achan)($362,402 × 5%) 18,120
Noncontrolling interest share (from Badge)($238,120 × 15%) 35,718
Total consolidated net income $780,000
Check: Total separate income = $400,000 + $160,000 + $220,000 = $780,000
Objective: LO2
Difficulty: Moderate
8) Separate earnings and investment percentages for three affiliates for 2011 are as follows:
Separate Percentage Interest Percentage Interest
Earnings in Acres in Bain
Palace Company $450,000 80%
Acres Inc 200,000 70%
Bain Corporation 160,000 10%
Assume the investments were acquired at a cost equal to the book value of each investment, which also equals the fair value. Separate earnings do not include investment income.
Required:
1. Calculate revised net incomes for Palace, Acres, and Bain by using the conventional method.
2. Determine the controlling interest share of consolidated net income and the noncontrolling interest shares.
Answer:
Requirement 1
Equations:
P = Income of Palace on a consolidated basis
A = Income of Acres on a consolidated basis
B = Income of Bain on a consolidated basis
P = $450,000 + 0.8A
A = $200,000 + 0.7B
B = $160,000 + 0.1A
Computations:
A = $200,000 + 0.7($160,000 + 0.1A)
A = $200,000 + $112,000 + 0.07A
0.93A = $312,000
A = $335,484
P = $450,000 + 0.8 × ($335,484)
P = $450,000 + $268,387
P = $718,387
B = $160,000 + 0.1($335,484)
B = $193,548
Palace = $718,387
Acres = $335,484
Bain = $193,548
Requirement 2
Controlling interest share of consolidated net income $718,387
Noncontrolling interest share (in Acres) (10% × $335,484) 33,548
Noncontrolling interest share (in Bain) (30% × $193,548) 58,064
Total consolidated net income $809,999
Check:
Total separate net income ($450,000 + $200,000 + $160,000) $810,000
Objective: LO2
Difficulty: Moderate
9) Padhy Corporation owns 80% of Abrams Corporation, Abrams Corporation owns 60% of Bacud Corporation, and Bacud Corporation owns 10% of Abrams Corporation. The separate net incomes (excluding investment income) of Padhy, Abrams, and Bacud are $300,000, $100,000, and $80,000, respectively. Assume the investments were acquired at a cost equal to the book value of each investment, which also equals the fair value.
Required:
Calculate the controlling interest share of consolidated net income and the noncontrolling interest shares for Padhy Corporation and its subsidiaries. Use the conventional method for your solution.
Answer:
Requirement 1
Equations:
P = Income of Padhy on a consolidated basis
A = Income of Abrams on a consolidated basis
B = Income of Bacud on a consolidated basis
P = $300,000 + 0.8A
A = $100,000 + 0.6B
B = $ 80,000 + 0.1A
Computations:
A = $100,000 + 0.6($80,000 + 0.1A)
A = $100,000 + $48,000 + 0.06A
0.94A = $148,000
A = $157,447
B = $80,000 + 0.1($157,447) = $95,745
P = $300,000 + 0.8($157,447) = $425,958
Padhy $425,958
Abrams $157,447
Bacud $95,745
Requirement 2
Controlling interest share of consolidated net income $425,958
Noncontrolling interest share (for Abrams) (10% × $157,447) 15,745
Noncontrolling interest share (for Bacud) (40% × $95,745) 38,298
Total consolidated net income $480,001
Check:
Total separate net income ($300,000 + $100,000 + $80,000) $480,000
Objective: LO2
Difficulty: Moderate
10) On January 1, 2011, Wrobel Company acquired a 90 percent interest in Sally Company for $270,000. On January 1, 2011, Sally's total stockholders' equity was $300,000. The fair value and book value of Sally's individual assets and liabilities were equal.
On January 2, 2011, Sally Company acquired a 10 percent interest in Wrobel Company for $70,000. On January 2, 2011, Wrobel's total stockholders' equity was $700,000. The fair value and book value of Wrobel's individual assets and liabilities were equal.
For the year ending December 31, 2011, the following data is available:
Net income Dividends
Wrobel Company $50,000 $0
Sally Company $30,000 $0
The treasury stock method is used to account for the mutual stock holdings between Wrobel and Sally. The separate net incomes do not include investment income.
Required:
1. What is Sally's income from Wrobel for 2011?
2. What is Wrobel's income from Sally for 2011?
3. What is the noncontrolling interest share associated with Sally Company for 2011?
4. Prepare the elimination entry for Sally's Investment in Wrobel Company.
Answer:
Requirement 1
No income from Wrobel because Sally uses the cost method for the Investment in Wrobel and dividends are $0 in 2011.
Requirement 2
$30,000 × 90% = $27,000
Requirement 3
$30,000 × 10% = $3,000
Requirement 4
Treasury stock 70,000
Investment in Wrobel Co. 70,000
Objective: LO2
Difficulty: Moderate
11) On January 1, 2011, Singh Company acquired an 80 percent interest in Gonzalez Company for $300,000. On January 1, 2011, Gonzalez's total stockholders' equity was $375,000. The fair value and book value of Gonzalez's individual assets and liabilities were equal.
On January 2, 2011, Gonzalez Company acquired a 10 percent interest in Singh Company for $50,000. On January 2, 2011, Singh's total stockholders' equity was $500,000. The fair value and book value of Singh's individual assets and liabilities were equal.
For the year ending December 31, 2011, the following data is available:
Net income Dividends
Singh Company $40,000 $0
Gonzalez Company $10,000 $0
The treasury stock method is used to account for the mutual stock holdings between Singh and Gonzalez. The separate net incomes do not include investment income.
Required:
1. What is Gonzalez's income from Singh for 2011?
2. What is Singh's income from Gonzalez for 2011?
3. What is the noncontrolling interest share associated with Gonzalez Company for 2011?
4. Prepare the elimination entry for Gonzalez's Investment in Singh Company.
Answer:
Requirement 1
No income from Singh because Gonzalez uses the cost method for the Investment in Singh, and dividends are $0 in 2011.
Requirement 2
$10,000 × 80% = $8,000
Requirement 3
$10,000 × 20% = $2,000
Requirement 4
Treasury stock 50,000
Investment in Singh Co. 50,000
Objective: LO2
Difficulty: Moderate
12) On January 1, 2011, Wrobel Company acquired a 90 percent interest in Sally Company for $270,000. On January 1, 2011, Sally's total stockholders' equity was $300,000. The fair value and book value of Sally's individual assets and liabilities were equal.
On January 2, 2011, Sally Company acquired a 10 percent interest in Wrobel Company for $70,000. On January 2, 2011, Wrobel's total stockholders' equity was $700,000. The fair value and book value of Wrobel's individual assets and liabilities were equal.
For the year ending December 31, 2011, the following data is available:
Net income Dividends
Wrobel Company $50,000 $0
Sally Company $30,000 $0
The treasury stock method is used to account for the mutual stock holdings between Wrobel and Sally. The separate net incomes do not include investment income.
A partial working paper is available for the year ending December 31, 2011.
![](https://wkrtcs.bdimg.com/rtcs/image?w=505&md5sum=87083407ad098dfa71850a23dd45ec78&sign=fbbdd1b1c5&rtcs_flag=1&rtcs_ver=3&l=webapp&bucketNum=43&ipr={"t":"img","w":"505","h":"365","dataType":"jpeg","c":"word/media/image1.png","imgOriW":1010,"imgOriH":730})
Required:
Prepare the elimination entries for the year ending December 31, 2011.
Do not enter them onto the worksheet. Instead, list them below.
Answer:
Debit Credit
Income from Sally 27,000
Investment in Sally 27,000
Noncontrolling interest share 3,000
Noncontrolling interest 3,000
Treasury stock 70,000
Investment in Wrobel 70,000
Retained earnings 100,000
Capital stock 200,000
Investment in Sally 270,000
Noncontrolling interest 30,000
Objective: LO2
Difficulty: Moderate
13) On January 1, 2011, Singh Company acquired an 80 percent interest in Gonzalez Company for $300,000. On January 1, 2011, Gonzalez's total stockholders' equity was $375,000. The fair value and book value of Gonzalez's individual assets and liabilities were equal.
On January 2, 2011, Gonzalez Company acquired a 10 percent interest in Singh Company for $50,000. On January 2, 2011, Singh's total stockholders' equity was $500,000. The fair value and book value of Singh's individual assets and liabilities were equal.
For the year ending December 31, 2011, the following data is available:
Net income Dividends
Singh Company $40,000 $0
Gonzalez Company $10,000 $0
The treasury stock method is used to account for the mutual stock holdings between Singh and Gonzalez. The separate net incomes do not include investment income. A partial consolidating worksheet is below.
![](https://wkrtcs.bdimg.com/rtcs/image?w=513&md5sum=87083407ad098dfa71850a23dd45ec78&sign=fbbdd1b1c5&rtcs_flag=1&rtcs_ver=3&l=webapp&bucketNum=43&ipr={"t":"img","w":"513","h":"379","dataType":"jpeg","c":"word/media/image2.png","imgOriW":1027,"imgOriH":758})
Required:
Prepare the elimination entries for the year ending December 31, 2011.
Do not enter them onto the worksheet. Instead, list them below.
Answer:
Debit Credit
Income from Gonzalez 8,000
Investment in Gonzalez 8,000
Noncontrolling interest share 2,000
Noncontrolling interest 2,000
Treasury stock 50,000
Investment in Singh 50,000
Retained earnings 75,000
Capital stock 300,000
Investment in Gonzalez 300,000
Noncontrolling interest 75,000
Objective: LO2
Difficulty: Moderate
14) On January 1, 2011, Peabody Corporation acquired a 90% interest in Salisbury Company for $270,000 when Salisbury's stockholders' equity was $300,000; with Common stock $200,000 and Retained earnings $100,000.
On January 1, 2011, Salisbury purchased a 10% interest in Peabody for $70,000 when Peabody's total stockholders' equity was $700,000; with Common stock $500,000 and Retained earnings $200,000.
The following data was available for the year ending December 31, 2011:
Peabody Company Salisbury Company
Net income $50,000 $30,000
Dividends 0 0
Use the conventional approach to account for the mutually-held stock. Assume there were no book value/fair value differentials for each investment. The separate net incomes do not include investment income.
Required:
1. Prepare the journal entry for Peabody on January 1, 2011.
2. Prepare the journal entry for Salisbury on January 1, 2011.
3. Prepare the journal entry to record the constructive retirement of 10% of Peabody's outstanding stock due to Salisbury's purchase of Peabody's stock.
4. Determine the incomes of Peabody and Salisbury on a consolidated basis with mutual income for 2011 using simultaneous equations.
5. What is controlling interest share of consolidated net income and noncontrolling interest shares for 2011?
Answer:
Requirement 1
Debit Credit
Investment in Salisbury Co. 270,000
Cash 270,000
Requirement 2
Investment in Peabody Co. 70,000
Cash 70,000
Requirement 3
Common stock 50,000
Retained earnings 20,000
Investment in Salisbury Co. 70,000
Requirement 4
P = the income of Peabody on a consolidated basis
S = the income of Salisbury on a consolidated basis
P = $50,000 + 0.90S
S = $30,000 + 0.10P
P = $50,000 + 0.9($30,000 + 0.10P)
P = $50,000 + $27,000 + 0.09P
P = $84,615
S = $30,000 + 0.1($84,615) = $38,462
Requirement 5
Peabody net income on an equity basis =
Controlling interest share of consolidated net income =
90% × $84,615 = $76,154
Noncontrolling interest share = 10% × $38,462 = $3,846
Check:
Separate net income = $50,000 + $30,000= $80,000
$76,154 + $3,846 = $80,000
Objective: LO2
Difficulty: Moderate
15) On January 1, 2011, Klode Corporation acquired an 80% interest in Savy Company for $400,000 when Savy's stockholders' equity was $500,000; with Common stock $400,000 and Retained earnings $100,000.
On January 1, 2011, Savy purchased a 10% interest in Klode for $50,000 when Klode's total stockholders' equity was $500,000; with Common stock $400,000 and Retained earnings $100,000.
The following data was available for the year ending December 31, 2011:
Klode Company Savy Company
Net income $70,000 $50,000
Dividends 0 0
Use the conventional approach to account for the mutually-held stock. Assume there were no book value/fair value differentials for each investment. The separate net incomes do not include investment income.
Required:
1. Prepare the journal entry for Klode on January 1, 2011.
2. Prepare the journal entry for Savy on January 1, 2011.
3. Prepare the journal entry to record the constructive retirement of 10% of Klode's outstanding stock due to Savy's purchase of Klode's stock.
4. Determine the incomes of Klode and Savy on a consolidated basis with mutual income for 2011 using simultaneous equations.
5. What is controlling interest share of consolidated net income and noncontrolling interest shares for 2011?
Answer:
Requirement 1
Debit Credit
Investment in Savy Co. 400,000
Cash 400,000
Requirement 2
Investment in Klode Co. 50,000
Cash 50,000
Requirement 3
Common stock 40,000
Retained earnings 10,000
Investment in Savy Co. 50,000
Requirement 4
K = the income of Klode on a consolidated basis
S = the income of Savy on a consolidated basis
K = $70,000 + 0.80S
S = $50,000 + 0.10K
K = $70,000 + 0.8($50,000 + 0.10K)
K = $70,000 + $40,000 + 0.08K
K = $119,565
S = $61,957
Requirement 5
Klode net income on an equity basis =
Controlling interest share of consolidated net income =
90% × $119,565 = $107,609
Noncontrolling interest share = 20% × $61,957 = $12,391
Check:
Separate net income = $50,000 + $70,000 = $120,000
$107,609 + $12,391 = $120,000
Objective: LO2
Difficulty: Moderate
16) On January 1, 2011, Paul Corporation acquired a 90% interest in Satorius Company for $360,000 when Satorius' stockholders' equity was $400,000; with Common stock $200,000 and Retained earnings $200,000.
On January 1, 2011, Satorius Company purchased a 10% interest in Paul Company for $90,000 when Paul's total stockholders' equity was $900,000; with Common stock $500,000 and Retained earnings $400,000.
The following data was available for the year ending December 31, 2011:
Paul Company Satorius Company
Net income $150,000 $130,000
Dividends 0 0
Use the conventional approach to account for the mutually-held stock. Assume there were no book value/fair value differentials for each investment. The separate net incomes do not include investment income.
Required:
1. Prepare the journal entry for Paul on January 1, 2011.
2. Prepare the journal entry for Satorius on January 1, 2011.
3. Prepare the journal entry to record the constructive retirement of 10% of Paul's outstanding stock due to Satorius' purchase of Paul's stock.
4. Determine the incomes of Paul and Satorius on a consolidated basis with mutual income for 2011 using simultaneous equations.
5. What is controlling interest share of consolidated net income and noncontrolling interest shares for 2011?
6. What is consolidated net income?
Answer:
Requirement 1
Debit Credit
Investment in Satorius Co. 360,000
Cash 360,000
Requirement 2
Investment in Paul Co. 90,000
Cash 90,000
Requirement 3
Common stock 50,000
Retained earnings 40,000
Investment in Satorius Co. 90,000
Requirement 4
P = the income of Paul on a consolidated basis
S = the income of Satorius on a consolidated basis
P = $150,000 + 0.90S
S = $130,000 + 0.10P
P = $150,000 + 0.9($130,000 + 0.10P)
P = $150,000 + $117,000 + 0.09P
0.91P = $267,000
P = $293,407
S = $130,000 + 0.1($293,407) = $159,341
Requirement 5
Paul's net income on an equity basis =
Controlling interest share of consolidated net income =
90% × $293,407 = $264,066
Noncontrolling interest share = 10% × $159,341 = $15,934
Check:
Separate net income = $150,000 + $130,000 = $280,000
$264,066 + $15,934 = $280,000
Requirement 6
Consolidated net income = $264,066 + $15,934 = $280,000
Objective: LO2
Difficulty: Moderate
17) On January 1, 2011, Adam Corporation purchased a 90% interest in Rodney Corporation. On January 1, 2011, Rodney Corporation purchased an 80% interest in Ben Corporation.
In all investment acquisitions, the cost of the interest was equal to the book value of the interest and the fair value of the interest. The following information is available for 2011:
Purchase Cost Net Income(Net Loss) for 2011
Adam $1,000,000 $200,000
Rodney $10,000 ($10,000)
Ben $15,000 $50,000
The separate net incomes do not include investment income.
Required:
1. What is controlling interest share of consolidated net income for 2011?
2. What is noncontrolling interest shares of consolidated net income for 2011?
Answer:
Adam Rodney Ben
Separate incomes $200,000 $(10,000) $50,000
Allocate Ben 80% ________ 40,000 (40,000)
Subtotal $200,000 $30,000 $10,000
Allocate Rodney 90% 27,000 (27,000)
________ ________ ________
Controlling interest
share of consolidated net
income $227,000
Noncontrolling interest share $3,000 $10,000
Noncontrolling interest share in Rodney $3,000
Noncontrolling interest share in Ben 10,000
Noncontrolling interest shares $13,000
Objective: LO1
Difficulty: Moderate
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