Chapter 4 Advanced accounting

Jordan, Inc., holds 75 percent of the outstanding stock of Paxson Corporation. Paxson currently owes Jordan $400,000 for inventory acquired over the past few months. In preparing consolidated financial statements, what amount of this debt should be eliminated? a. -0- . b. $100,000 . c. $300,000 . d. $400,000 .

D In consolidating the subsidiary's figures, all intra-entity balances must be eliminated in their entirety for external reporting purposes. Even though the subsidiary is less than fully owned, the parent nonetheless controls it.

Tree, Inc., has held a 10 percent interest in the stock of Limb Company for several years. Because of the level of ownership, this investment has been accounted for using the fair-value method. At the beginning of the current year, Tree acquires an additional 70 percent interest, which provides the company with control over Limb. In preparing consolidated financial statements for this business combination, how does Tree account for the previous 10 percent ownership interest?

Following the second acquisition, consolidation is appropriate. Once Tree gains control, the 10% previous ownership is included at fair value as part of the total consideration transferred by Tree in the acquisition.

What does the term non-controlling interest mean?

Noncontrolling interest" refers to an equity interest that is held in a member of a consolidated entity by an unrelated (outside) party.

Duke Corporation owns a 70 percent equity interest in Salem Company, a subsidiary corporation. During the current year, a portion of this stock is sold to an outside party. Before recording this transaction, Duke adjusts the book value of its investment account. How would Duke account for the remainder of its investment subsequent to the sale of this partial interest?

The accounting method choice for the remaining shares depends upon the current relationship between the two firms. If Duke retains control, consolidation is still required. However, if the parent now can only significantly influence the decision-making process, the equity method is applied. A third possibility is Duke may have lost the power to exercise even significant influence. The fair value method then is appropriate.

Duke Corporation owns a 70 percent equity interest in Salem Company, a subsidiary corporation. During the current year, a portion of this stock is sold to an outside party. Before recording this transaction, Duke adjusts the book value of its investment account. What is the purpose of this adjustment?

When a company sells a portion of an investment, it must remove the carrying value of that portion from its investment account. The carrying value is based upon application of the equity method. Thus, if either the initial value method or the partial equity method has been used, Duke must first restate the account to the equity method before recording the sales transaction. The same method is applied to the operations of the current period occurring prior to the time of sale.

Mittelstaedt Inc., buys 60 percent of the outstanding stock of Sherry, Inc. Sherry owns a piece of land that cost $212,000 but had a fair value of $549,000 at the acquisition date. What value should be attributed to this land in a consolidated balance sheet at the date of takeover? a. $549,000 . b. $337,000 . c. $127,200 . d. $421,800 .

a

Duke Corporation owns a 70 percent equity interest in Salem Company, a subsidiary corporation. During the current year, a portion of this stock is sold to an outside party. Before recording this transaction, Duke adjusts the book value of its investment account. How would the parent record the sales transaction?

Unless control is surrendered, the acquisition method views the sale of subsidiary's stock as a transaction with its owners. Thus, no gain or loss is recognized. The difference between the sale proceeds and the carrying value of the shares sold (equity method) is accounted for as an adjustment to the parent's additional paid in capital.

On January 1, 2014, Chamberlain Corporation pays $388,000 for a 60 percent ownership in Neville. Annual excess fair-value amortization of $15,000 results from the acquisition. On December 31, 2015, Neville reports revenues of $400,000 and expenses of $300,000 and Chamberlain reports revenues of $700,000 and expenses of $400,000. The parent figures contain no income from the subsidiary. What is consolidated net income attributable to Chamberlain Corporation? a. $385,000 . b. $351,000 . c. $366,000 . d. $400,000 .

b

The noncontrolling interest represents an outside ownership in a subsidiary that is not attributable to the parent company. Where in the consolidated balance sheet is this outside ownership interest recognized? a. In the liability section. b. In a mezzanine section between liabilities and owners' equity. c. In the owners' equity section. d. The non-controlling interest is not recognized in the consolidated balance sheet.

c

What is a basic premise of the acquisition method regarding accounting for a non-controlling interest? a. Consolidated financial statements should be primarily for the benefit of the parent company's stockholders. b. Consolidated financial statements should be produced only if both the parent and the subsidiary are in the same basic industry. c. A subsidiary is an indivisible part of a business combination and should be included in its entirety regardless of the degree of ownership. d. Consolidated financial statements should not report a non-controlling interest balance because these outside owners do not hold stock in the parent company.

c

On January 1, 2014, Brendan, Inc., reports net assets of $760,000 although equipment (with a 4-year remaining life) having a book value of $440,000 is worth $500,000 and an unrecorded patent is valued at $45,000. Hope Corporation pays $692,000 on that date for an 80 percent ownership in Brendan. If the patent is to be written off over a 10-year period, at what amount should it be reported on consolidated statements at December 31, 2015? a. $28,800 . b. $32,400 . c. $36,000 . d. $40,500

c.36,000

How do you calculate the Non-controlling interest in a subsidiary

fair value of subsidiary * .20 + net income attributale non controlling interest - dividands payable from subsidiary * .20

December 31 consolidated financial statements are being prepared for Allsports Company and its new subsidiary acquired on July 1 of the current year. Should Allsports adjust its consolidated balances for the preacquisition subsidiary revenues and expenses?

Allsports should remove the pre-acquisition revenues and expenses from the consolidated totals. These amounts are attributable to prior ownership and therefore should are not earnings for the current parent company owners.

How to you calculate net income attributed to Non-controlling interest in subsidiary

Net income from subsidiary - total amortization * 20 percent

What is a control premium and how does it affect consolidated financial statements?

A control premium is the portion of an acquisition price (above currently traded market values) paid by a parent company to induce shareholders to sell a sufficient number of shares to obtain control. The extra payment typically becomes part of the goodwill acquired in the acquisition attributable to the parent company.

Where should the non-controlling interest's claims be reported in a set of consolidated financial statements?

Current accounting standards require the noncontrolling interest to appear in the stockholders' equity section. The noncontrolling interest's share of the subsidiary's net income is shown as an allocated component of consolidated net income.

How do you calculate retained earnings 1/31/20xx

retained earnings 1/1 + consolidated Net income - non controlling interest in subsidiary - dividends payable