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08 Fischer10e SM Ch08 Final
08 Fischer10e SM Ch08 Final
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CHAPTER 8
1. The stock dividend will result in the follow- (a) If the parent buys less than its current
ing entry being made by the subsidiary: ownership percentage of shares, it will
increase its equity to the extent others
Retained Earnings
pay more than book value. The in-
(10,000 shares
crease will normally go to paid-in capi-
$60 per share) ............ 600,000
tal in excess of par.
Common Stock
($1 par, 10,000 (b) If the parent maintains its percentage,
shares $1)................ 10,000 there is no impact other than an in-
Paid-In Capital in crease in the investment account equal
Excess of Par to the price paid. The parent will supply
($600,000, $10 par) ..... 590,000 90% of the funds and will own 90% of
the equity provided by the new funds.
The parent need make no adjustment to its
investment account since there has been (c) If the parent buys more than 90% of
no change in the total subsidiary equity. the shares issued, it will adjust its in-
vestment based on the impact of the
When eliminating the investment in subsid-
sale. A sale at more than book value
iary account, the parent will now simply
will cause a reduction in the invest-
eliminate its share of the revised (but equal
ment; a sale at less than book value
in total) subsidiary equity accounts.
will cause an increase in the invest-
2. The parents share in any equity increases ment.
from the excess of the current book value
4. Control, in this example, is a chain link
of $40 per share ($4,000,000/100,000
process. If A controls B and B, in turn,
shares) that the subsidiary receives. The
controls C, then all three are under com-
parent does not record as income the in-
mon ownership, and B and C are controlled
crease in equity that results. Rather, it is an
by A.
increase in the parents paid-in capital in
excess of par. The calculation in this case In the distribution of Company Cs $10,000
would be as follows: income, 40% (or $4,000) will flow to the
NCI of Company C, and 60% (or $6,000)
Equity after sale
will flow to Company B, the controlling in-
{(90,000 shares/120,000
terest. That $6,000 will flow as follows: 40%
shares = 75%)
(or $2,400) will flow to the NCI of Company
[$4,000,000 + ($50
B, and 60% (or $3,600) will flow to Compa-
20,000 shares)]} .............. $3,750,000
ny A, the controlling interest.
Equity prior to sale
(90% $4,000,000) ........... 3,600,000 5. The 2% holding in Company P shares,
Increase in equity interest ..... $ 150,000 owned by Company S, is best treated as
treasury stock. This approach views the
3. The subsidiary is selling the additional
subsidiary as the parents agent in purchas-
shares at $50 each, which is in excess of
ing parent company shares. As treasury
the current book value of $40 per share
stock, the 2,000 shares will not share in the
($4,000,000/100,000 shares).
distribution of income and will not create a
separate excess of cost or book value.
417
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Ch. 8Exercises
EXERCISES
EXERCISE 8-1
Lamp Company
Stockholders Equity
December 31, 20X1
Common stock ($10 par)........................................................................ $330,000
Paid-in capital in excess of par .............................................................. 225,000
Retained earnings [$200,000 original balance +
$120,000 income $105,000 stock dividend
(33,000 share $0.50 = $16,500 cash dividend)] ............................. 198,500
Total stockholders equity....................................................................... $753,500
(2) Memo: Investment in Lamp Company now includes 2,700 (30,000 90% 10%) additional
shares for a total of 29,700 shares.
418
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Ch. 8Exercises
EXERCISE 8-2
Calculation:
90% first 6 months income of $35,000 ......................................... $31,500
75%* second 6 months income of $35,000 .................................. 26,250
Total ....................................................................................................... $57,750
419
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Ch. 8Exercises
EXERCISE 8-3
420
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Ch. 8Exercises
EXERCISE 8-4
Elimination:
Common StockNolan (72% $300,000 .......................................... 216,000
Paid-In Capital in Excess of ParNolan (72% $60,000) ................. 43,200
Retained EarningsNolan (72% $120,000) .................................... 86,400
Investment in Nolan ($216,000* + $81,360 $5,760) .................. 291,600
Treasury Stock (at cost, 72% $75,000) ...................................... 54,000
To eliminate the investments against the subsidiarys equity.
421
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Ch. 8Exercises
EXERCISE 8-5
(1)
Company As Books Company Bs Books
December 31, 20X1 Cash ........................................ 4,000
Investment in B ........................ 12,000
Subsidiary IncomeB .......... 16,000
December 31, 20X2 Cash ........................................ 4,000 Cash ........................................... 3,000
Investment in B ........................ 32,000 Investment in C........................... 12,000
Subsidiary IncomeB .......... 36,000 Subsidiary IncomeC .......... 15,000
Income:
80% ($30,000 +
$15,000 from C).
December 31, 20X3 Cash ........................................ 4,000 Cash ........................................... 3,000
Investment in B ........................ 42,400 Investment in C........................... 15,000
Subsidiary IncomeB .......... 46,400 Subsidiary IncomeC .......... 18,000
Income:
80% ($40,000 +
$18,000 from C).
(2)
Company As Books Company Bs Books
December 31, 20X1 Investment in C........................... 7,000
Subsidiary IncomeC .......... 7,000
December 31, 20X2 Cash ........................................... 3,500
Investment in C........................... 14,000
Subsidiary IncomeC .......... 17,500
December 31, 20X3 Cash ........................................ 4,500 Cash ........................................... 3,500
Investment in B ........................ 50,400 Investment in C........................... 17,500
Subsidiary IncomeB .......... 54,900 Subsidiary IncomeC .......... 21,000
Income:
90% ($40,000 +
$21,000 from C).
422
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Ch. 8Exercises
EXERCISE 8-6
(1)
423
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Ch. 8Exercises
EXERCISE 8-7
Companies A, B, and C
Consolidated Income Statement
For Year Ended December 31, 20X5
Sales [($300,000 + $400,000 + $100,000)
intercompany sales of $75,000] .............................................. $725,000
Cost of goods sold [$200,000 + $300,000 + $60,000
intercompany sales of $75,000 realized profit
in beginning inventory of $1,800 + unrealized profit
in ending inventory of ($6,000 + $720)] .................................. 489,920
Gross profit ................................................................................... $235,080
Expenses ($60,000 + $30,000 + $10,000 $4,000
depreciation adjustment for deferred gain on equipment)....... 96,000
Consolidated net income .............................................................. $139,080
To NCICompany C .............................................................. $ 9,600
To NCICompany B .............................................................. 17,680 27,280
To controlling interest.................................................................... $111,800
424
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Ch. 8Exercises
EXERCISE 8-8
EXERCISE 8-9
425
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Ch. 8Exercises
426
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Ch. 8Exercises
EXERCISE 8-10
(1)
427
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Ch. 8Exercises
EXERCISE 8-11
(1)
428
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Ch. 8Problems
PROBLEMS
PROBLEM 8-1
429
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Ch. 8Problems
20X1
(7)*December 31 Investment in Sandel .......................................... 9,300
Subsidiary Income ........................................ 9,300
To record 62% parent share of subsidiary
income for one-half year.
20X2
430
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Ch. 8Problems
*$373,000 64% = $238,720; balance after $238,720 balance before $228,000 = $10,720 increase.
**$515,000 62% = $319,300; balance after $319,300 balance before $249,000 = $70,300 increase.
$70,300 increase in investment $74,000 paid for new shares = $3,700 decrease in Zees equity.
***$440,000 72.333% = $318,265; balance after $318,265 balance before $328,600 = $10,335 decrease.
431
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Ch. 8Problems
432
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Ch. 8Problems
PROBLEM 8-2
433
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Ch. 8Problems
*Entry to convert investment in Kelly Company to simple equity method as of December 31,
20X3:
*Entry to convert investment in Samco Company to simple equity method as of December 31,
20X3:
434
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Ch. 8Problems
*From D&D
**Required debit to investment account and credit to Cash for $60,000 to record additional purchase.
***After (75% $455,000 = $341,250) before $354,000 = $12,750 decrease in equity.
435
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Ch. 8Problems
*From D&D
**The investment has been increased by $6,000 (cost of the stock purchased by the parent), while the controlling share of equity has decreased by
$3,000. The total decrease of $9,000 is deducted from additional paid-in capital in excess of par. The adjustment shown reduces the investment ac-
count (and additional paid-in capital in excess of par) to reconcile it with the parents share of the subsidiary equity.
436
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Ch. 8Problems
PROBLEM 8-3
437
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Ch. 8Problems
438
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Ch. 8Problems
Cost of Goods Sold ........................................ 1,120,000 450,000 (EI) 10,000 (IS) 200,000 ............... 1,380,000 . .................
.......................................................................
Other Expenses ............................................. 405,000 220,000 (A) 3,000 ........ ........... 628,000 ................ .................
.......................................................................
Dividends Declared ........................................ 45,000 36,000 ............... (CY) ............. 23,040 12,960 ......
............................................................45,000
0 0 1,149,360 1,149,360 . ................. ................. .................
Consolidated Net Income ........................................................................................................................................ (142,000) .............. ................. .................
To NCI (see distribution schedule) .......................................................................................................................... 24,120 (24,120) .... .................
To Controlling Interest (see distribution schedule) .................................................................................................. 117,880 ............... (117,880) ..
Total NCI ........................................................................................................................................................................................ (442,800) ...............
(442,800)
Retained EarningsControlling Interest, December 31, 20X4 ............................................................................................................................. (507,080)
(507,080)
Totals ..................................................................................................................................................................................................................................... 0
439
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Ch. 8Problems
440
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Ch. 8Problems
PROBLEM 8-4
441
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Ch. 8Problems
442
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Ch. 8Problems
Subsidiary Income.......................................... (32,000) ............ (CY1) 32,000 ................. ................. ................. ................. .................
Cost of Goods Sold ........................................ 1,170,000 420,000 (EIa) 2,000 (BIa) ............... 1,500 ............... ................. .................
.......................................................................
................. ................. (EIb) 600 (ISa) 30,000 ............... ................. ................. .................
................. ................. ................. (BIb) 1,800 ............... ................. ................. .................
................. ................. ................. (ISb) 20,000 1,539,300 . ................. .................
443
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Ch. 8Problems
444
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Ch. 8Problems
445
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Ch. 8Problems
446
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Ch. 8Problems
PROBLEM 8-5
447
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Ch. 8Problems
Problem 8-5, Continued
448
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Ch. 8Problems
Retained EarningsElcam ............. ................. ................. (125,000) (ELE) 100,000 ............... ................. (25,000) ...............
Dividends DeclaredBarns ............ 24,000 ............. ................. ............... ............... ................. ............. 24,000 ....
Dividends DeclaredWebo ............ ................. 22,500 .............. ............... (CY2) 20,000 ...... 2,500 .... ...............
Dividends DeclaredElcam ........... ................. ................. 10,000 ............... (CY2) 8,000 ........ 2,000 .... ...............
Treasury Stock (at cost) .................. ................. 48,000 .............. ............... (ELW) 42,667 ...... 5,333 .... ...............
Gain on Sale of Equipment ............. (2,000) ............ ................. (F1) 2,000 ............... ................. ............. ............. ...............
Sales ............................................... (2,950,000) (1,550,000) (1,750,000) (IS) ......... 385,000 ............. .......... (5,865,000) ....
...................................................
Interest Income on Bonds ............... ................. (13,000) ............. (B) 13,000 ............... ................. ............. ............. ...............
Dividend Income ............................. (28,000) ............ ................. (CY2) 28,000 ............... ................. ............. ............. ...............
Cost of Goods Sold ......................... 2,500,000 1,200,000 1,400,000 (EI) 15,000(IS) 385,000 ........... 4,730,000 ...............
...................................................
449
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Ch. 8Problems
Problem 8-5, Continued
450
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Ch. 8Problems
(CY2) Eliminate intercompany dividends (4,000/4,500 $22,500 = $20,000 for Webo divi-
dends and 80% $10,000 = $8,000 for Elcam dividends).
(ELW) Eliminate 4,000/4,500 interest in Webo equity accounts, including treasury stock
against the investment account.
(ELE) Eliminate 80% of Elcam equity accounts against investment in Elcam account.
(B) Eliminate intercompany interest income and expense. Eliminate balance of investment
in bonds against 75% of the bonds payable. The gain on retirement as of the begin-
ning of the year is calculated as follows:
Gain remaining at year-end:
Carrying value of bonds at December 31, 20X2
[($200,000 $800) 75%] ................................ $149,400
Investment in bonds at December 31, 20X2 ........... 148,000 $ 1,400
Gain amortized during the year:
Interest revenue eliminated ...................................... $ 13,000
Interest expense eliminated {[($200,000
8%) + ($1,200/3)] 75%} ...................................... 12,300 700
Gain at January 1, 20X2................................................... $ 2,100
451
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Ch. 8Problems
452
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Ch. 8Problems
PROBLEM 8-6
453
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Ch. 8Problems
Marys investment in Joan on January 1, 20X4 (4,000 shares plus effective control of 5,000
shares):
454
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Ch. 8Problems
455
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Ch. 8Problems
Retained EarningsJohn ............... ................. (130,000) ............. (EL1) 78,000 (NCI) 16,000 ...... (68,000) ...............
Common Stock ($10 par)Joan ..... ................. ................. (100,000) (EL2) 40,000 ................ ................. ............. ............. ...............
................. ................. ................. (EL3) 50,000 ................ ................. (10,000) ...............
Retained EarningsJoan ............... ................. ................. (80,000) (EL2) 32,000 ................ ................. ............. ............. ...............
................. ................. ................. (EL3) 40,000 ................ ................. (8,000) .. ...............
Sales ............................................... (1,800,000) (500,000) (300,000) (IS) 20,000 ..... .......... (2,580,000).... ...............
...................................................
Gain on Sale of Equipment ............. ................. ................. (10,000) (F1) 10,000 ................ ................. ............. ............. ...............
Subsidiary IncomeMary ............... (58,000) ............ ................. (CY1) 42,000 ................ ................. ............. ............. ...............
................. ................. ................. (CY2) 16,000 ................ ................. ............. ............. ...............
Subsidiary IncomeJohn ............... ................. (20,000) ............. (CY3) 20,000 ................ ................. ............. ............. ...............
456
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Ch. 8Problems
Consoli-
Eliminations Consolidated Controlling dated
Trial Balance and Adjustments Income Retained Balance
Mary John Joan Dr. Cr. Statement NCI Earnings Sheet
Cost of Goods Sold ......................... 1,170,000 350,000 180,000 (EI) 1,500 (IS) 20,000 1,681,500 ............. ...............
Other Expenses .............................. 525,000 100,000 90,000 ................ (F2) 2,000 713,000 ............. ...............
Dividends Declared ......................... 75,000 ............. ................. ................ ............... ................. ............. 75,000 ....
................. 15,000 .............. ................ (CY1) 9,000 ........ ............. ............. ...............
................. ................. 5,000 ................ (CY2) 2,000 ........ ............. ............. ...............
................. ................. ................. ............... (CY3) 2,500 .............. 6,500 .... ...............
0 0 0 529,500 529,500 .... ............. ............. ...............
Consolidated Net Income .................................................................................................................................................... (185,500) .......... ............. ...............
To NCI (John and Joan) (see distribution schedule) ........................................................................................................... 29,000 (29,000) ...............
To Controlling Interest (see distribution schedule) .............................................................................................................. 156,500 ........... (156,500) ...........
Total NCI ................................................................................................................................................................................................... (198,500) ..........
(198,500)
Retained EarningsControlling Interest, December 31, 20X4 .................................................................................................................................... (371,500) (371,500)
Totals .......................................................................................................................................................................................................................................... 0
457
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Ch. 8Problems
458
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Ch. 8Problems
PROBLEM 8-7
459
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Ch. 8Problems
................. ................. ................. (EL1) 366,600 ................ ................. ............. ............. ...............
460
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Ch. 8Problems
................. ................. ................. (A3) 4,500 ................ ................. ............. ............. ...............
................. ................. ................. (A1) 2,000 ................ ................. ............. ............. ...............
................. ................. ................. (BI) 2,160 ................ ................. ............. ............. ...............
................. ................. ................. (F1) 4,800 ................ ................. ............. ............. ...............
Common StockBorner ................. ................. ................. (200,000) (EL2) 180,000 ................ ................. (20,000) ...............
Paid-In Capital in Excess of
ParBorner ............................... ................. ................. (80,000) (EL2) 72,000 ................ ................. (8,000) .. ...............
461
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Ch. 8Problems
................. ................. ................. (A3) 1,500 ................ ................. ............. ............. ...............
................. ................. ................. (BI) 600 ................ ................. ............. ............. ...............
Sales ............................................... (900,000) (700,000) (600,000) (IS) 125,000 ... .......... (2,075,000).... ...............
...................................................
Cost of Goods Sold ......................... 570,000 425,000 400,000 (EI) 8,000 (IS) 125,000 1,272,000 ............. ...............
................. ................. ................. ............... (BI) 6,000 .............. ............. ............. ...............
Expenses ........................................ 205,000 200,000 150,000 (A1) 5,000 (F2) 3,000 562,000 ............. ...............
................. ................. ................. (A3) 5,000 ................ ................. ............. ............. ...............
Subsidiary Income........................... (72,000) ............ ................. (CY1) 72,000 ................ ................. ............. ............. ...............
................. (45,000) ............. (CY2) 45,000 ............... ................. ............. ............. ...............
0 0 0 1,961,600 1,961,600 . ............. ............. ...............
Consolidated Net Income .................................................................................................................................................... (241,000) .......... ............. ...............
To NCIBorner (see distribution schedule) ........................................................................................................................ 4,300 (4,300) .. ...............
To NCIShelby (see distribution schedule) ....................................................................................................................... 44,680 (44,680) ...............
Consolidated Net Income .................................................................................................................................................... 192,020 ........... (192,020) ...........
Total NCI ................................................................................................................................................................................................... (668,420) ..........
(668,420)
Retained EarningsControlling Interest, December 31, 20X4 .................................................................................................................................... (1,100,580)
(1,100,580)
Totals .......................................................................................................................................................................................................................................... 0
462
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Ch. 8Problems
463
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Ch. 8Problems
464
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Ch. 8Problems
PROBLEM 8-8
465
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Ch. 8Problems
466
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Ch. 8Problems
Operating Expenses ....................................... 160,000 90,000 ............... ................. ........... 250,000 ................ .................
.......................................................................
Dividend Income ............................................ (8,000) (2,000) (CY1) 8,000 ................. ................. ................. ................. .................
................. ................. (CY2) 2,000 ................. ................. ................. ................. .................
Dividends DeclaredPepe ............................ 40,000 ............. ................. (CY2) 2,000 ........ ................. 38,000 ......
Dividends DeclaredSalida .......................... ................. 10,000 ................. (CY1) 8,000 ........ 2,000 ........ .................
Treasury Stock ............................................... ................. ................. (TS) 40,000 ................. ................. ................. .................
............................................................40,000
Total ............................................................... 0 0 576,000 576,000 .... ................. ................. .................
Consolidated Net Income ........................................................................................................................................ (176,000) .............. ................. .................
To NCI (see distribution schedule) ...................................................................................................................... 12,000 (12,000) .... .................
To Controlling Interest (see distribution schedule)............................................................................................... 164,000 ............... (164,000) ..
Total NCI ........................................................................................................................................................................................ (118,000) ...............
(118,000)
Retained EarningsControlling Interest, December 31, 20X2 ............................................................................................................................. (508,000)
(508,000)
Totals ......................................................................................................................................................................................................................................... 0
467
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Ch. 8Problems
468
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Ch. 8Problems
PROBLEM 8-9
469
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Ch. 8Problems
470
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Ch. 8Problems
Cost of Goods Sold ........................................ 360,000 200,000 (EI) 4,000 (IS) 40,000 ............... 524,000 .... .................
.......................................................................
Operating Expenses ....................................... 160,000 90,000 ............... ................. ........... 250,000 ................ .................
.......................................................................
Dividend Income ............................................ (8,000) (2,000) (CY2) 8,000 ................. ................. ................. ................. .................
................. ................. (CY2) 2,000 ................. ................. ................. ................. .................
Dividends DeclaredPepe ............................ 40,000 ............. ................. (CY2) 2,000 ........ ................. 38,000 ......
Dividends DeclaredSalida .......................... ................. 10,000 ................. (CY2) 8,000 ........ 2,000 ........ .................
Total ............................................................... 0 0 736,000 736,000 .... ................. ................. .................
Consolidated Net Income ........................................................................................................................................ (176,000) .............. ................. .................
To NCI ................................................................................................................................................................. 10,000 (10,000) .... .................
To Controlling Interest ......................................................................................................................................... 166,000 ............... (166,000) ..
Total NCI ........................................................................................................................................................................................ (117,667) ...............
(117,667)
Total Controlling Retained Earnings...................................................................................................................................................................... (510,000)
(510,000)
Totals ......................................................................................................................................................................................................................................... 0
471
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Ch. 8Problems
(CV) Convert 80% interest to equity method, 80% $40,000 increase in retained
earnings.
(TR) Transfer investment in parent to investment in subsidiary.
(CY2) Eliminate intercompany dividends paid by parent and subsidiary.
(EL) Eliminate combined 5/6 ownership in subsidiary.
(D)/(NCI) Distribute excess to goodwill: (D1) is original goodwill; (D2) is reduction in Pepe
paid-in capital in excess of par*.
(IS) Eliminate intercompany merchandise sales.
(EI) Eliminate intercompany profit in ending inventory.
472
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Ch. 8Problems
PROBLEM 8-10
*Last purchase at $51,800/1,400 shares = $37 per share. Fair value = 3,000 shares $37 =
$111,000
473
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Ch. 8Problems
474
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Ch. 8Problems
475
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Ch. 8Problems
476
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Ch. 8Problems
477
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