Exercise 4 [PDF]

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EXERCISE 4-1 Percy Company purchased 80% of the outstanding voting shares of Song Company at the beginning of 2019 for $387,000. At the time of purchase, Song Company's total stockholders' equity amounted to $475,000. Income and dividend distributions for Song Company from 2019 through 2021 are as follows:



Net income (loss) Dividen distribution



2019 $63.500 25.000



20220 $52.500 50.000



2021 ($55.000) 35.000



Required: Prepare journal entries on the books of Percy Company front the date of purchase through 2021 to account for its investment in Song Company under each of the following assumptions: A. Percy Company uses the cost method to record its investment. B. Percy Company uses the partial equity method to record its investment. C. Percy Company uses the complete equity method to record its investment. The difference between book value of equity acquired and the value implied by the purchase price was attributed solely to an excess of market over hook values of depreciable assets, with a remaining life of 10 years. Answer : Date A. Cost Method



Accounts Title



2019 Investment in Song Cash



Dr



387000 387000



Cash Dividend Income ($25000*80%)



20000



2020 Cash Dividend Income ($50000*80%)



40000



2021 Cash Investment in Song (35000*80%) (Recording of liqidating dividend)



28000



B. Partial Equity Method 2019 Investment in Song Cash Investment in Song Equity Income (63500*80%)



Cr



20000



40000



28000



387000 387000 50800 50800



(Recoded income of subsidary) Cash Investment in Song (25000*80%) (Recorded dividend as decrease in investment) 2020 Investment in Song Equity Income (52500*80%) (Recoded income of subsidary) Cash Investment in Song (50000*80%) (Recorded dividend as decrease in investment) 2021 Equity Loss (55000*80%) Investment in Song Cash Investment in Song (35000*80%) (Recorded dividend as decrease in investment) C. Complete Equity Method 2019 Investment in Song Cash



20000 20000



42000 42000



40000 40000



44000 44000 28000 28000



387000 387000



Investment in Song Equity Income (63500*80%) (Recoded income of subsidary)



50800 50800



Cash Investment in Song (25000*80%) (Recorded dividend as decrease in investment)



20000 20000



Equity Income (7000/10) Investment in Song



700 700



(Adjsutment of depreciation due to excess value of the asset Investment cost=387000 less Acquired book value 475000*80%=$380000 so difference is $7000 so $700 for each of 10 years



2020 Investment in Song Equity Income (52500*80%) (Recoded income of subsidary)



42000 42000



Cash Investment in Song (50000*80%) (Recorded dividend as decrease in investment) Equity Income (7000/10) Investment in Song



40000 40000



700 700



2021 Equity Loss (55000*80%) Investment in Song



44000 44000



Cash Investment in Song (35000*80%) (Recorded dividend as decrease in investment) Equity Income (7000/10) Investment in Song



28000 28000



700 700



Exercise 4-2 Park Company purchased 90% of the stock of Salt Company on January 1, 2019, for $465,000, an amount equal to $15,000 in excess of the book value of equity acquired. This excess payment relates to an undervaluation of Salt Company's land. On the date of purchase, Salt Company's retained earnings balance was $50,000. The remainder of the stockholders' equity consists of no-par common stock. During 2023, Salt Company declared dividends in the amount of $10,000, and reported net income of $40,000. The retained earnings balance of Salt Company on December 31, 2022, was $160,000. Park Company uses the cost method to record its investment. Required: Prepare in general journal form the workpaper entries that would be made in the preparation of a consolidated statements workpaper on December 31, 2023. Answer: Computation and Allocation of difference between implied and book value Acquired Particulars Parent Share NCI Share Entire Value Purchase price and implied value 465000 51667 516667 Less: book value of equity acquired: 450000 50000 500000 Difference (implied and book value) 15000 1667 16667 Allocated to undervalued land -15000 -1667 -16667 Balance 0 0 0 Equity acquired for the parent company Equity acquired for the whole company



450000 500000



Common stock Retained Earnings (Given)



-450000 50000



Jurnal :



 



Account Titles Investment in Salt company Retained Earnings   Dividend Income Dividends Declared   Common Stock Retained Earnings Land Investment Non-controlling Interest



       



   



  Debit Credit 99000   99000   9000   9000   450000   160000   16667   564000 62667



Exercise 4-3 At the beginning of 2014, Presidio Company purchased 95% of the common stock of Succo Company for $494,000. On that date, Succo Company’s stockholders’ equity consisted of the following: Common stock



$300,000



Other contributed capital



100,000



Retained earnings



120,000



Total



$520,000



During 2022, Succo Company reported net income of $40,000 and distributed dividends in the amount of $19,000. Succo Company’s retained earnings balance at the end of 2021 amounted to $160,000. Presidio Company uses the equity method. Required: Prepare in general journal form the workpaper entries necessary in the compilation of consolidated financial statements on December 31, 2022. Explain why the partial and complete equity methods would result in the same entries in this instance. Answer: Journal Entry Date Dec 31, 2022



Account titles and explanation Equity Income (40,000*95%)



Debit $     38,000



Credit



Investment in Succo Company (To record net income) Dec 31, 2022



Dec 31, 2022



WN 1.



Investment in Succo Company Dividends Declared (19000*95%) (To record dividend declared )



$     18,050



Common Stock Other Contributed Capital Retained Earnings, 1/1/2017 Investment (WN 1) Noncontrolling Interest (WN 2)



$ 3,00,000 $ 1,00,000 $ 1,60,000



$     18,050



$ 5,32,000 $     28,000



Net Investment Particulars



WN 2.



$     38,000



Investment Retained earning Retained earning end of the year Net Diff. Share of company Total Investment (494,000+38,000)



Amount $ 4,94,000 $ -1,20,000 $ 1,60,000 $     40,000 $     38,000 $ 5,32,000



Stock holder equity Retained earning Add retained earnings Total Stock holderby others (100%-95%) Non controlling Interest



$ 5,20,000 $ -1,20,000 $ 1,60,000 $ 5,60,000 5% $     28,000



Exercise 4-4 Poco Company purchased 85% of the outstanding common stock of Serena Company on December 31, 2019, for $310,000 cash. On that date, Serena Company’s stockholders’ equity consisted of the following: Common stock $240,000 Other contributed capital



55,000



Retained earnings



50,000



Total



$345,000



During 2022, Serena Company distributed a dividend in the amount of $12,000 and atyear end reported a net loss of $10,000. During the time that Poco Company has held its investmentin Serena Company, Serena Company’s retained earnings balance has decreased



$29,500 to a nebalance of $20,500 after closing on December 31, 2022. Serena Company did not declare or distribute any dividends in 2020 or 2021. The difference between book value and the value implied bthe purchase price relates to goodwill. Required: A. Assume that Poco Company uses the equity method. Prepare in general journal form the entries needed in the preparation of a consolidated statements workpaper on December 31, 2022. Explain why the partial and complete equity methods would result in the same entries in this instance. B. Assume that Poco Company uses the cost method. Prepare in general journal form the entries needed in the preparation of a consolidated statements workpaper on December 31, 2022. Answer: A. Workpaper entries 31/12/22 - Equity Method Investment in Serena Company (0.85)×($12,000) Dividends declared



10200 10200



Investment in Serena Company (0.85)*($10,000 loss) 8500 Equity loss 8500 



The partial equity and the complete equity methods result in the same entries because the excess of the cost over fair value of net assets is allocated to goodwill, a nonamortizable asset. If any of this excess is allocated to depreciable assets or intangible assets with limited lives (subject to amortization), additional expenses will be recorded under the complete equity method.



B. Cost method Parent Share



NCI Share



Entire



Purchase price and implied value Less: Book value of equity acquired:



310,000 293,250



54,706 51,750



364,706 345,000



Difference IV & BV Goodwill Balance



16,750 (16,750) 0



2,956 (2,956) 0



19,706 (19,706) 0



Common Stock Other Contributed Capital Retained Earnings 1/1/22 Difference (IV&BV) Investment in S ($310,000 – $6,375*) NCI (54706-1125 )



240,000 55,000 42,500 19,706 303 ,625 53,581



$42,500 = $20,500 at year-end plus 2022 loss of $10,000 plus 2022 dividends of $12,000  [($50,000 - $42,500) x .85] = 6,375  [($50,000 - $42,500) x .15] = 1125 Goodwill Difference (IV&BV)



19,706 19,706



Workpaper entries 31/12/19 - Cost Method Under Cost method, before elimination of the investment account, a workpaper entry is made to the investment account and P Company’s beginning retained earnings to recognize P’s share of the cumulative undistributed income or loss of S Company from the date of acquisition to the beginning of the current year as follows: Retained Earnings 1/1 - Poco Company



6,375



Investment in Serena Company



6,375



To establish reciprocity (0.85 (($50,000 – $42,500))



Investment in Serena Company (0.85)*($12,000) Dividends Declared - Serena Company



Common Stock



240,000



Other Contributed Capital



55,000



Retained Earnings 1/1/22



42,500



Difference (IV&BV)



19,706



Investment ($310,000 – $6,375) NCI (54706-1125 )



303,625



Goodwill Difference (IV&BV)



53,581 19,706 19,706



10,200 10,200