ACCT 1B Lecture Notes - Lecture 29: Retained Earnings, Control Premium

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rosebuffalo981

31 Aug 2020

School

Irvine Valley College

Department

Accounting

Course

ACCT 1B

Professor

seilo

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Document Summary

An important basic elimination entry in preparation of consolidated f/s is the elimination of the. The investment account is reciprocal to subsidiary stockholder equity. Since subs a+l are joined with parents it is necessary to eliminate the investment account of parent against subsidiary equity to avoid double counting. If the acquisition is for less than 100%, the fv of the controlling interest is generally assumed to equal the amount paid by the acquisition. Determining fv of non-controlling is less straight forward. If not other valuation techniques must be applied. Example: co p acquires 80% of co s for per share. This implies control premium of per share, and it would be appropriate to value nci at. In this textbook, the assumption is that the value of controlling and non-controlling shares is equal unless explicitly stated otherwise. Therefore, the fv of nci can be inferred from the value implied by the acquisition price.

Related Questions

Chapman Company obtains 100 percent of Abernethy Companyâs stock on January 1, 2014. As of that date, Abernethy has the following trial balance:

	Debit		Credit
Accounts payable			$	57,300
Accounts receivable	$	42,200
Additional paid-in capital				50,000
Buildings (net) (4-year life)		214,000
Cash and short-term investments		82,250
Common stock				250,000
Equipment (net) (5-year life)		375,000
Inventory		90,500
Land		117,000
Long-term liabilities (mature 12/31/17)				170,000
Retained earnings, 1/1/14				409,650
Supplies		16,000

Totals	$	936,950	$	936,950

During 2014, Abernethy reported net income of $117,500 while declaring and paying dividends of $15,000. During 2015, Abernethy reported net income of $171,250 while declaring and paying dividends of $55,000.

Assume that Chapman Company acquired Abernethyâs common stock for $860,500 in cash. As of January 1, 2014, Abernethyâs land had a fair value of $132,000, its buildings were valued at $287,600, and its equipment was appraised at $352,500. Chapman uses the equity method for this investment.

Prepare consolidation worksheet entries for December 31, 2014, and December 31, 2015. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

There should be ten entries and I solved the first few:

Step 1.
Common Stock	250,000.00
Additional Paid in capital	50,000.00
Retained earnings account	409,650.00
Stockholders Equity	709,650.00
Purchase Consideration	860,500.00
Less: Fvof net assets	(709,650.00)
Excess of purchase consideration over FV	150,850.00
Overvalued Land ( 132000-90500)	(15,000.00)
Undervalued Equipment (352500-375000)	22,500.00
Overvalued Buildings (287600-214000)	(73,600.00)
Remaining Attributed to goodwill	84,750.00
Overvalued Land ( 132000-90500)	(15,000.00)
Undervalued Equipment (352500-375000)	22,500.00
Overvalued Buildings (287600-214000)	(73,600.00)
Total Amount attributed to assets	18,650.00
Total excess of purchase considerations over Fari value	150,850.00
Less:Attributed to assets	(18,650.00)
Attributed to goodwill	169,500.00
Step 2.
Overvlaued Land:	-
Undervalued Equipment (22,500 useful life of 5 years)	(4,500.00)
Overvalued Building (73600 uselful life 4 years)	18,400.00
Total Annual excess amortization	13,900.00
Step 3.
Entry S For elininating thetotal of stockholders account of subsidiary company:
Common Stock (abernathy)	250,000.00
Additional Paid in capital	50,000.00
Retained earnings account (1/1/14)	409,650.00
Investment in A. Co.		709,650.00
Step 4
The entry A will be passed to attribute the allocation of fair value to specific accounts at acquisition date.
Land	15,000.00
Building	73,600.00
Goodwill	84,750.00
Equipment		22,500.00
Investment in A. Co.	84,750.00	150,850.00
	173,350.00	173,350.00
Step 5.
The entry I is passed by deiting equity in earnings of subsidiary company and eliminating the income accrual of $117,500 nd 13900 of amortization amount, and crediting the investment in A company
Equity in earnings of subsidiary	103,600.00
Investment in A. Co.		103,600.00

azurelocust610

On January 1, 2014, McIIroy, Inc., acquired a 60 percent interest in the common stock of Stinson, Inc., for $372,000. Stinson's book value on that date consisted of common stock of $100,000 and retained earnings of $220,000. Also, the acquisition date fair value of the 40 percent noncontrolling interest was $248,000. The subsidiary held patents (with a 10 year remaining life) that were undervalued within the company's accounting records by $70,000, and an unrecorded customer list (15 year remaining life) assessed at a $45,000 fair value. Any remaining excess acquistion date fair value was assigned to goodwill. Since acquistion, McIIroy has applied the equity method to its investment in Stinson account and no goodwill impairment has occurred. At year end, there are no intra-entity payables or receivables. Intra-entity inventory sales between the two companies have been made as follows:

Year Cost to McIIroy Transfer price to Stinson Ending Balance (at transfer price)

2014 $120,000 $150,000 $50,000

2015 $112,000 $160,000 $40,000

The individual financial statements for these two companies as of December 31, 2015 and the year then ended follow:

McIIroy, Inc. Stinson, Inc.

Sales $(700,000) $(335,000)

COGs 460,000 205,000

Operating expenses 188,000 70,000

Equity earnings in Stinson (28000) 0

Net income $(80,000) $(60,000)

Retained earnings 1/1/15 $(695,000) $(280,000)

Net income(above) (80,000) (60,000)

Dividends declared 45,000 15,000

Retained earnings 12-31-15 $(730,000) $(325,000)

Cash & receivables $248,000 $148,000

Inventory 233,000 129,000

Investment in Stinson 411,000 0

Buildings (net) 308,000 202,000

Equipment (net) 220,000 86,000

Patents (net) 0 20,000

Total assets $1,420,000 $585,000

Liabilities $(390,000) $(160,000)

Common Stock (300,000) (100,000)

Retained earnings 12-31-15 (730,000) (325,000)

Total liabilities & equities $(1,420,000) $(585,000)

a. Show how McIIroy determined the $411,000 investment in Stinson account balance. Assume that McIIroy defers 100 percent of downstream intra-entity profits against its share of Stinson's income (amounts to be deducted should be indicated with a minus sign.)

Consideration transferred _______________________________

Increase in Stinson's retained earnings 1/1/14 to 1/1/15______________________________

Excess fair value amortization _________________________________

2014 ending inventory profit deferral_____________________________

McIIroy's equity in earnings of Stinson for 2015_____________________

Stinson 2015 dividends declared to McIIroy________________________

Investment account balance 12/31/15_____________________________

b. Prepare a consolidated worksheet to determine appropriate balances for external financial reporting as of Dec. 31, 2015.

Accounts McIIroy Stinson Debit Credit Non Controlling Interest Consolidation total

Sales $(700,000) $(335,000)

COGs 460,000 205,000

Operating exps 188,000 70,000

Equity in earnings of Stinson (28,000) 0

Seperate co. net income (80,000) (60,000)

Cons. net income

To NCI

To parent

Retained earnings 1/1 $(695,000) $(280,000)

Net income (80,000) (60,000)

Dividends declared 45,000 15,000

Retained earnings 12/31 (730,000) (325,000)

Cash & Rec's $248,000 $148,000

Inventory 233,000 129,000

Investment in Stinson 411,000 0

Bldgs (net) 308,000 202,000

Equip(net) 220,000 86,000

Patents(net) 0 20,000

Customer list

Goodwill

Total Assets $1,420,000 $585,000

Liabilities (390,000) (160,000)

Common Stock 300,000 100,000

NCI 1/1

NCI 12/31

Retained earnings 12/31 (730,000) (325,000)

Total Liabilities & equity $(1,420,000) $(585,000)

mauvelouse384

Can someone please help me with the following questions so I candouble check my work? No explanation needed just the answer isfine.

8. U.S. GAAP and IFRS require firms to account for minority,active investments, generally those where the investor owns between_____ using the equity method. Under the equity method, theinvestor recognizes as revenue (expense) each period its share ofthe net income (loss) of the investee. The investor recognizesdividends received from the investee as a return (reduction) ofinvestment, not as income.

a.	10% and 50%
b.	20% and 50%
c.	30% and 50%
d.	40% and 60%
e.	50% and 60%

25. Purchaser Corporation acquires 30%of the outstanding voting common shares of the Investee Corporationfor $600,000. Purchaser Corporation acquires the investment inInvestee Corporation by buying previously issued shares of InvesteeCorporation from other investors. When Purchaser Corporationacquired 30% of Investee Corporationâs common shares for $600,000,Investee Corporationâs total shareholdersâ equity was $1.5 million.Purchaser Corporationâs cost exceeds the carrying value of the netassets acquired by $150,000 [ $600,000 - (0.30 x$1,500,000)].

Purchaser Corporation attributes the $150,000 excess purchaseprice as follows: $100,000 to remeasure buildings and equipment tofair value and $50,000 to goodwill. Which of the following is/aretrue?

a.	Purchaser Corporation does not reclassify this excess out of itsInvestment in Stock of Investee Corporation account to Buildingsand Equipment and to Goodwill.
b.	Purchaser Corporation must amortize (or depreciate) any amountattributed to assets with limited lives.
c.	Purchaser Corporation must depreciate the $100,000 attributed tobuildings and equipment over their remaining useful lives.
d.	U.S. GAAP and IFRS do not permit the investor to amortize theexcess purchase price attributed to goodwill and other assets withindefinite lives. Instead, the investor must test the investmentaccount annually for possible impairment.
e.	all of the above

32. Pareto Corporation owns 40% ofSpring Corporation. During Year 3, Spring has net income of$60,000. What entry should Pareto record related to its investmentin Spring during Year 3?

a.	Investment in SpringCorp. 24,000 Equity in Earnings ofAffiliate 24,000
b.	DividendReceivable 24,000 DividendIncome 24,000
c.	InvestmentReceivable 24,000 InvestmentIncome 24,000
d.	Investment in SpringCorp. 24,000 InvestmentIncome 24,000
e.	Investment in SpringCorp. 24,000 Cash 24,000

35. Pense Co. purchased 40% of thestock of Stretch Co. in Year 1 for $100,000. Stretch had net incomein Year 1 of $50,000 and net income in Year 2 of $30,000. Stretchalso paid total dividends of $20,000 in Year 2. On January 1, Year3, Pense Co. sold its investment in Stretch Co. to GE CapitalCorporation (GE) for $130,000. What entry would Pense Co. make torecord the sale of Stretch Co.?

a.	Cash 130,000 Gain onSale 6,000 Investment inStretch 124,000
b.	Cash 130,000 Loss onSale 2,000 Investment inStretch 132,000
c.	Cash 130,000 Loss onSale 10,000 Investment inStretch 140,000
d.	Cash 130,000 Loss onSale 30,000 Investment inStretch 160,000
e.	Cash 130,000 Loss onSale 20,000 Investment inStretch 150,000

55. Intercompany sales

a.	do not need to be eliminated as long as the sales have beencompleted to an outside party.
b.	must be eliminated from both the sales and cost of goods soldaccounts.
c.	do not need to be eliminated if made at arm's length values.
d.	must be eliminated only if not in the ordinary course of tradeor business.
e.	do not need to be eliminated.

54. To avoid double counting P'sinvestment in S, P must eliminate

a.	the investment in S and S's separate company shareholders'equity.
b.	all debt on S's separate company financial statements.
c.	any dividends paid against the cash account.
d.	all intercompany transactions.
e.	all of the above.

58. U.S. GAAP view investments of over50 percent of the voting stock of another company (for the purposeof controlling the other company at the broad policy-making leveland at the day-to-day operational level) as

a.	minority, passive investments.
b.	minority, active investments.
c.	majority, passive investments.
d.	majority, active investments.
e.	marketable securities.

33. If Wabasso Company pays $55,000 individends to its corporate investor Lament Corporation (Lament owns35% of The Wabasso Company), what entry should Lament Corporationrecord when it receives the dividends?

a.	Cash 55,000 DividendIncome 55,000
b.	Cash 55,000 InvestmentIncome 55,000
c.	Cash 55,000 Investment in WabassoCompany 55,000
d.	Cash 55,000 Additional Paid-inCapital 55,000
e.	Cash 55,000 Common Stock- WabassoCompany 55,000

Purchaser Corporation attributes the $150,000 excess purchaseprice as follows: $100,000 to remeasure buildings and equipment tofair value and $50,000 to goodwill. Which of the following is/aretrue?

a.	Purchaser Corporation does not reclassify this excess out of itsInvestment in Stock of Investee Corporation account to Buildingsand Equipment and to Goodwill.
b.	Purchaser Corporation must amortize (or depreciate) any amountattributed to assets with limited lives.
c.	Purchaser Corporation must depreciate the $100,000 attributed tobuildings and equipment over their remaining useful lives.
d.	U.S. GAAP and IFRS do not permit the investor to amortize theexcess purchase price attributed to goodwill and other assets withindefinite lives. Instead, the investor must test the investmentaccount annually for possible impairment.
e.	all of the above

20. Pagoli Corporation acquires 30% ofthe outstanding voting common shares of the Inform Corporation for$600,000. Pagoli Corporation acquires the investment in InformCorporation by buying previously issued shares of InformCorporation from other investors.

Between the time of the acquisition and the end of PagoliCorporationâs next accounting period, Inform Corporation reportsearnings of $80,000; and pays a dividend of $30,000 to holders ofits common stock.

Inform Corporation reports earnings of $100,000 and paysdividends of $40,000 during the subsequent accounting period.

Pagoli Corporationâs Investment in Stock of Inform Corporationaccount now has a balance of:

a.	$609,000
b.	$621,000
c.	$633,000
d.	$642,000
e.	$657,000

ACCT 1B Lecture Notes - Lecture 29: Retained Earnings, Control Premium

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