chapter 3 - CHAPTER 3 UNDERSTANDING THE ISSUES 1(a...

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Unformatted text preview: CHAPTER 3 UNDERSTANDING THE ISSUES 1. (a) Subsidiary Income = $30,000 Investment in Subsidiary ($400,000 + $30,000 – $5,000) = $425,000. (b) Subsidiary Income ($30,000 – $5,000) = $25,000. Investment in Subsidiary ($400,000 + $25,000 – $5,000) = $420,000. (c) Subsidiary Income = $0. Dividend Income = $5,000. Investment in Subsidiary = $400,000. 2. Date alignment means adjusting the in- vestment account to reflect the same date as the subsidiary equity accounts so that their balances reflect the same point in time. (a) Simple equity method—The subsidiary’s equity accounts reflect beginning-of-year balances, yet the investment account reflects an end-of- year balance. During the consolidation process, the subsidiary income and the parent’s share of the subsidiary’s declared dividends are closed to the investment account to return it to its beginning-of-year balance. (b) Sophisticated equity method—The subsidiary’s equity accounts reflect beginning-of-year balances, yet the investment account reflects an end-of- year balance. During the consolidation process, the subsidiary income and the parent’s share of the subsidiary’s declared dividends are closed to the investment account to return it to its beginning-of-year balance. (c) Cost method—The subsidiary’s equity accounts reflect beginning-of-year balances, yet the investment account reflects the balance on the date of acquisition. Therefore, the investment account is converted to its simple equity balance at the beginning of the period to create date alignment. 3. The noncontrolling share of consolidated net income is the outside ownership share of the subsidiary’s internally generated income as adjusted for amortizations created by fair value adjustments on the acquisition date. The NCI share of consolidated net income has, in the past, been shown as an expense. That is no longer allowed. It is to be shown as a distribution of consolidated net income. 4. The $80,000 excess attributed to the controlling interest means that the patent is adjusted by $100,000 ($80,000/80%). (a) Parent net income for 20X1... $140,000 Subsidiary net income in 20X1 ($60,000 × ½ year)..... 30,000 Amortization of excess for 20X1 ($100,000 ÷ 10 × ½ year)................................ (5,000 ) Consolidated net income........$165,000 (b) NCI share of net income = 1/2 × ($60,000 – $10,000) × 20% = $5,000. 5. In 20X1, consolidated net income would be reduced by $20,000 as a result of the inventory and equipment. The inventory would increase cost of goods sold by $10,000 ($60,000 – $50,000). The equipment would increase depreciation expense by $10,000 [($150,000 – $100,000) ÷ 5 years]. In 20X2, consolidated net income would be reduced by $10,000 as a result of the equipment. The equipment would increase depreciation expense by $10,000 [($150,000 – $100,000) ÷ 5 years]....
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chapter 3 - CHAPTER 3 UNDERSTANDING THE ISSUES 1(a...

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