Chapter 8 - Copy

Chapter 8 - Copy - CHAPTER 8 ANSWERS TO QUESTIONS 1. The...

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CHAPTER 8 ANSWERS TO QUESTIONS 1. The three types of transactions that result in a change in a parent company’s ownership interest are: a. The parent company may buy additional shares of subsidiary stock or sell a portion of its holdings; b. The subsidiary may issue additional shares of stock to outsiders; c. The subsidiary may acquire or reissue treasury shares from or to the noncontrolling shareholders or the parent company 2. The date of acquisition of subsidiary stock is important under the purchase method because subsidiary retained earnings accumulated prior to the date of acquisition constitute a portion of the equity acquired by the parent company, whereas the parent’s share of subsidiary retained earnings accumulated after acquisition is a part of consolidated retained earnings. 3. On the date that control is achieved, all previous purchases are revalued to reflect the market value on the “acquisition date,” which is the date that control is achieved. Thus, they all have the same basis. 4. The correct accounting depends on whether the parent retains control, or maintains some ownership but surrenders control. If the parent retains control, no gain or loss is reflected in the Income Statement. Instead, an adjustment is made to contributed capital. If the parent surrenders control, the entire interest is adjusted to fair value, and a gain or loss reflected in the Income Statement on all shares owned prior to the sale. 5. A loss would be reported because the total of the $5 per share gain related to (1) the undistributed profits of EZ Company from the date of acquisition to the beginning of the year of sale and (2) the undistributed profit of EZ Company from the beginning of the year of sale to the date of sale exceeds the $5 per share overall gain. Thus, the total assigned to the first two components of gain exceed the total gain. The other market factors effect (the third component) produced a loss. 6. If a parent company owns less than 100% of a subsidiary and purchases an entire new issue of common stock directly from the subsidiary, either (1) the preemptive right has been waived previously, or (2) the noncontrolling stockholders elected not to exercise their rights. 7. Regardless of whether the issuance results in an increase or a decrease in the book value of the parent’s share of the subsidiary’s equity, the correct accounting is to adjust the contributed capital of the controlling interest 8. Noncontrolling Interest Situation Total Book Value Percent of Ownership (a) No Change Decrease (b) Decrease Decrease (c) Increase Decrease (d) Increase Increase 8 - 1
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BUSINESS ETHICS 1. This is an awkward situation. One strategy would be to wait a reasonable period of time, and check to see if anything has changed (have the entries been documented, adjusted, reversed, etc.?) If nothing has been done, mention it to the supervisor again. If he (she) is unresponsive this time, tactfully bring up your concern with a higher-level supervisor. ANSWERS TO EXERCISES
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Chapter 8 - Copy - CHAPTER 8 ANSWERS TO QUESTIONS 1. The...

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