Practice 4- Ch 4 Outside ownership

Practice 4- Ch 4 Outside ownership - Ch 4: Outside...

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1 Ch 4: Outside Ownership Three Practice Problems: 4-25, 4-26, and 4-33. Solutions: Problem 1: 4- 25. (30 Minutes) (Reporting the sale of a portion of an investment in a subsidiary.) a. Posada records an accrual of $7,950 (see computation below) as "Equity Income from Sold Shares of Sabathia" for the January 1, 2012 to October 1, 2012 period which will appear in the 2012 consolidated income statement. The consolidation will continue to include all of Sabathia's accounts but now recognizing a 40% noncontrolling interest. Sabathia fair value 1/1/10 . ........................................... $1,200,000 Sabathia book value . ................................................... Patent . ......................................................................... $70,000 (1,130,000) Life of patent . .............................................................. 5 Annual amortization . ................................................... $14,000 years Posada’s share of Sabathia’s income accruing to shares sold: Sabathia's net income . ...................................... $120,000 Excess patent fair value amortization . ............... Sabathia's adjusted net income . ........................ 106,000 (14,000) Fraction of year held . ......................................... Sabathia’s adjusted income for 9 months . ......... 79,500 9/12 Percentage owned by Posada . .......................... 70%
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2 Posada’s share of Sabathia’s 9 month income . .......................... 55,650 Shares sold—1,000 out of 7,000 . ..................... Posada’s income shares sold . ..................................... $7,950 1/7 b. As long as control is maintained, the acquisition method considers transactions in the stock of a subsidiary, whether purchases or sales, as transactions in the equity of the consolidated entity. Posada’s investment book value 10/1/12 1/1/12 balance (given—equity method) . ...................... $1,085,000 Recognition of 1/1/12–10/1/12 period: Income accrual ($120,000 × 70% × ¾) . ................. 63,000 Dividends ($40,000 × 70% × ¾) . ........................... (21,000) Amortization ($14,000 × 70% × ¾) . ....................... (7,350 Pre-sale investment book value—10/1/12 . ................... $1,119,650 ) Computation of income effect—sale transaction 10/1/12 book value (above) . ........................................ $1,119,650 Portion of investment sold (1,000/7,000 shares) . ........ Book value of investment sold .
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Practice 4- Ch 4 Outside ownership - Ch 4: Outside...

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