B. Woods Chapter 04 electronic

B. Woods Chapter 04 electronic - Chapter 4 Electronic...

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85 Chapter 4 Electronic Supplement Solutions W-1 The method used by a parent company in accounting for its subsidiary can be determined by examining the separate financial statements of the parent company and the subsidiary. If the cost method is used, the parent company will report dividend income from the subsidiary and the investment account will be stated at original cost. If the equity method is used, the parent company will report investment income from the subsidiary, and the investment account will reflect subsidiary income since acquisition. When the equity method is used but the difference between investment cost and book value acquired has not been amortized on the parent company's books, the difference between the investment balance and underlying book value at any statement date will reflect the difference between the investment cost and underlying book value at the time of acquisition. W-2 When the cost method is used, reciprocity between the investment account balance and the underlying subsidiary equity is established by adjusting the parent company's investment and retained earnings accounts for the parent's share of the change in subsidiary retained earnings between the dates the subsidiary was acquired and the beginning of the current year.
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86 Consolidation Techniques and Procedures W-3 1 Cost method Cash $30,000 Dividend income $30,000 To record receipt of dividends ($40,000 x 75%). 2 Cost method Investment cost January 1, 2005 $300,000 Less: Dividends in excess of earnings ($30,000 - $10,000) x 75% (15,000 ) Investment account balance - cost method $285,000 3 Equity method Investment in S’Brain $45,000 Income from S’Brain $45,000 To record share of S’Brain's net income ($60,000 x 75%). Cash $30,000 Investment in S’Brain $30,000 To record receipt of dividends ($40,000 x 75%). 4 Investment balance under equity method Investment cost $300,000 Add: Share of income for 2005 and 2006 ($70,000 x 75%) 52,500 Less: Share of dividends for 2005 and 2006 ($70,000 x 75%) (52,500) Investment in S’Brain balance December 31, 2006 $300,000 5 Consolidated net income Pinky's separate income $ 90,000 Add: Investment income 45,000 Consolidated net income $134,000
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87 Chapter 4 W-4 [AICPA adapted] 1 a Investment cost $145,000 Add: Excess of book value acquired over cost 7,000 Book value of 80% interest acquired $152,000 Book value of 100% interest ($152,000 ÷ 80%) $190,000 2 d There is no way to determine the components of the subsidiary's stockholders' equity from the information given. 3 d The minority interest represents 20% of the current stockholders' equity of the subsidiary. Thus, total stockholders' equity must be $29,200 ÷ 20%, or $146,000. 4
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This note was uploaded on 04/04/2012 for the course ACCT 111 taught by Professor Bemo during the Spring '12 term at Nanyang Technological University.

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B. Woods Chapter 04 electronic - Chapter 4 Electronic...

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