Ch03 - Chapter 3 UNDERSTANDING THE ISSUES 1(a Subsidiary...

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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 investment account to reflect the same date as the subsidi- ary equity accounts so that their balances re- flect the same point in time. (a) Simple equity method—The subsidiary’s equity accounts reflect beginning of the year balances, yet the investment account reflects an end of the year balance. During the consolidation process, the subsidiary income and the parent’s share of the subsi- diary’s declared dividends are closed to the investment account to return it to its begin- ning of the year balance. (b) Sophisticated equity method—The subsidi- ary’s equity accounts reflect beginning of the year balances, yet the investment ac- count reflects an end of the year balance. During the consolidation process, the sub- sidiary 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 the year balance. (c) Cost method—The subsidiary’s equity ac- counts reflect beginning of the year bal- ances, yet the investment account reflects the balance on the date of acquisition. Therefore, the investment account is con- verted to its simple equity balance at the beginning of the period to create date align- ment. 3. The noncontrolling share of consolidated net in- come is the outside ownership share of the subsidiary’s internally generated income. This amount does not reflect adjustments based on fair values at the purchase date. In the past, it has been displayed as an expense. However, it should be displayed as a distribution of consol- idated net income to the NCI. 4. (a) Parent net income for 20X1 ...... $140,000 Parent’s share of subsidiary net income in 20X1 ($60,000 × ½ year × 80%)... 24,000 Amortization of excess for 20X1 ($100,000 ÷ 10 × ½ year) ..... (5,000) NCI share of subsidiary net income in 20X1 ($60,000 × 20%) ................... 12,000 Consolidated net income .......... $171,000 (b) NCI share of net income = $60,000 × 20% = $12,000. 5. In 20X1, consolidated net income would be re- duced by $16,000 as a result of the inventory and equipment. The inventory would increase cost of goods sold by $8,000 [($60,000 – $50,000) × 80%]. The equipment would in- crease depreciation expense by $8,000 [($150,000 – $100,000) × 80% ÷ 5 years]. In 20X2, consolidated net income would be re- duced by $8,000 as a result of the equipment. The equipment would increase depreciation ex- pense by $8,000 [($150,000 – $100,000) × 80% ÷ 5 years]. The inventory would reduce controlling retained earnings by $8,000 in future years. 6. The total noncontrolling interest will consist of 20% of the subsidiary’s common stock, paid-in capital in excess of par, retained earnings, di- vidends declared, and internally generated in- come. The NCI is shown as a subdivision of equity as a total amount on the consolidated balance sheet.
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