Ch07 - Chapter 7 UNDERSTANDING THE ISSUES 1 Equity prior to...

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Chapter 7 UNDERSTANDING THE ISSUES 1. Equity prior to sale of new shares ................................................................................ $200,000 Equity gained by sale ................................................................................................... 600,000 Total equity after sale ................................................................................................... $800,000 Parent interest .............................................................................................................. 60% Parent equity ................................................................................................................ $480,000 Price paid ..................................................................................................................... 600,000 Excess of cost over book value .................................................................................... $120,000 Excess will likely be attributed to goodwill. 2. Excess calculation: 1/1/X1 1/1/X4 Equity ........................................................................ $400,000 $500,000 Interest ...................................................................... 20% 40% Equity ........................................................................ $ 80,000 $200,000 Price ......................................................................... 100,000 250,000 Excess ...................................................................... $ 20,000 $ 50,000 Amortization period ................................................... 10 10 Annual amortization .................................................. $ 2,000 $ 5,000 Parent income .......................................................... $100,000 Subsidiary income .................................................... 50,000 Equipment depreciation ............................................ (7,000 ) Consolidated net income .......................................... $143,000 NCI (40% × $50,000) ............................................... 20,000 Controlling [$100,000 + (0.60 × $50,000) – $7,000]. $123,000 3. Excess calculation: 1/1/X1 7/1/X6 Equity ........................................................................ $450,000 $575,000 Interest ...................................................................... 80% 10% Equity ........................................................................ $360,000 $ 57,500 Price ......................................................................... 500,000 150,000 Excess calculation: ................................................... $140,000 $ 92,500 Amortization period ................................................... 10 10 Annual amortization .................................................. $ 14,000 $ 9,250 Parent income .......................................................... $120,000 Subsidiary income .................................................... 50,000 Equipment depreciation ............................................ (18,625 ) Total income ............................................................. $151,375 Income purchased (0.50 × 0.10 × $50,000) ............ (2,500 ) Consolidated net income .......................................... $148,875 NCI (10% × $50,000) ............................................... 5,000 Controlling: Internally generated .................................................. $120,000 80% × 1 × $50,000 ...................... $ 40,000 10% × 1/2 × $50,000 ................... 2,500 $ 42,500 Depreciation [14,000 + (0.50 × $9,250)] (18,625 ) 23,875 $143,875 7–1
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Ch. 7—Understanding the Issues 4. Excess calculation: ................................................... 1/1/X1 Equity ........................................................................ $ 900,000 Interest ...................................................................... 80% Equity ........................................................................ $ 720,000 Price ......................................................................... 800,000 Excess ...................................................................... $ 80,000 Amortization period ................................................... 10 Annual amortization .................................................. $ 8,000 Cost of investment .................................................... $ 800,000 Equity increase: Equity at 7/1/X5, with 1/2 year income ...................... $1,300,000 Equity at 1/1/X1 ........................................................ 900,000 Increase .................................................................... $ 400,000 Interest ...................................................................... 80% 320,000 Equipment depreciation ($8,000 × 4.5) .................... (36,000 ) Adjusted cost ............................................................ $1,084,000 Sale of 8,000 shares a. Gain on sale of investment (could be discontinued operation): Sale price ($150 × 8,000) .................................. $1,200,000 Adjusted cost ...................................................... (1,084,000 ) Gain .................................................................... $ 116,000 b. There will be no consolidated statements. c. The parent will report investment income (perhaps gain on discontinued operations): Income for 6 months ........................................... $ 100,000 Equipment depreciation, 1/2 year ....................... (4,000 ) Income ............................................................... $ 96,000 Sale of 2,000 shares a. Increase in paid-in equity on sale of investment: Sale price ($150 × 2,000) .................................. $ 300,000 Adjusted cost (1/4 × $1,084,000) ....................... (271,000 ) Equity increase ................................................... $ 29,000 b. Consolidated statements are prepared as follows: Parent income .................................................... $150,000 Subsidiary income .............................................. 200,000 Equipment depreciation [(3/4 × $8,000) + (1/4 × $8,000 × 1/2)] ....... (7,000 ) Consolidated net income .................................... $343,000 NCI (20% × 1 × $200,000) ............................... $ 40,000 (20% × 1/2 × $200,000) ............................ 20,000 60,000 Controlling: Internally generated .................................................. $150,000 Subsidiary 60% × 1 $200,000 ............................................. 120,000 20% × 1/2 $200,000 .......................................... 20,000 Equipment depreciation [(3/4 × $8,000) + (1/4 × $8,000 × 1/2)] ....... (7,000 ) $283,000 c. Not applicable 7–2
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Ch. 7—Understanding the Issues Sale of 6,000 shares a. Gain on sale of investment (would not be discontinued operation): Sale price ($150 × 6,000) ......................................... $ 900,000 Adjusted cost (3/4 × $1,084,000) ............................. (813,000 ) Gain .......................................................................... $ 87,000 b. There will be no consolidated statements. c. The parent will report investment income under the equity method. Amount Period Interest Income Depreciation Net 200,000 × 1/2 × 60% $60,000 $(3,000) $57,000 200,000 × 1 × 20% $40,000 (2,000) 38,000 Total $95,000 5. Goodwill calculation: 1/1/X5 Common stock equity: Common, par ............................................................ $100,000 Paid-in capital in excess of par ................................. 900,000 Retained earnings .................................................... 500,000 Arrearage .................................................................. (12,000 ) $1,488,000 Interest ...................................................................... 80% Equity ........................................................................ $1,190,400 Price ......................................................................... 1,400,000 Goodwill .................................................................... $ 209,600 Parent income .......................................................... $ 120,000 Subsidiary income .................................................... 80,000 Consolidated net income .......................................... $ 200,000 NCI (20% × 68,000) ................................................. $13,600 NCI Pref. (6% × 200,000) ......................................... 12,000 25,600 Controlling {$120,000 + [0.80 × ($80,000 – $12,000)]} $ 174,400 Income would be as follows if Company P owns 1/2 of preferred stock: Parent income .......................................................... $ 120,000 Subsidiary income .................................................... 80,000 Consolidated net income .......................................... $ 200,000 NCI (20% × 68,000) ................................................. $13,600 NCI Pref. (6% × 100,000) ......................................... 6,000 19,600 Controlling {$120,000 + [0.80 × ($80,000 – $12,000)] + (6% × $100,000)} ............................................ $ 180,400 7–3
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Ch. 7—Exercises EXERCISES 1. Determination and Distribution of Excess Schedule
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