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Questions and Answers of Accounting

How are the workpaper procedures for the investment in subsidiary, income from subsidiary, and subsidiary’s stockholders’ equity accounts alike?
If a parent uses the equity method but does not amortize the difference between fair value and book value on its separate books, its net income and retained earnings will not equal its share of
Are workpaper adjustments and eliminations entered on the parent’s books? The subsidiary’s books? Explain.
The financial statement and trial balance workpaper approaches illustrated in the chapter generate comparable information, so why learn both approaches?
In what way do the adjustment and elimination entries for consolidation workpapers differ for the financial statement and trial balance approaches?
When is it necessary to adjust the parent’s retained earnings account in the preparation of consolidation workpapers? In answering this question, explain the relationship between parent retained
What approach would you use to check the accuracy of the consolidated retained earnings and noncontrolling interest amounts that appear in the balance sheet section of completed consolidation
Explain why noncontrolling interest share is added to the controlling share of consolidated net income in determining cash flows from operating activities.
Controlling share of consolidated net income is a measurement of income to the stockholders of the parent, but does a change in cash as reflected in a statement of cash flows also relate to other
1. Workpaper entries normally:a. Are posted to the general ledger accounts of one or more of the affiliatesb. Are posted to the general ledger accounts only when the financial statement approach is
Pan Corporation purchased 80 percent of the outstanding voting common stock of Sal Corporation on January 2, 2011, for $600,000 cash. Sal's balance sheets on this date and on December 31, 2011, are
1. Peg Corporation owns a 70 percent interest in San Corporation, acquired several years ago at book value. On December 31, 2011, San mailed a check for $20,000 to Peg in part payment of a $40,000
The stockholder's equity accounts of Pen Corporation and Sin Corporation at December 31, 2010, were as follows (in thousands) On January 1, 2011, Pen Corporation acquired an 80 percent interest in
1. In preparing a statement of cash flows, the cost of acquiring a subsidiary is reported:a. As an operating activity under the direct methodb. As an operating activity under the indirect methodc. As
Information needed to prepare the Cash Flow from Operating Activities section of Par Corporation’s consolidated statement of cash flows is included in the following list:Amortization of
The information needed to prepare the Cash Flow from Operating Activities section of Pro Corporation’s consolidated statement of cash flows is included in the following list:Cash received from
Pea Corporation purchased 75 percent of the outstanding voting stock of Sen Corporation for $2,400,000 on January 1, 2011. Sen's stockholders' equity on this date consisted of the following (in
Pal Corporation acquired 70 percent of the outstanding voting stock of Sal Corporation for $91,000 cash on January 1, 2011, when Sal's stockholders' equity was $130,000. All the assets and
Pan Corporation acquired a 75 percent interest in Saf Corporation on January 1, 2011. Financial statements of Pan and Saf Corporations for the year 2011 are as follows (in thousands): REQUIRED:
Pal Corporation acquired a 75 percent interest in Sun Corporation on January 1, 2011, for $360,000 in cash. Financial statements of Pal and Sun Corporations for 2011 are as follows (in
Par Corporation acquired a 70 percent interest in Sul Corporation's outstanding voting common stock on January 1, 2011, for $490,000 cash. The stockholders' equity (book value) of Sul on this date
Separate company financial statements for Pen Corporation and its subsidiary, Syn Company, at and for the year ended December 31, 2012, are summarized as follows (in thousands): ADDITIONAL
Par Corporation acquired a 70 percent interest in Sol Corporation's outstanding voting common stock on January 1, 2011, for $490,000 cash. The stockholders' equity of Sol on this date consisted of
Separate-company financial statements for Pun Corporation and its subsidiary, Son Company, at and for the year ended December 31, 2012, are summarized as follows (in thousands): ADDITIONAL
Pas Corporation acquired 80 percent of Sel Corporation's common stock on January 1, 2011, for $210,000 cash. The stockholders' equity of Sel at this time consisted of $150,000 capital stock and
Pik Corporation acquired 80 percent of Sel Corporation's common stock on January 1, 2011, for $210,000 cash. The stockholders' equity of Sel at this time consisted of $150,000 capital stock and
Pil Corporation paid $170,000 for an 80 percent interest in Stu Corporation on December 31, 2011, when Stu's stockholders' equity consisted of $100,000 capital stock and $50,000 retained earnings. A
Pat Corporation acquired an 80 percent interest in Sci Corporation for $480,000 on January 1, 2011, when Sci's stockholders' equity consisted of $400,000 capital stock and $50,000 retained earnings.
Comparative adjusted trial balances for Ply Corporation and Ski Corporation are given here. Ply Corporation acquired an 80 percent interest in Ski Corporation on January 1, 2011, for $80,000 cash.
Pep Company paid $99,000 for a 90 percent interest in Sim on January 5, 2011, when Sim's capital stock was $60,000 and its retained earnings $20,000. Trial balances for the companies at December 31,
Peg Corporation owns 90 percent of the voting stock of Sup Corporation and 25 percent of the voting stock of Ell Corporation. The 90 percent interest in Sup was acquired for $18,000 cash on January
The accountant for Pil Corporation collected the following information that he thought might be useful in the preparation of the company’s consolidated statement of cash flows (in thousands):Cash
Comparative consolidated financial statements for Pes Corporation and its 90 percent-owned subsidiary, Sun Corporation, at and for the years ended December 31 are as follows: REQUIRED: Prepare a
The consolidated workpaper balances of Puh, Inc., and its subsidiary, Sto Corporation, as of December 31 are as follows (in thousands): ADDITIONAL INFORMATION1. On January 20, 2011, Puh issued
Comparative consolidated financial statements for Pil Corporation and its 80 percent-owned subsidiary at and for the years ended December 31 are summarized as follows: REQUIRED: Prepare a
Explain the terms preacquisition earnings and preacquisition dividends.
How are preacquisition earnings accounted for by a parent under the equity method? How are they accounted for in the consolidated income statement?
Assume that an 80 percent investor of Sub Company acquires an additional 10 percent interest in Sub halfway through the current fiscal period. Explain the effect of the 10 percent acquisition by the
Isn’t preacquisition income really noncontrolling interest share?
How is the gain or loss determined for the sale of part of an investment interest that is accounted for as a one-line consolidation? Is the amount of gain or loss affected by the accounting method
When a parent sells a part of its interest in a subsidiary during an accounting period, is the income applicable to the interest sold up to the time of sale included in consolidated net income and
Assume that a subsidiary has 10,000 shares of stock outstanding, of which 8,000 shares are owned by the parent. What equity method adjustment will be necessary on the parent books if the subsidiary
Assume that a subsidiary has 10,000 shares of stock outstanding, of which 8,000 shares are owned by the parent. If the parent purchases an additional 2,000 shares of stock directly from the
How do the treasury stock transactions of a subsidiary affect the parent’s accounting for its investment under the equity method?
Can gains or losses to a parent/investor result from a subsidiary’s/investee’s treasury stock transactions? Explain.
Do common stock dividends and stock splits by a subsidiary affect the amounts that appear in the consolidated financial statements? Explain, indicating the items, if any, that would be affected.
Pie Corporation increases its ownership interest in its subsidiary, Set Corporation, from 70 percent on January 1, 2011, to 90 percent at July 1, 2011. Set’s net income for 2011 is $100,000, and it
On January 1, 2011, Pin Industries purchased a 40 percent interest in Sip Corporation for $800,000, when Sip’s stockholders’ equity consisted of $1,000,000 capital stock and $1,000,000 retained
Pet Corporation owns 100 percent (300,000 shares) of the outstanding shares of Sap Corporation’s common stock on January 1, 2011. Its Investment in Sap account on this date is $4,400,000, equal to
The balance of Pal Corporation’s investment in Sag Company account at December 31, 2010, was $436,000, consisting of 80 percent of Sag’s $500,000 stockholders’ equity on that date and $36,000
Pig Corporation paid $1,274,000 cash for 70 percent of the common stock of Set Corporation on June 1, 2011. The assets and liabilities of Set were fairly valued, and any fair value/book value
The stockholders’ equities of Pal Corporation and its 80 percent-owned subsidiary, Sow Corporation, on December 31, 2011, are as follows (in thousands):Pal’s Investment in Sow account balance on
The stockholders' equities of Pod Corporation and its 80 percent-owned subsidiary, Sod Corporation, on December 31, 2011, appear as follows (in thousands): Pod's Investment in Sod account on this
Pam Corporation owns two-thirds (600,000 shares) of the outstanding $1 par common stock of Sat Company on January 1, 2011. In order to raise cash to finance an expansion program, Sat issues an
The stockholder’s equity of Sum Corporation at December 31, 2010, 2011, and 2012, is as follows (in thousands):Sum reported income of $80,000 in 2011 and paid no dividends. In 2012, Sum reported
Pit Corporation acquired a 90 percent interest in Sad on July 1, 2012, for $675,000. The stockholders’ equity of Sad at December 31, 2011, was as follows (in thousands):Capital stock
Pan Corporation purchased a 75 percent interest in Soy Corporation in the open market on January 1, 2012, for $690,000. A summary of Soy's stockholders' equity on December 31, 2011 and 2012, is as
Put Corporation’s Investment in Son Company account had a balance of $475,000 at December 31, 2011. This balance consisted of goodwill of $35,000 and 80 percent of Son’s $550,000 stockholders’
Pat Company paid $1,800,000 for 90,000 shares of Sir Company's 100,000 outstanding shares on January 1, 2011, when Sir's equity consisted of $1,000,000 of $10 par common stock and $500,000 retained
A summary of changes in the stockholders' equity of Sin Corporation from January 1, 2011, to December 31, 2012, appears as follows (in thousands): Par Corporation purchases 40,000 shares of Sin's
Pin Corporation purchased 960,000 shares of Sit Corporation's common stock (an 80 percent interest) for $21,200,000 on January 1, 2011. The $2,000,000 excess of investment fair value over book value
Pat Corporation owned a 90 percent interest in Saw Corporation, and during 2010 the following changes occurred in Saw's equity and Pat's investment in Saw (in thousands): During 2011, Saw's net
Pan Corporation owns 300,000 of 360,000 outstanding shares of Son Corporation, and its $8,700,000 Investment in Son account balance on December 31, 2011, is equal to the underlying equity interest in
Pal Company purchased 9,000 shares of Sal Corporation’s $50 par common stock at $90 per share on January 1, 2011, when Sal had capital stock of $500,000 and retained earnings of $300,000. During
Pot Corporation purchased a 70 percent interest in Sod Corporation on January 2, 2011, for $98,000, when Sod had capital stock of $100,000 and retained earnings of $20,000. On June 30, 2012, Pot
Comparative separate-company and consolidated balance sheets for Pod Corporation and its 70 percent-owned subsidiary, Saw Corporation, at year-end 2011 were as follows (in thousands): Saw's net
Pop Corporation acquired an 80 percent interest in Sat Corporation on October 1, 2011, for $82,400, equal to 80 percent of the underlying equity of Sat on that date plus $16,000 goodwill (total
Pal Corporation paid $175,000 for a 70 percent interest in Sid Corporation's outstanding stock on April 1, 2011. Sid's stockholders' equity on January 1, 2011, consisted of $200,000 capital stock and
Pam Corporation acquired a 70 percent interest in Sam Corporation on January 1, 2011, for $420,000 cash, when Sam's equity of Sam consisted of $300,000 capital stock and $200,000 retained earnings.
Pan Corporation acquired an 85 percent interest in Sly Corporation on August 1, 2011, for $522,750, equal to 85 percent of the underlying equity of Sly on that date. In August 2011, Sly sold
Comparative consolidated financial statements for Pop Corporation and its subsidiary, Sat Corporation, at and for the years ended December 31, 2012 and 2011 follow (in thousands). REQUIRED:
The effect of unrealized profits and losses on sales between affiliated companies is eliminated in preparing consolidated financial statements. When are profits and losses on such sales realized for
Poe Corporation purchased a 90 percent interest in San Corporation on December 31, 2011, for $2,700,000 cash, when San had capital stock of $2,000,000 and retained earnings of $500,000. All San's
Is the amount of intercompany profit to be eliminated from consolidated financial statements affected by the existence of a noncontrolling interest? Explain.
What effect does the elimination of intercompany sales and cost of goods sold have on consolidated net income?
What effect does the elimination of intercompany accounts receivable and accounts payable have on consolidated working capital?
Explain the designations upstream sales and downstream sales. Of what significance are these designations in computing parent and consolidated net income?
Would failure to eliminate unrealized profit in inventories at December 31, 2011, have any effect on consolidated net income in 2012? 2013?
Under what circumstances is noncontrolling interest share affected by intercompany sales activity?
How does a parent adjust its investment income for unrealized profit on sales it makes to its subsidiaries? (a) In the year of the sale and (b) In the year in which the subsidiaries sell the related
How is the combined cost of goods sold affected by unrealized profit in (a) The beginning inventory of the subsidiary and (b) The ending inventory of the subsidiary?
Is the effect of unrealized profit on consolidated cost of goods sold influenced by (a) The existence of a noncontrolling interest and (b) The direction of intercompany sales?
Unrealized profit in the ending inventory is eliminated in consolidation workpapers by increasing cost of sales and decreasing the inventory account. How is unrealized profit in the beginning
Describe the computation of noncontrolling interest share in a year in which there is unrealized inventory profit from upstream sales in both the beginning and ending inventories of the parent.
Consolidation workpaper procedures are usually based on the assumption that any unrealized profit in the beginning inventory of one year is realized through sales in the following year. If the
1. Intercompany profit elimination entries in consolidation workpapers are prepared in order to:a. Nullify the effect of intercompany transactions on consolidated statementsb. Defer intercompany
1. Per, Inc., owns 80 percent of Sen, Inc. During 2011, Per sold goods with a 40 percent gross profit to Sen. Sen sold all of these goods in 2011. For 2011 consolidated financial statements, how
1. The separate incomes of Pil Corporation and Sil Corporation, a 100 percent-owned subsidiary of Pil, for 2012 are $2,000,000 and $1,000,000, respectively. Pil sells all of its output to Sil at 150
Pid Corporation owns an 80 percent interest in Sed Corporation and at December 31, 2011, Pid's investment in Sed on an equity basis was equal to 80 percent of Sed's stockholders' equity. During 2012,
Par Corporation owns an 80 percent interest in Sel Corporation acquired several years ago. Sel regularly sells merchandise to its parent at 125 percent of Sel's cost. Gross profit data of Par and Sel
1. Pat Corporation owns 70 percent of Sue Company's common stock, acquired January 1, 2012. Patents from the investment are being amortized at a rate of $20,000 per year. Sue regularly sells
Pan Corporation owns an 80 percent interest in the common stock of She Corporation, acquired several years ago at book value. Pan regularly sells merchandise to She. Information relevant to the
The separate incomes (which do not include investment income) of Pic Corporation and Sil Corporation, its 80 percentowned subsidiary, for 2011 were determined as follows (in thousands): During 2011,
Income statement information for 2011 for Pug Corporation and its 60 percent-owned subsidiary, Sev Corporation, is as follows: Intercompany sales for 2011 are upstream (from Sev to Pug) and total
Pap Corporation purchased an 80 percent interest in Sak Corporation for $1,200,000 on January 1, 2012, at which time Sak's stockholders' equity consisted of $1,000,000 common stock and $400,000
On January 1, 2004, Pre Corporation acquired 60 percent of the voting common shares of Sue Corporation at an excess of fair value over book value of $1,000,000. This excess was attributed to plant
The consolidated income statement of Pul and Swa for 2011 was as follows (in thousands):Sales $2,760Cost of sales (1,840)Operating expenses (320)Income to 20 percent
Por Corporation acquired its 90 percent interest in Sam Corporation at its book value of $1,800,000 on January 1, 2011, when Sam had capital stock of $1,500,000 and retained earnings of $500,000. The
Put Corporation acquired a 90 percent interest in Sam Corporation at book value on January 1, 2011. Intercompany purchases and sales and inventory data for 2011, 2012, and 2013, are as
Pot Company owns controlling interests in San and Tay Corporations, having acquired an 80 percent interest in San in 2011, and a 90 percent interest in Tay on January 1, 2012. Pot's investments in

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