3-1 Consolidated Workpaper: Two Cases The two following separate cases show the financial position of a parent company and its subsidiary company on November 30, 2011, just after the parent had purchased 90% of the subsidiarys stock: Case I Case II P Company S Company P Company S Company Current assets $ 880,000 $260,000 $ 780,000 $280,000 Investment in S Company 190,000 190,000 Long-term assets 1,400,000 400,000 1,200,000 400,000 Other assets 90,000 40,000 70,000 70,000 Total $2,560,000 $700,000 $2,240,000 $750,000 Current liabilities $ 640,000 $270,000 $ 700,000 $260,000 Long-term liabilities 850,000 290,000 920,000 270,000 Common stock 600,000 180,000 600,000 180,000 Retained earnings 470,000 (40,000) 20,000 40,000 Total $2,560,000 $700,000 $2,240,000 $750,000 Prepare a November 30, 2011, consolidated balance sheet workpaper for each of the foregoing cases. In Case I, any difference between book value of equity and the value implied by the purchase price relates to subsidiary long-term assets. In Case II, assume that any excess of book value over the value implied by purchase price is due to overvalued long-term assets. PROBLEM 3-8 Intercompany Items, Two Subsidiaries On February 1, 2011, Punto Company purchased 95% of the outstanding common stock of Sara Company and 85% of the outstanding common stock of Rob Company. Immediately before the two acquisitions, balance sheets of the three companies were as follows: Punto Sara Rob Cash $165,000 $ 45,000 $17,000 Accounts receivable 35,000 35,000 26,000 Notes receivable 18,000 0 0 Merchandise inventory 106,000 35,500 14,000 Prepaid insurance 13,500 2,500 500 Advances to Sara Company 10,000 Advances to Rob Company 5,000 Land 248,000 43,000 15,000 Buildings (net) 100,000 27,000 16,000 Equipment (net) 35,000 10,000 2,500 Total $735,500 $198,000 $91,000 Accounts payable $ 25,500 $ 20,000 $10,500 Income taxes payable 30,000 10,000 0 Notes payable 0 6,000 10,500 Bonds payable 100,000 0 0 Common stock, $10 par value 300,000 144,000 42,000 Other contributed capital 150,000 12,000 38,000 Retained earnings (deficit) 130,000 6,000 (10,000) Total $735,500 $198,000 $91,000 The following additional information is relevant. 1. One week before the acquisitions, Punto Company had advanced $10,000 to Sara Company and $5,000 to Rob Company. Sara Company recorded an increase to Accounts Payable for its advance, but Rob Company had not recorded the transaction. 2. On the date of acquisition, Punto Company owed Sara Company $12,000 for purchases on account, and Rob Company owed Punto Company $3,000 and Sara Company $6,000 for such purchases. The goods purchased had all been sold to outside parties prior to acquisition. 3. Punto Company exchanged 13,400 shares of its common stock with a fair value of $12 per share for 95% of the outstanding common stock of Sara Company. In addition, stock issue fees of $4,000 were paid in cash. The acquisition was accounted for as a purchase. 4. Punto Company paid $50,000 cash for the 85% interest in Rob Company. 5. Three thousand dollars of Sara Companys notes payable and $9,500 of Rob Companys notes payable were payable to Punto Company. 6. Assume that for Sara, any difference between book value and the value implied by the purchase price relates to subsidiary land. However, for Rob, assume that any excess of book value over the value implied by the purchase price is due to overvalued buildings. A. Give the book entries to record the two acquisitions in the accounts of Punto Company. B. Prepare a consolidated balance sheet workpaper immediately after acquisition. C. Prepare a consolidated balance sheet at the date of acquisition for Punto Company and its subsidiaries