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The title of each problem is followed by the estimated time in minutes required for completion and by a
difficulty rating. The time estimates are applicable for students using the partially filled-in working papers.
SOLUTIONS TO EXERCISES
Ex. 7–1 1. d 9. a
2. d 10. d
3. d 11. c ($80,000 x 0.80 = $64,000)
4. b 12. b ($1,600,000 + $80,000 = $1,680,000)
5. c 13. c
6. c 14. a
7. c 15. a
8. b 16. a
Ex. 7–2 Journal entries for Pence Corporation, year ended Sept. 30, 2006:
2006
Sept. 1 Intercompany Dividends Receivable 80,000
Investment in Spence Company Common Stock 80,000
18 Cash 80,000
Intercompany Dividends Receivable 80,000
30 Investment in Spence Company Common Stock 980,000
Intercompany Investment Income 980,000
Ex. 7–3 The most logical explanation for each of the transactions or events follows:
(1) The September 1, 2005, $630,000 debit to Investment in Subsidiary Common Stock is the
cost of the parent company’s investment in the subsidiary, acquired in a business
combination.
(2) The August 16, 2006, debit to Intercompany Dividends Receivable and credit to
Investment in Subsidiary Common Stock in the amount of $36,000 is the parent
company’s share of dividends declared by the subsidiary on that date.
(3) The August 27, 2006, credit to Intercompany Dividends Receivable in the amount of
$36,000 shows the collection of the dividend paid by the subsidiary.
(4) The August 31, 2006, debit to Investment in Subsidiary Common Stock and credit to
Intercompany Investment Income in the amount of $72,000 is the parent company's share
of the subsidiary’s reported net income for the year ended on that date.
(5) The August 31, 2006, debit to Intercompany Investment Income and credit to Investment
in Subsidiary Common Stock in the amount of $5,000 is the parent company’s share of the
depreciation and amortization of the differences between current fair values and carrying
amounts of the subsidiary’s identifiable net assets on the date of the business combination.
Ex. 7–4 PRISTINE CORPORATION AND SUBSIDIARY
Working Paper Elimination
May 31, 2006
CASES
Case 7–1 Rebuttals to each of the chief accountant's arguments are as follows:
20 06
Sept 5 Intercompany Dividends Receivable [(100,000 x $1)
x 0.80] 8 0 0 0 0
Investment in Soy Company Common Stock 8 0 0 0 0
To record dividend declared by Soy Company, payable
September 26, 2006.
26 Cash 8 0 0 0 0
Intercompany Dividends Receivable 8 0 0 0 0
To record receipt of dividend from Soy Company.
20 06
Mar 1 Intercompany Dividends Receivable (50,000 x $0.40) 2 0 0 0 0
Investment in Sanz Company Common Stock 2 0 0 0 0
To record dividend declared by Sanz Company,
payable Mar. 15, 2006.
15 Cash 2 0 0 0 0
Intercompany Dividends Receivable 2 0 0 0 0
To record receipt of dividend from Sanz Company.
Computations:
(1) $50,000 ÷ 0.20 = $250,000; $250,000 – ($20,000 + $80,000) = $150,000 stockholders’ equity on
Oct. 31, 2005; $150,000 + $50,000 – $20,000 = $180,000 stockholders’ equity on Oct. 31, 2006;
$180,000 x 1/9 = $20,000
(2) $180,000 x 3/9 = $60,000
(3) $180,000 x 5/9 = $100,000; $100,000 – $50,000 + $20,000 = $70,000
(2)
Dec 31 Investment in Stewart Company Common Stock
($36,000 x 0.80) 2 8 8 0 0
Investment in Skate Company Common
Stock ($12,000 x 0.70) 8 4 0 0
Intercompany Investment Income 2 0 4 0 0
To record share of subsidiaries’ net income or net loss
for Year 2006.
(3)
31 Intercompany Dividends Receivable 1 9 1 0 0
Investment in Stewart Company Common
Stock ($16,000 x 0.80) 1 2 8 0 0
Investment in Skate Company Common
Stock ($9,000 x 0.70) 6 3 0 0
To record declaration of dividends by subsidiaries
during Year 2006.
b. Pewter Corporation
Computation of Minority Interest in Net Assets of Subsidiaries
December 31, 2006
Stewart Skate
Company Company
Stockholders’ equity of subsidiaries, Dec. 31, 2006:
Common stock $ 5 0 0 0 0 $ 6 0 0 0 0
Additional paid-in capital 2 0 0 0 0
Retained earnings 4 0 0 0 0 1 9 0 0 0
Total stockholders’ equity $ 9 0 0 0 0 $ 9 9 0 0 0
Minority interest percentage .0 2 0 .0 3 0
Minority interest in net assets of subsidiaries $ 1 8 0 0 0 $ 2 9 7 0 0
20 06
May 31 Intercompany Dividends Receivable 3 0 0 0 0
Investment in State Company Common Stock 3 0 0 0 0
To record dividends declared by State Company.
20 06
Mar 31 Investment in Steppe Company Common Stock
[(25,000 x $1.20) x 0.82] 2 4 6 0 0
Intercompany Investment Income 2 4 6 0 0
To record 82% of Steppe Company’s net income for
the year ended Mar. 31, 2006. (Income tax effects
are disregarded.)
20 06
Sept 30 Cash ($10,000 x 0.75) 7 5 0 0
Investment in Sisler Company Common Stock 7 5 0 0
To record dividend received from Sisler Company.
20 07
Sept 30 Cash ($75,000 x 0.75) 5 6 2 5 0
Investment in Sisler Company Common Stock 5 6 2 5 0
To record dividend received from Sisler Company.
20 07
Sept 30 Close net income not available
for dividends ($83,250 – $56,250) 2 7 0 0 0 5 0 2 5 0 cr
20 06
Nov 30 Investment in Stamm Company Common Stock 9 0 0 0 0
Intercompany Investment Income 9 0 0 0 0
To record 100% of Stamm Company’s net income for
the year ended Nov. 30, 2006.
30 Cash 3 0 0 0 0
Investment in Stamm Company Common Stock 3 0 0 0 0
To record receipt of dividends from Stamm Company
during Year 2006.
Statement of Retained
Earnings
Retained earnings, beginning
of year 6 4 0 0 0 0 2 2 0 0 0 0 (a) 2 2 0 0 0 0 ) 6 4 0 0 0 0
Net income 1 1 0 0 0 0 9 0 0 0 0 ( 9 0 0 0 0 ) 1 1 0 0 0 0
Subtotals 7 5 0 0 0 0 3 1 0 0 0 0 ( 3 1 0 0 0 0 ) 7 5 0 0 0 0
Dividends declared 6 0 0 0 0 3 0 0 0 0 (a) ( 3 0 0 0 0 )† 6 0 0 0 0
Retained earnings, end of year 6 9 0 0 0 0 2 8 0 0 0 0 ( 2 8 0 0 0 0 ) 6 9 0 0 0 0
Balance Sheet
Assets
Investment in Stamm Company
common stock 6 0 0 0 0 0 (a)( 6 0 0 0 0 0 )
Other 1 8 4 0 0 0 0 9 6 0 0 0 0 2 8 0 0 0 0 0
Goodwill (a) 4 0 0 0 0 4 0 0 0 0
Total assets 2 4 4 0 0 0 0 9 6 0 0 0 0 ( 5 6 0 0 0 0 ) 2 8 4 0 0 0 0
65 Minutes, Strong
The McGraw-Hill Companies, Inc., 2006
258 Modern Advanced Accounting, 10/e
Ping Corporation Pr. 7–10
a. Ping Corporation and Subsidiary
Adjusting Entries
December 31, 2006
(1)
Investment in Stang Company Common Stock
[($75,000 – $30,000) x 0.80] 3 6 0 0 0
Intercompany Dividends Receivable ($9,000 x 0.80) 7 2 0 0
Retained Earnings of Subsidiary
[($59,000 – $30,000) x 0.80] 2 3 2 0 0
Intercompany Investment Income ($25,000 x
0.80) 2 0 0 0 0
To convert accounting for investment in subsidiary to
equity method from cost method of accounting.
(Income tax effects are disregarded.)
(2)
Intercompany Investment Income 3 2 0 0
Retained Earnings of Subsidiary 9 6 0 0
Investment in Stang Company Common
Stock 1 2 8 0 0
To amortize combination date excess of current fair
value over carrying amount of signboard leases as
follows:
Year 2006: ($20,000 x 1/5 x 0.80 = $3,200)
Years 2003 through 2005: ($20,000 x 3/5 x
0.80 = $9,600)
(Income tax effects are disregarded.)
Balance Sheet
Assets
Current assets 1 7 2 0 0 0 1 9 9 1 0 0 3 7 1 1 0 0
Intercompany dividends
receivable (payable) 7 2 0 0 ( 7 2 0 0 )
Investment in Stang Company
common stock 1 4 3 2 0 0 (a)( 1 4 3 2 0 0 )
Land 2 5 0 0 0 1 0 5 0 0 3 5 5 0 0
Building and equipment 2 0 0 0 0 0 4 0 0 0 0 2 4 0 0 0 0
Accumulated depreciation ( 1 0 2 0 0 0 ) ( 7 0 0 0 ) ( 1 0 9 0 0 0 )
Signboard leases (net) 8 4 0 0 (a) 4 0 0 0 1 2 4 0 0
Total assets 4 4 5 4 0 0 2 4 3 8 0 0 ( 1 3 9 2 0 0 ) 5 5 0 0 0 0
* An increase in total costs and expenses, etc., and a decrease in net income.
†A decrease in dividends and increase in retained earnings.
50 Minutes, Strong
Petal Corporation Pr. 7–11
*Computation of goodwill
Cost of Petal Corporation’s investment (1,000,000 shares x $19) $19 0 0 0 0 0 0
Less: Current fair value of Sepal Corporation’s identifiable net assets on date
of business comination:
Carrying amount of net assets ($1,000,000 + $400,000 + $1,600,000) $3 0 0 0 0 0 0
Differences between current fair values and carrying amounts of
identifiable net assets:
Plant assets (net) ($16,400,000 – $3,300,000) 13 1 0 0 0 0 0
Other assets ($200,000 – $500,000) ( 3 0 0 0 0 0 )
Long-term debt ($2,200,000 – $2,600,000) 4 0 0 0 0 0 16 2 0 0 0 0 0
Goodwill $ 2 8 0 0 0 0 0