Multiple Stock Purchases and Sale of Shares On January 1, 2014, Plum Company mad
ID: 2531646 • Letter: M
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Multiple Stock Purchases and Sale of Shares On January 1, 2014, Plum Company made an open-market purchase of 30,000 shares of Spivey Company common stock for $122,000. At that time, Spivey Company had common stock ($2 par) of $600,000 and retained earnings of $240,000. On July 1, 2014, an additional 210,000 shares were purchased on the open market by Plum Company at a cost of $789,600 or $3.76 a share. On November 1, 2014, 3,000 of the shares purchased on January 1, 2014, were sold on the open market for $21,000. Assume that any excess of implied value over book value acquired relates to subsidiary goodwill. During 2014, Plum Company earned $22,000 (excluding any gain or loss on the sale of the shares). Plum Company received income statements from Spivey Company reporting the following results. Spivey Company Income January 1, 2014 to June 30, 2014 $ 60,000 January 1, 2014 to October 31, 2014 96,000 For the year ended December 31, 2014 130,000 Neither company declared dividends during the year. Plum Company’s retained earnings were $460,000 on January 1, 2014. Required: A. Prepare the book entries Plum Company would make during 2014 to account for its investment in Spivey Company, assuming (1) The use of the cost method. (2) The use of either the complete or the partial equity method. B. Prepare in general journal form the eliminating entries for a consolidated statements workpaper on December 31, 2014, assuming (1) The use of the cost method. (2) The use of either the complete or the partial equity method. C. Compute controlling interest in consolidated net income for 2014. Multiple Stock Purchases and Sale of Shares On January 1, 2014, Plum Company made an open-market purchase of 30,000 shares of Spivey Company common stock for $122,000. At that time, Spivey Company had common stock ($2 par) of $600,000 and retained earnings of $240,000. On July 1, 2014, an additional 210,000 shares were purchased on the open market by Plum Company at a cost of $789,600 or $3.76 a share. On November 1, 2014, 3,000 of the shares purchased on January 1, 2014, were sold on the open market for $21,000. Assume that any excess of implied value over book value acquired relates to subsidiary goodwill. During 2014, Plum Company earned $22,000 (excluding any gain or loss on the sale of the shares). Plum Company received income statements from Spivey Company reporting the following results. Spivey Company Income January 1, 2014 to June 30, 2014 $ 60,000 January 1, 2014 to October 31, 2014 96,000 For the year ended December 31, 2014 130,000 Neither company declared dividends during the year. Plum Company’s retained earnings were $460,000 on January 1, 2014. Required: A. Prepare the book entries Plum Company would make during 2014 to account for its investment in Spivey Company, assuming (1) The use of the cost method. (2) The use of either the complete or the partial equity method. B. Prepare in general journal form the eliminating entries for a consolidated statements workpaper on December 31, 2014, assuming (1) The use of the cost method. (2) The use of either the complete or the partial equity method. C. Compute controlling interest in consolidated net income for 2014.Explanation / Answer
No. of shares Amount Mkt rate Remarks Jan 1 2014 Spivy common stock 300000 $ 600,000 $ 2.00 Spivy retained earnings $ 240,000 Jan 1 2014 Plum purcahsed Spivy stock 30000 $ 122,000 $ 4.07 July 1 2014 Plum purcahsed Spivy stock 210000 $ 789,600 $ 3.76 Nov 1 2014 Total stock held in Spivy 240000 $ 911,600 $ 3.80 Average rate of the stock held in spivy= (911600/240000) Nov 1 2014 Plum purcahsed Spivy stock -3000 $ 21,000 $ (7.00) Nov 1 2014 Value of stock sold $ 11,395 Average rate * stock sold (3.8 * 3000) Nov 1 2014 Gain on sale of shares 3000 $ 9,605 $ 3.20 (Average cost - sale price) 2014 Plum earnings $ 22,000 Retained earnings $ 460,000 Spivy company income Jan 1st to June 30 2014 $ 60,000 Jan 1st to Oct 31 2014 $ 96,000 Jan 1st to Dec 31 2014 $ 130,000 Book entries in books of Plum for investment The use of the cost method Cost method of the investment is used when the investor has little or no influence over the investment it owns. The first transaction where Plum purchased 30,000 shares of Spivy stock it has only 10% of the shares of Spivy. Hence it has no influence and the cost method of investment is to be used. Book entries for the same in books of plum would be as below: Jan 1 2014 Investment A/c Dr $ 122,000 To Cash A/c $ 122,000 (Being 30000 shares of Spivy purchased @ $4.07 (Face value $2) July 1 2014 Investment A/c Dr $ 789,600 To Cash A/c $ 789,600 (Being 210000 shares of Spivy purchased @ $3.76 (Face value $2) Nov 1 2014 Cash A/c Dr 21,000 To Investment A/c $ 11,395 To Gain on sale of shares $ 9,605 (Being gain on sale of shares) Use of complete equity / partial equity method Complete or partial equity method is used when a significant proportion of the shares are acquired i.e, a minimum of 25% of the shares are acquired On July 1 2014 with acquisition of 210000 shares, total investment of Plum in spivy has become 80% of the shares and even on subsequent sale of 3000 shares, it still had a balance of 79% hold in spivy. Spivy retained earnings as on Jan 1 2014 $ 240,000 Net income of Spivy till June 2014 $ 60,000 Total RE as on June 2014 $ 300,000 As Plum acquired 80% of the shares, it would account for the 80% of the retained earnings for the cost of acquisition i.e., 300,000 * 80/100 = $240,000 Face value of the shares acquired = 240,000 * $2 = $480,000 Therefore, Total value of the acquisition = $240,000+$480,000 = $720,000 Total amount paid for acquisition = $911,600 (Refer working notes above) Therefore, Value of Goodwill = $911,600 - $720,000 = $191,600 Acquisition entry would be as below Retained earnings in Spivy $ 240,000 Common stock in Spivy $ 480,000 Goodwill in Spivy $ 191,600 To Investment A/c 911600 Controlling interest caluculation Retained earnings at the beginning of year $ 240,000 Net income for year 2014 $ 130,000 Total retained earnings $ 370,000 79% of the retained earnings = 370000*79% $ 292,300
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