14) On January 4, 2013, Mason Co. purchased 40,000 shares (40%) of the common st

Question

14) On January 4, 2013, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly's net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. During 2013, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2014, Mason sold 10,000 of their 40,000 shares for $150,000. What is the appropriate journal entry to record the sale of the 10,000 shares? A) Cash 150,000 10,000 Loss on sale of investment Investment in Hefly 160,000 B) Cash 150,000 Investment in Hefly Gain on sale of investment 130,000 20,000 C) Cash 150,000 1,000 Loss on investment Investment in Hefly 151,000 D) Cash 150,000 Investment in Hefly Gain on sale of investment 149,000 1,000 15) New York Co. acquired 75% of the voting stock of Tennessee Corp. on January 1, 2013. During the year, New York made sales of inventory to Tennessee. The inventory cost New York $260,000 and was sold to Tennessee for $390,000. Tennesssee still had $60,000 of the goods in its inventory at the end of the year. The amount of unrealized intra-entity profit that should be eliminated (deferred) in the consolidation process at the end of 2013 is: A) $20,000 B) $32,500 C) $30,000 D) $110,000 16) Which of the following accounts is not eliminated when preparing consolidated financial statements when control, but not 100% ownership is achieved? A) Investment in subsidiary B) Equity in subsidiary earnings C) Non-controlling interest D) Both A and B E) Both A and C

Explanation / Answer

14) First, we have to calculate carrying amount of investment in Hefty Corp. in books of Mason co.

Now out of 40,000 shares, 10,000 shares had been sold.

Hence, the carrying amount of 10,000 shares sold is 151,000 [604,000*10,000/40,000]

Journal Entry will be:

Hence, correct answer is option C.

15)We have to calculate profit markup on goods sold from New York Co. to Tennessee corp.

Profit (%) = (390,000-260,000)/390,000 = 33.33% of sales

Value of goods already in inventory of Tennessee Corp is 60,000

Unrealised Profit = 60,000*33.33% = 20,000

16

Non-controlling interest is not eliminated when preparing consolidated financial statement.

$ Initial Investment 560000 Add: Share in Subsidiary's earning 60000 [150,000*40%] Less: Dividend received from subsidiary 16000 [40,000*40%] Carrying value of Investment 604000

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