On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidia

Question

On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for $316,000. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $40,000, $120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as follows:

20X1 20X2

Net income $50,000 $90,000

Dividends 10,000 20,000

On January 1, 20X1, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used, was worth $5,000 more than cost. The inventory was sold in 20X1. Building, which was worth $15,000 more than book value, has a remaining life of 8 years, and straight-line depreciation is used. Any remaining excess is goodwill. Prepare Parent’s 20X1 and 20X2 journal entries (after the purchase has been recorded) to record the transactions related to its investment in Subsidiary under the cost method.

Explanation / Answer

Jan 1 20X1 Assets of Subsidiary Amt $ Common stock                                     40,000 Other paid in capital                                   120,000 Retained Earning                                   190,000 Inventory -Additional Fair value recognized                                       5,000 Buliding -Additional fair value Recognition                                     15,000 Goodwilll                                     25,000                                   395,000 80% of Net Assets=Cash Paid                                   316,000 Share of Parent in Fair value additions @80% Inventroy                                       4,000 Building                                     12,000 Write off -Inventory in X1                                       4,000 Write Off building each in X1 &X2                                       1,500 Details Year X1 Year X2 Net Income                                     50,000                              90,000 Parent's share in Net Income of subsidiary                                     40,000                              72,000 Dividends declared by subsidiary                                     10,000                              20,000 Parent's share in Dividend of subsidiary                                       8,000                              16,000 Journal Entry year 20X1in Parent's Book Investment in Stock of Subsidiary                                     40,000 Share in Earning From Subsidiary                              40,000 (recording share of net income in subsidiary) Cash                                       8,000 Investment in Stock of Subsidiary                                8,000 (recording dididend share from subsidiary) Cost of Goods sold (additional fair value depreciation in subsidiary assets)                                       5,500 Inventory (Additional fair value adjustment)                                4,000 Building(additional depreciation for fair value adjustment)                                1,500 Journal Entry year 20X2in Parent's Book Investment in Stock of Subsidiary                                     72,000 Share in Earning From Subsidiary                              72,000 (recording share of net income in subsidiary) Cash                                     16,000 Investment in Stock of Subsidiary                              16,000 (recording dididend share from subsidiary) Cost of Goods sold (additional fair value depreciation in subsidiary assets)                                       1,500 Building(additional depreciation for fair value adjustment)                                1,500

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.