The following accounts appeared in the stand alone financial statements of P, In
ID: 2530941 • Letter: T
Question
The following accounts appeared in the stand alone financial statements of P, Inc. at the
end of 2014. P acquired 100% of the common stock of S, Co. on January 1, 2014 at book
value. On the date of acquisition, S had common stock of $20,000, additional paid in capital of
$380,000, and retained earnings of $339,000. P received $24,000 in dividends during 2014
and does not own any other equity investments.
P
Investment in subsidiary 660,000
Common stock 300,000
Additional paid-in-capital 500,000
Retained earnings, 12/31/14 500,000
Dividends declared (75,000)
Equity in net loss of subsidiary (55,000)
Retained earnings at 1/1/14 380,000
Required
1. Is P using the cost or equity method to account for its investment in S?
2. Compute consolidated net income.
3. How much income did P, Inc. earn from its own independent operations?
4. Compute consolidated retained earnings at 12/31/14.
5. What are consolidated dividends?
6. Compute retained earnings at 12/31/14 for S, Inc.
7. What was the amount of difference between book value and the value implied
by the purchase price at acquisition?
Explanation / Answer
1.
Net asset in S Ltd.
Particulars
Amount ($)
Common stock of S
20000
Additional paid in capital
380000
Retained earnings
339000
Net asset in S Ltd.
739000
Investment in Subsidiary
660000
If P would have used equity method then the value of the investment would have been $739,000. However, since the investment is shown at $660,000 thus, P has used cost method to account for its investment in S Ltd.
Particulars
Amount ($)
Retained earnings as on 31/12/2014
500000
Less: Retained earnings as on 01/01/2014
380000
Consolidated net income
120000
Particulars
Amount ($)
Retained earnings as on 31/12/2014
500000
Less: Retained earnings as on 01/01/2014
380000
Consolidated net income
120000
Less: Dividend received from S Limited
24000
Income from independent operations
96000
Consolidated Retained earnings
Particulars
Amount ($)
Retained earnings as on 31/12/2014
500000
Add: Retained earnings of S Limited
339000
839000
Less: Dividend paid by S Limited
24000
Consolidated Retained earnings
815000
Consolidated dividends
Particulars
Amount ($)
Amount of dividend declared by P Limited
75000
Add: Amount of dividend declared by S Limited
24000
Consolidated dividends
99000
Particulars
Amount ($)
Retained earnings of S Limited as on 01/01/2014
339000
Less: Dividend paid in 2014
24000
Retained earnings of s Limited as on 31/12/2014
315000
Value implied:
Net asset in S Ltd.
Particulars
Amount ($)
Amount ($)
Common stock of S
20000
Additional paid in capital
380000
Retained earnings
339000
Value implied:
739000
Less: Purchase price
660000
Difference between value implied and purchase price (739000 - 660000)
79000
Net asset in S Ltd.
Particulars
Amount ($)
Common stock of S
20000
Additional paid in capital
380000
Retained earnings
339000
Net asset in S Ltd.
739000
Investment in Subsidiary
660000