Problem 1: Consolidations Peppers Corporation acquired an 80% interest in Sal Co
ID: 2546579 • Letter: P
Question
Problem 1: Consolidations Peppers Corporation acquired an 80% interest in Sal Corporation for $250,000 on lanuary 1, 2017 when Sal's stockholder's equity consisted of $200,000 of common stock and $25,000 of retained earnings. At that time, plant assets had fair value of $280,000. The remainder of the assets and liabilities were fairly valued. The plant assets had a 4-year remaining useful life. Financial statements for Peppers and Sal for the year ended December 31,2018 are presented below: Income Statement Sales Income from Sal Cost of Goods Sold Pepper Co Sal Co 300,000 38,000 600,000 190,000 150,000 90,000 Net Income Statement of Retained Earnin Retained earnings 1/1 Add: Net Income Less: Dividends 122,000 148,000 100,000 50,000 60,000 20,000 Retained Earnings 12/31 Balance Sheet Assets Cash Accounts Receivable, net Invento Advance to Sal Land Plant Assets, net Investment in Sal 86,000 26,000 82,000 20,000 160,000 20,000 60,0 Total Assets Liabilities & Equities Accounts Payable Dividends Payable Other Liabilities 24,000 100,000 700,000 15.000 10,000 45,000 200,000 90,0000 Common Stock Retained Earnin 170,000 Total Liabilities and EquitiesExplanation / Answer
Computation and Allocation of Schedule from Jan 1, 2017
$50000
2. What method is used for investment in sal.
Under these circumstances, the cost method mandates that the investor account for the investment at its historical cost (i.e., the purchase price). This information appears as an asset on the balance sheet of the investor.
Once the investor records the initial transaction, there is no need to adjust it, unless there is evidence that the fair market value of the investment has declined to below the recorded historical cost. If so, the investor writes down the recorded cost of the investment to its new fair market value.
If there is evidence that the fair market value has increased above the historical cost, it is not allowable under Generally Accepted Accounting Principles to increase the recorded value of the investment. This is a highly conservative approach to recording investments.
3. The entries made Journal entries.
a)
Investment account (122000*80%) Dr 97600
Equity in subsdiary income Cr 976000
b) Cash (100000*80%) Dr 80000
Investment in Sal Cr 80000
4.) Consolidated financial statements are designed to provide the results of operations, cash flow and the balance sheet as if the parent and subsidiary were a single entity. Generally, these are more informative for shareholders of the controlling company.
An investor having a passive interest in its investee (generally resulting from less than 20% ownership) records dividends as dividend income.
Generally, statements are to be consolidated when a parent firm owns over 80% of the voting stock of another company. The only exceptions are when control is temporary or does not rest with the majority owner. There may be instances when a parent firm effectively has control with less than 51% of the voting stock because no other ownership interest exercises significant influence on management. Because many entities may be combined in a consolidation, unprofitable subsidiaries may not be obvious when combined with profitable entities.
Computation and Allocation of Difference between Implied and Book Value Purchase price and implied value $250,000 Book Value of Equity Acquired $200,000
$50000
2. What method is used for investment in sal.
Under these circumstances, the cost method mandates that the investor account for the investment at its historical cost (i.e., the purchase price). This information appears as an asset on the balance sheet of the investor.
Once the investor records the initial transaction, there is no need to adjust it, unless there is evidence that the fair market value of the investment has declined to below the recorded historical cost. If so, the investor writes down the recorded cost of the investment to its new fair market value.
If there is evidence that the fair market value has increased above the historical cost, it is not allowable under Generally Accepted Accounting Principles to increase the recorded value of the investment. This is a highly conservative approach to recording investments.
3. The entries made Journal entries.
a)
Investment account (122000*80%) Dr 97600
Equity in subsdiary income Cr 976000
b) Cash (100000*80%) Dr 80000
Investment in Sal Cr 80000
4.) Consolidated financial statements are designed to provide the results of operations, cash flow and the balance sheet as if the parent and subsidiary were a single entity. Generally, these are more informative for shareholders of the controlling company.
An investor having a passive interest in its investee (generally resulting from less than 20% ownership) records dividends as dividend income.
Generally, statements are to be consolidated when a parent firm owns over 80% of the voting stock of another company. The only exceptions are when control is temporary or does not rest with the majority owner. There may be instances when a parent firm effectively has control with less than 51% of the voting stock because no other ownership interest exercises significant influence on management. Because many entities may be combined in a consolidation, unprofitable subsidiaries may not be obvious when combined with profitable entities.