Problem 8-4 (LO 2) Worksheet, subsidiary stock sale with parent purchase, interc
ID: 2566038 • Letter: P
Question
Problem 8-4 (LO 2) Worksheet, subsidiary stock sale with parent purchase, intercompany merchandise.
On January 1, 2016, Mitta Corporation acquires a 60% interest (12,000 shares) in Train Company for $156,000. Train stockholders’ equity on the purchase date is as follows:
Common stock ($5 par) $100,000
Paid-in capital in excess of par 50,000
Retained earnings 80,000
Total stockholders’ equity $230,000
At the purchase date, Train’s book values for assets and liabilities closely approximate fair values. Any excess of cost over book value is attributed to goodwill. On January 1, 2017, Train Company sells 5,000 shares of common stock in a public offering at $20 per share. Mitta Corporation purchases 4,000 shares. During 2017, Mitta sells $30,000 of goods to Train at a gross profit of 25%. There are $6,000 of Mitta goods in Train’s beginning inventory and $8,000 of Mitta goods in Train’s ending inventory. Merchandise sales by Train to Mitta are $20,000 during 2017 at a gross profit of 30%. There are $6,000 of Train goods in Mitta’s beginning inventory and $2,000 of Train goods in Mitta’s ending inventory. Intercompany gross profit rates have been constant for many years. There are no intercompany payables/receivables. Mitta’s investment in Train Company balance is determined as follows:
Original cost $156,000
60% of Train 2016 income ($40,000 × 60%) 24,000
Subtotal $180,000
Less 60% of Train dividends declared in 2016 (60% × $8,000) (4,800)
Subtotal $175,200
Cost to acquire additional shares (new issue) 80,000
64% of Train 2017 income ($50,000 × 64%) 32,000
Subtotal $287,200
Less 64% of Train dividends declared in 2017 (64% × $10,000) (6,400)
Investment balance, December 31, 2017 $280,800
The trial balances of the two companies as of December 31, 2017, are as follows: Mitta Corporation Train Company Cash 106,200 63,500 Accounts Receivable 113,600 60,000 Inventory 350,000 80,000 Investment in Train Company 280,800 Property, Plant, and Equipment 1,800,000 360,000 Accumulated Depreciation (600,000) (89,500) Accounts Payable (180,000) (64,000) Other Current Liabilities (26,000) (8,000) Bonds Payable (500,000) Common Stock ($10 par) (1,000,000) Common Stock ($5 par) (125,000) Paid-In Capital in Excess of Par (125,000) Retained Earnings, January 1, 2017 (212,600) (112,000) Sales (1,950,000) (600,000) Subsidiary Income (32,000) Cost of Goods Sold 1,170,000 420,000 Other Expenses 630,000 130,000 Dividends Declared 50,000 10,000 Totals 0 0 Required Prepare the worksheet necessary to produce the consolidated financial statements of Mitta Corporation and its subsidiary as of December 31, 2017. Include the determination and distribution of excess and income distribution schedule.
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Explanation / Answer
Solution:
Preparing the Worksheet Necessary to Produce the Consolidated Financial Statements of Mitta Corporation and its Subsidary's as of Decemebr 31, 2017:
Determination and Distribution of Excess and Income Distribution Schedule:
Adjustments of identifiable accounts:
Mitta Corp. and Train Company
Worksheet for Consolidated Financial Statements
Year end December 31, 2017
(180,000)
Company Implied Fair Value Parent Price (60%) NCI Value (40%) Fair value of subsidiary $260,000 $156,000 $104,000 Less book value of interest acquired: Common stock $100,000 Paid-in capital in excess of par $50,000 Retained earnings $80,000 Total Equity $230,000 $230,000 $230,000 Interest acquired 60% 40% Book value $138,000 $92,000 Excess of fair value over book value $30,000 $18,000 $12,000