On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidia
ID: 2776819 • Letter: O
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