P Company owns 80% of S Company’s common stock (cost $650,000) and 20% of its preferred stock (cost $50,000). Both interests were acquired on January 1, 2009. On the date of purchase, S Company’s stockholders’ equity consisted of the following accounts.
Preferred stock......... $200,000
Common stock......... 500,000
Retained earnings......... 160,000
The preferred stock is $25 par value, 9% cumulative, and nonparticipating. The call price is $27 per share. Dividends have been declared in all years except for 2010.
An examination of S Company’s assets and liabilities revealed that their book values were equal to fair values except for the inventory and equipment.

The equipment had a remaining life of five years at the date of the equity purchase, and the FIFO cost flow assumption is used in costing inventory. S Company sells inventory to P Company at 25% above cost. During 2010 and 2011, such sales amounted to $350,000 and $390,000, respectively. The 2010 and 2011 ending inventories of P Company included goods purchased from S Company for $77,500 and $54,000, respectively. The companies file consolidated tax returns. Ignore deferred income taxes when assigning the difference between implied and book value. Selected data for the 2011 December 31 fiscal year-end are given below:

A. Prepare a schedule to compute the book value interest acquired for each equity investment.
B. Prepare a schedule to assign the difference between the implied value of the common stock investment and the book value of S.
C. Compute the following items:
(1) Dividends received during 2011 by P Company from S Company for each equity interest held.
(2) Noncontrolling interest in 2011 consolidated net income.
(3) Controlling interest in consolidated net income for 2011.
(4) Consolidated retained earnings on January 1,2011.

  • CreatedMarch 13, 2015
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