PROBLEM 3-1 Consolidated Workpaper: Two Cases LO 8 LO 9

The two following separate cases show the financial position of a parent company and its subsidiary company on November 30, 2024, just after the parent had purchased 90% of the subsidiary's stock:

Case I Case II

P Company S Company P Company S Company

Current assets $ 880,000 $260,000 $ 780,000 $280,000

Investment in S Company 190,000

190,000

Long-term assets 1,400,000 400,000 1,200,000 400,000

Other assets 90,000 40,000 70,000 70,000

Total $2,560,000 $700,000 $2,240,000 $750,000

Current liabilities $ 640,000 $270,000 $ 700,000 $260,000

Long-term liabilities 850,000 290,000 920,000 270,000

Common stock 600,000 180,000 600,000 180,000

Retained earnings 470,000 (40,000) 20,000 40,000

Total $2,560,000 $700,000 $2,240,000 $750,000

Required:

Provide a November 30, 2024, consolidated balance sheet workpaper for each of the foregoing cases. In Case I, any difference between the book value of equity and the value implied by the purchase price relates to subsidiary long-term assets. In Case II, assume that any excess of book value over the value implied by purchase price is due to overvalued long-term assets. Assume that Company S's balance sheet is the same as the balance sheet used in Case I (from part A). Suppose that there were 50,000 shares of S Company common stock outstanding and that Company P acquired 90% of the shares for $4.50 a share. Shortly after the acquisition, the noncontrolling shares were selling for $4.25 a share. Provide a computation and allocation of difference schedule considering this information.

PROBLEM 3-2 Consolidated Balance Sheet Workpaper LO 8 LO 9

On January 1, 2024, Perry Company purchased 8,000 shares of Soho Company's common stock for $120,000. Immediately after the stock acquisition, the statements of financial position of Perry and Soho appeared as follows:

Assets Perry Soho

Cash $39,000 $19,000

Accounts receivable 53,000 31,000

Inventory 42,000 25,000

Investment in Soho Company 120,000

Plant assets 160,000 110,500

Accumulated depreciationplant assets (52,000) (19,500)

Total $362,000 $166,000

Liabilities and Owners' Equity

Current liabilities $18,500 $26,000

Mortgage notes payable 40,000

Common stock, $10 par value 120,000 100,000

Other contributed capital 135,000 16,500

Retained earnings 48,500 23,500

Total $362,000 $166,000

Required:

Calculate the percentage of Soho acquired by Perry Company. Provide a schedule to compute the difference between the book value of equity and the value implied by the purchase price. Any difference between the book value of equity and the value implied by the purchase price relates to subsidiary plant assets. Provide a consolidated balance sheet workpaper as of January 1, 2024. Suppose instead that Perry acquired the 8,000 shares for $20 per share including a $5 per share control premium. Provide a computation and allocation of difference schedule.

PROBLEM 3-3 Intercompany Bond Holdings at Par, 90% Owned Subsidiary LO 8 LO 9

Balance sheets for P Company and S Company on August 1, 2024, are as follows:

P Company S Company

Cash $ 165,500 $106,000

Receivables 366,000 126,000

Inventory 261,000 108,000

Investment in bonds 306,000 0

Investment in S Company stock 586,500 0

Plant and equipment (net) 573,000 320,000

Land 200,000 300,000

Total $2,458,000 $960,000

Accounts payable $ 174,000 $58,000

Accrued expenses 32,400 26,000

Bonds payable, 8% 0 200,000

Common stock 1,500,000 460,000

Other contributed capital 260,000 60,000

Retained earnings 491,600 156,000

Total $2,458,000 $960,000

Required: Provide a workpaper for a consolidated balance sheet for P Company and its subsidiary on August 1, 2024, taking into consideration the following:

P Company acquired 90% of the outstanding common stock of S Company on August 1, 2024, for a cash payment of $586,500. Included in the Investment in Bonds account are $40,000 par value of S Company bonds payable that were purchased at par by P Company in 2007. The bonds pay interest on April 30 and October 31. S Company has appropriately accrued interest expense on August 1, 2024; P Company, however, inadvertently failed to accrue interest income on the S Company bonds. Included in P Company receivables is a $35,000 cash advance to S Company that was mailed on August 1, 2024. S Company had not yet received the advance at the time of the preparation of its August 1, 2024. Assume that any excess of book value over the value implied by purchase price is due to overvalued plant and equipment.