On January 2, 20X8, Paint Company acquired 75 percent of Stain Company’s outstanding common stock at an amount equal to its underlying book value. Selected balance sheet data at December 31, 20X8, follow:

 Select the correct answer for each of the following questions.

Parts 1 and 2 are based on the following:

On January 2, 20X8, Paint Company acquired 75 percent of Stain Company’s outstanding common stock at an amount equal to its underlying book value. Selected balance sheet data at December 31, 20X8, follow:

     Paint Company    Stain Company
Total Assets    $ 420,000    $ 180,000
Liabilities    $ 120,000    $ 60,000
Common Stock    100,000    50,000
Retained Earnings    200,000    70,000
     $ 420,000    $ 180,000
1. In Paint’s December 31, 20X8, consolidated balance sheet, what amount should be reported as noncontrolling interest in net assets?

Multiple Choice

$105,000


$45,000


$30,000 Correct

$0

Explanation
1.

Total book value of net assets is $120,000 ($50,000 + $70,000). The amount attributed to the noncontrolling interest = 25% × $120,000 = $30,000.

 In Paint’s December 31, 20X8, consolidated balance sheet, what amount should be reported as noncontrolling interest in net assets?

Multiple Choice

$45,000


$105,000


$0


$30,000 Correct
Explanation
1.

Total book value of net assets is $120,000 ($50,000 + $70,000). The amount attributed to the noncontrolling interest = 25% × $120,000 = $30,000.

 

In its consolidated balance sheet at December 31, 20X8, what amount should Paint report as common stock outstanding?

Multiple Choice

$100,000 Correct

$50,000


$137,500


$150,000

Explanation

The consolidated balance in common stock is always equal to the parent's common stock and the common stock of the subsidiary is eliminated.

($50,000) Incorrect. The common stock of Stain Company is eliminated in consolidation.
($137,500) Incorrect. The only amount to be reported in the consolidated balance sheet is the amount of common stock on Paint’s books. The common stock is not allocated based on ownership percentage, but rather is eliminated in its entirety prior to consolidation.
($150,000) Incorrect. The common stock of Stain Company is eliminated, and not added to the common stock balance of the parent.

 

3. Consolidated statements are proper for Neely Incorporated, Randle Incorporated, and Walker Incorporated, if

Multiple Choice

Neely owns 100 percent of the outstanding common stock of Randle and 90 percent of Walker; Neely bought the Walker stock one month before the foreign country in which Walker is based imposed restrictions preventing Walker from remitting profits to Neely.


Neely owns 80 percent of the outstanding common stock of Randle and 40 percent of Walker; Reeves Incorporated owns 55 percent of Walker.


Neely owns 80 percent of the outstanding common stock of Randle and 40 percent of Walker; Randle owns 30 percent of Walker. Correct

Neely owns 100 percent of the outstanding common stock of Randle and Walker; Walker is in legal reorganization.

Explanation
3.

Neely directly controls Randle, and indirectly controls Walker as a result of owning 40% plus an additional 30% as a result of Randle's ownership of Walker, thus Neely should consolidate both Randle and Walker.

(Neely owns 100 percent of the outstanding common stock of Randle and 90 percent of Walker; Neely bought the Walker stock one month before the foreign country in which Walker is based imposed restrictions preventing Walker from remitting profits to Neely.) Incorrect. Due to foreign restrictions, Neely does not control Walker and thus should not consolidate, regardless of its 90% ownership.
(Neely owns 100 percent of the outstanding common stock of Randle and Walker; Walker is in legal reorganization.) Incorrect. Because Walker is in a legal reorganization, Neely does not maintain control, and thus cannot consolidate.
(Neely owns 80 percent of the outstanding common stock of Randle and 40 percent of Walker; Reeves Incorporated owns 55 percent of Walker.) Incorrect. Neely only maintains 40% ownership of Walker and thus does not maintain control. Walker should not be consolidated. 

2. In its consolidated balance sheet at December 31, 20X8, what amount should Paint report as common stock outstanding?

Multiple Choice

$137,500


$50,000


$100,000 Correct

$150,000

Explanation
2.

The consolidated balance in common stock is always equal to the parent's common stock and the common stock of the subsidiary is eliminated.

($50,000) Incorrect. The common stock of Stain Company is eliminated in consolidation.
($137,500) Incorrect. The only amount to be reported in the consolidated balance sheet is the amount of common stock on Paint’s books. The common stock is not allocated based on ownership percentage, but rather is eliminated in its entirety prior to consolidation.
($150,000) Incorrect. The common stock of Stain Company is eliminated, and not added to the common stock balance of the parent.

Thanks