Page 583 - Accounting Principles (A Business Perspective)

14. Stock investments

➢ Why is it necessary to make elimination entries on the consolidated statement work sheet? Are these
elimination entries also posted to the accounts of the parent and subsidiary? Why or why not?

➢ Why might a corporation pay an amount in excess of the book value for a subsidiary's stock? Why
might it pay an amount less than the book value of the subsidiary's stock?
➢ The item Minority interest often appears as one amount in the consolidated balance sheet. What
does this item represent?
➢ How do a subsidiary's earnings, losses, and dividends affect the investment account of the parent
when the equity method of accounting is used?

➢ Why are consolidated financial statements of limited usefulness to the creditors and minority
stockholders of a subsidiary?
Exercises
Exercise A On 2010 July 1, Tam Company purchased 200 shares of Del Company capital stock as a temporary
investment (trading securities) at USD 676.80 per share plus a commission of USD 720. On July 15, a 10 per cent
stock dividend was received. Tam received a cash dividend of USD 3.60 per share on 2010 August 12. On November
1, Tam sold all of the shares for USD 835.20 per share, less a commission of USD 720. Prepare entries to record all

of these transactions in Tam Company's accounts.
Exercise B Key Company purchased 200 shares of Franklin Company stock at a total cost of USD 7,560 on
2010 July 1. At the end of the accounting year (2010 December 31), the market value for these shares was USD
6,840. By 2011 December 31, the market value had risen to USD 7,920. This stock is the only marketable equity
security that Key Company owns. The company classifies the securities as trading securities. Give the entries
necessary at the date of purchase and at 2010 December 31, and 2011.
Exericse C Corbit Company has marketable equity securities that have a fair market value at year-end that is

USD 13,440 below their cost. Give the required entry if:
a. The securities are current assets classified as trading securities.
b. The securities are noncurrent assets classified as available-for-sale securities, and the loss is considered to be
temporary.
c. The securities are noncurrent assets classified as available-for-sale securities, and the loss is considered to be
permanent.
State where each of the accounts debited in (a), (b), and (c) would be reported in the financial statements.
Exercise D Ruiz Company owns 75 per cent of Sim Company's outstanding common stock and uses the equity
method of accounting. Sim Company reported net income of USD 702,000 for 2010. On 2010 December 31, Sim

Company paid a cash dividend of USD 189,000. In 2011, Sim Company incurred a net loss of USD 125,000. Prepare
entries to reflect these events on Ruiz Company's books.
Exercise E On 2010 February 1, Larkin Company acquired 100 per cent of the outstanding voting common
stock of TRD Company for USD 8,400,000 cash. The stockholders' equity of the TRD Company consisted of
common stock, USD 6,720,000, and retained earnings, USD 1,680,000. Prepare (a) the entry to record the
investment in TRD Company and (b) the elimination entry on the work sheet used to prepare a consolidated
balance sheet as of the date of acquisition.

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