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Petunia Corporation acquired 90 percent of the stock of Spring Company on January 1, 20X2, for...

Petunia Corporation acquired 90 percent of the stock of Spring Company on January 1, 20X2, for $360,000. At that date, the fair value of the noncontrolling interest was $40,000. Spring’s balance sheet contained the following amounts at the time of the combination:

Cash $ 20,000 Accounts Payable $ 25,000
Accounts Receivable 60,000 Bonds Payable 75,000
Inventory 70,000 Common Stock 100,000
Buildings and Equipment (net) 350,000 Retained Earnings 300,000
Total Assets $ 500,000 Total Liabilities & Equity $ 500,000

  
During each of the next three years, Spring reported net income of $70,000 and paid dividends of $20,000. On January 1, 20X4, Petunia sold 3,000 shares of Spring’s $5 par value shares for $90,000 in cash. Petunia used the fully adjusted equity method in accounting for its ownership of Spring Company.

Based on the preceding information, in the consolidation entries to complete a consolidation worksheet at January 1, 20X4 (after the sale of the 3,000 shares of Spring stock), Investment in Spring Stock will be credited for what amount?

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Expert Solution

Petunia used the fully adjusted equity method in accounting for its ownership of Spring Company. The Company will deduct any Intra-Group Unrealized profit until these are realized.

In this case, there is no Intra-Group transactions.

On January, 1 20X3 Investment in Spring Stock account balance will be

Particulars                                                                                          Amount ($)

Investments    360,000

Add: Share on Net Income (70,000 * 90%)    63,000

Less: Dividend Share (20,000 * 90%)    18,000

Closing balance 405,000

On January, 1 20X4 Investment in Spring Stock account balance will be

Particulars                                                                                          Amount ($)

Investments    405,000

Add: Share on Net Income (70,000 * 90%) 63,000

Less: Dividend Share (20,000 * 90%) 18,000

Less: Investment value (See note). 75000

Closing balance 3,75,000

Hence, Closing balance of Investment in Spring Stock is $3,75,000.

Note: Calculation of Value 3,000 shares

Value of common stock. $100,000

Add: Retained earning as on (1.1.04)

(300,000 + 50,000 + 50,000) $4,00,000

Total $5,00,000

Total shares = Common stock / par value

= 100,000/5

= 20,000

Value of 3,000 shares

= 500,000*(3,000/20,000)

= $75,000

ekkarill92 answered 1 year ago
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