Multiple Stock Purchases and Sale of Shares On January 1, 2014, Plum Company made an open-market...

Multiple Stock Purchases and Sale of Shares
On January 1, 2014, Plum Company made an open-market purchase of 30,000 shares of Spivey Company common
stock for $122,000. At that time, Spivey Company had common stock ($2 par) of $600,000 and retained
earnings of $240,000. On July 1, 2014, an additional 210,000 shares were purchased on the open market by Plum
Company at a cost of $789,600 or $3.76 a share. On November 1, 2014, 3,000 of the shares purchased on January
1, 2014, were sold on the open market for $21,000. Assume that any excess of implied value over book value
acquired relates to subsidiary goodwill.
During 2014, Plum Company earned $22,000 (excluding any gain or loss on the sale of the shares). Plum
Company received income statements from Spivey Company reporting the following results.
Spivey Company Income
January 1, 2014 to June 30, 2014 $ 60,000
January 1, 2014 to October 31, 2014 96,000
For the year ended December 31, 2014 130,000
Neither company declared dividends during the year. Plum Company’s retained earnings were $460,000 on
January 1, 2014.
Required:
A. Prepare the book entries Plum Company would make during 2014 to account for its investment in Spivey
Company, assuming
(1) The use of the cost method.
(2) The use of either the complete or the partial equity method.
B. Prepare in general journal form the eliminating entries for a consolidated statements workpaper on
December 31, 2014, assuming
(1) The use of the cost method.
(2) The use of either the complete or the partial equity method.
C. Compute controlling interest in consolidated net income for 2014.

Expert Solution


		No. of shares	Amount	Mkt rate	Remarks
Jan 1 2014	Spivy common stock	300000	$ 600,000	$ 2.00
	Spivy retained earnings		$ 240,000
Jan 1 2014	Plum purcahsed Spivy stock	30000	$ 122,000	$ 4.07

July 1 2014	Plum purcahsed Spivy stock	210000	$ 789,600	$ 3.76


Nov 1 2014	Total stock held in Spivy	240000	$ 911,600	$ 3.80	Average rate of the stock held in spivy= (911600/240000)

Nov 1 2014	Plum purcahsed Spivy stock	-3000	$ 21,000	$ (7.00)
Nov 1 2014	Value of stock sold		$ 11,395		Average rate * stock sold (3.8 * 3000)
Nov 1 2014	Gain on sale of shares	3000	$ 9,605	$ 3.20	(Average cost - sale price)

2014	Plum earnings		$ 22,000
	Retained earnings		$ 460,000


	Spivy company income
	Jan 1st to June 30 2014		$ 60,000
	Jan 1st to Oct 31 2014		$ 96,000
	Jan 1st to Dec 31 2014		$ 130,000


	Book entries in books of Plum for investment
	The use of the cost method

	Cost method of the investment is used when the investor has little or no
	influence over the investment it owns.
	The first transaction where Plum purchased 30,000 shares of Spivy stock
	it has only 10% of the shares of Spivy. Hence it has no influence and
	the cost method of investment is to be used.

	Book entries for the same in books of plum would be as below:

Jan 1 2014	Investment A/c Dr	$ 122,000
	To Cash A/c		$ 122,000
	(Being 30000 shares of Spivy
	purchased @ $4.07 (Face value $2)

July 1 2014	Investment A/c Dr	$ 789,600
	To Cash A/c		$ 789,600
	(Being 210000 shares of Spivy
	purchased @ $3.76 (Face value $2)

Nov 1 2014	Cash A/c Dr	21,000
	To Investment A/c		$ 11,395
	To Gain on sale of shares		$ 9,605
	(Being gain on sale of shares)


	Use of complete equity / partial equity method

	Complete or partial equity method is used when a significant proportion
	of the shares are acquired i.e, a minimum of 25% of the shares are
	acquired

	On July 1 2014 with acquisition of 210000 shares, total investment
	of Plum in spivy has become 80% of the shares and even on subsequent
	sale of 3000 shares, it still had a balance of 79% hold in spivy.


	Spivy retained earnings as on Jan 1 2014		$ 240,000
	Net income of Spivy till June 2014		$ 60,000
	Total RE as on June 2014		$ 300,000

	As Plum acquired 80% of the shares, it would account for the 80%
	of the retained earnings for the cost of acquisition
	i.e., 300,000 * 80/100 = $240,000

	Face value of the shares acquired = 240,000 * $2 = $480,000

	Therefore, Total value of the acquisition = $240,000+$480,000
	= $720,000

	Total amount paid for acquisition = $911,600
	(Refer working notes above)

	Therefore, Value of Goodwill = $911,600 - $720,000 = $191,600



	Acquisition entry would be as below


	Retained earnings in Spivy		$ 240,000
	Common stock in Spivy		$ 480,000
	Goodwill in Spivy		$ 191,600
	To Investment A/c			911600


	Controlling interest caluculation

	Retained earnings at the beginning of year		$ 240,000
	Net income for year 2014		$ 130,000
	Total retained earnings		$ 370,000

	79% of the retained earnings = 370000*79%		$ 292,300

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