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

ekkarill92 answered 1 year ago

On January 1, 2014, Plum Company made an open-market purchase of 30,000 shares of Spivey Company...

On January 1, 2014, Plum Company made an open-market purchase of 30,000 shares of Spivey Company com-mon stock for $122,000. At that time, Spivey Company had common stock ($2 par) of $600,000 and retainedearnings of $240,000. On July 1, 2014, an additional 210,000 shares were purchased on the open market by PlumCompany at a cost of $789,600 or $3.76 a share. On November 1, 2014, 3,000 of the shares purchased on Janu-ary 1, 2014, were sold on the open market...

On January 1, 2014, Kane Corp. issued shares of its common stock to acquire all of...

On January 1, 2014, Kane Corp. issued shares of its common stock to acquire all of the outstanding common stock of Dean Inc. Dean's book value was only $140,000 at the time, but Kane issued 12,000 shares having a par value of $1 per share and a fair value of $20 per share. The buildings (ten-year life) were undervalued on Dean's records by $60,000 while equipment (five-year life) was undervalued by $25,000. Any consideration transferred over fair value of identified...

Park Company purchased 90% of the stock of Salt Company on January 1, 2014, for $465,000,...

Park Company purchased 90% of the stock of Salt Company on January 1, 2014, for $465,000, an amount equal to $15,000 in excess of the book value of equity acquired. This excess payment relates to an undervaluation of Salt Company’s land. On the date of purchase, Salt Company’s retained earnings balance was $50,000. The remainder of the stockholders’ equity consists of no-par common stock. During 2018, Salt Company declared dividends in the amount of $10,000, and reported net income of...

The Nathan Company acquired all of the outstanding stock of Caleb Company on January 1, 2014...

The Nathan Company acquired all of the outstanding stock of Caleb Company on January 1, 2014 for P267,800 cash. Caleb had a book value of only P182,000 on that date. However, equipment (having an eight-year life) is undervalued by P52,000 on Caleb’s financial records. A building with a 20-year life was overvalued by P13,000. Subsequent to the acquisition, Caleb reported the following: Net Income Dividends Paid 2014 P 65,000 P 13,000 2015 78,000 52,000 2016 39,000 26,000 In accounting for...

On January 1, 2014, Paterson Company purchased 70% of the common stock of Smith Company for...

On January 1, 2014, Paterson Company purchased 70% of the common stock of Smith Company for $420,000. At that time, Smith’s stockholders’ equity consisted of $80,000 of Common stock, $60,000 of Other contributed capital, and $240,000 of Retained earnings. Any difference between implied and book value relates to Smith’s land. Paterson uses the cost method to record its investment in Smith. Its fiscal year ends on December 31. Additional information for both companies for 2020 follows: Paterson Smith Common stock...

Pearson Company owns 90% of the outstanding common stock of Spring Company. On January 1, 2014,...

Pearson Company owns 90% of the outstanding common stock of Spring Company. On January 1, 2014, Spring Company sold equipment to Pearson Company for $206,850. Spring Company had purchased the equipment for $316,700 on January 1, 2009, and had depreciated it using a 10% straight-line rate. The management of Pearson Company estimated that the equipment had a remaining useful life of five years on January 1, 2014. In 2015, Pearson Company reported $163,200 and Spring Company reported $107,300 in net...

On January 1, 2014, Pert Company purchased 85% of the outstanding common stock of Sales Company...

On January 1, 2014, Pert Company purchased 85% of the outstanding common stock of Sales Company for$350,000.On that date, Sales Company’s stockholders’ equity consisted of common stock, $100,000; other con-tributed capital, $40,000; and retained earnings, $140,000. Pert Company paid more than the book value of netassets acquired because the recorded cost of Sales Company’s land was significantly less than its fair value.During 2014 Sales Company earned $148,000 and declared and paid a $50,000 dividend. Pert Companyused the partial equity method...

On January 1, 2014, Palka, Inc., acquired 70 percent of the outstanding shares of Sellinger Company...

On January 1, 2014, Palka, Inc., acquired 70 percent of the outstanding shares of Sellinger Company for $1,290,800 in cash. The price paid was proportionate to Sellinger’s total fair value, although at the acquisition date, Sellinger had a total book value of $1,570,000. All assets acquired and liabilities assumed had fair values equal to book values except for a patent (six-year remaining life) that was undervalued on Sellinger’s accounting records by $264,000. On January 1, 2015, Palka acquired an additional...

On January 1, 2015, Pepper Company purchases 80% of the common stock of Salty Company for...

On January 1, 2015, Pepper Company purchases 80% of the common stock of Salty Company for $270,000. On this date, Salty has total owners' equity of $300,000. The excess of cost over book value is due to goodwill. For tax purposes, goodwill is amortized over 15 years. During 2015, Pepper appropriately accounts for its investment in Salty using the simple equity method. During 2015, Pepper sells merchandise to Salty for $50,000, of which $10,000 is held by Salty on December...

Chapman Company obtains 100 percent of Abernethy Company’s stock on January 1, 2014. As of that...

Chapman Company obtains 100 percent of Abernethy Company’s stock on January 1, 2014. As of that date, Abernethy has the following trial balance: Debit Credit Accounts payable $ 59,500 Accounts receivable $ 46,600 Additional paid-in capital 50,000 Buildings (net) (4-year life) 145,000 Cash and short-term investments 84,250 Common stock 250,000 Equipment (net) (5-year life) 257,500 Inventory 106,000 Land 129,000 Long-term liabilities (mature 12/31/17) 151,000 Retained earnings, 1/1/14 273,050 Supplies 15,200 Totals $ 783,550...

Question