Question

The following accounts appeared in the stand alone financial statements of P, Inc. at the

end of 2014. P acquired 100% of the common stock of S, Co. on January 1, 2014 at book

value. On the date of acquisition, S had common stock of $20,000, additional paid in capital of

$380,000, and retained earnings of $339,000. P received $24,000 in dividends during 2014

and does not own any other equity investments.

P

Investment in subsidiary 660,000

Common stock 300,000

Additional paid-in-capital 500,000

Retained earnings, 12/31/14 500,000

Dividends declared (75,000)

Equity in net loss of subsidiary (55,000)

Retained earnings at 1/1/14 380,000

Required

1. Is P using the cost or equity method to account for its investment in S?

2. Compute consolidated net income.

3. How much income did P, Inc. earn from its own independent operations?

4. Compute consolidated retained earnings at 12/31/14.

5. What are consolidated dividends?

6. Compute retained earnings at 12/31/14 for S, Inc.

7. What was the amount of difference between book value and the value implied

by the purchase price at acquisition?

Answer 1

1.

Net asset in S Ltd.
Particulars	Amount ($)
Common stock of S	20000
Additional paid in capital	380000
Retained earnings	339000
Net asset in S Ltd.	739000
Investment in Subsidiary	660000

  

If P would have used equity method then the value of the investment would have been $739,000. However, since the investment is shown at $660,000 thus, P has used cost method to account for its investment in S Ltd.

1.   Consolidated net income:

Particulars	Amount ($)
Retained earnings as on 31/12/2014	500000
Less: Retained earnings as on 01/01/2014	380000
Consolidated net income	120000

Particulars	Amount ($)
Retained earnings as on 31/12/2014	500000
Less: Retained earnings as on 01/01/2014	380000
Consolidated net income	120000
Less: Dividend received from S Limited	24000
Income from independent operations	96000

Consolidated Retained earnings
Particulars	Amount ($)
Retained earnings as on 31/12/2014	500000
Add: Retained earnings of S Limited	339000
	839000
Less: Dividend paid by S Limited	24000
Consolidated Retained earnings	815000

1. Consolidated dividends:

Consolidated dividends
Particulars	Amount ($)
Amount of dividend declared by P Limited	75000
Add: Amount of dividend declared by S Limited	24000
Consolidated dividends	99000

1. Retained earnings as on 31/12/2014:

Particulars	Amount ($)
Retained earnings of S Limited as on 01/01/2014	339000
Less: Dividend paid in 2014	24000
Retained earnings of s Limited as on 31/12/2014	315000

1. Difference:

Value implied:
Net asset in S Ltd.
Particulars	Amount ($)	Amount ($)
Common stock of S	20000
Additional paid in capital	380000
Retained earnings	339000
Value implied:		739000
Less: Purchase price		660000
Difference between value implied and purchase price (739000 - 660000)		79000