17.
On January 1, 20X7, Parent Company purchased 80% of
the common stock of Subsidiary Company for $402,000. On this date Subsidiary
had total owners’ equity of $440,000.

Any
excess of cost over book value is due to goodwill.

During 20X7 and 20X8, Parent has appropriately accounted for its
investment in Subsidiary using the simple equity method.
On January
1, 20X8, Parent held merchandise acquired from Subsidiary for $30,000. During
20X8, Subsidiary sold merchandise to Parent for $100,000, of which $50,000 is
held by Parent on December 31, 20X8. Subsidiary’s usual gross profit on
affiliated sales is 40%.

On December 31, 20X8, Parent still owes Subsidiary $10,000 for
merchandise acquired in December.

On December
31, 20X7, Parent sold $100,000 par value of 11%, 10-year bonds for $106,232,
which resulted in an effective interest rate of 10%. The bonds pay interest
semi-annually on June 30 and December 31. Parent uses the effective interest
method of amortization for the premium.

An amortization table for 20X2 is presented
below:

Carrying

Carrying

Effective

Interest

Nominal

Premium

Value on

Value

Interest

Expense

Interest

Write-off

12-31-X7

$106,232

5%

$5,312

$5,500

$188

6-30-X8

188

5%

5,302

5,500

198

106,044

12-31-X8

198

$105,846

========

On December
31, 20X8, Subsidiary repurchased $50,000 par value of the bonds, paying a price
equal to par.

Required:

Complete
the Figure 5-16 worksheet for consolidated financial statements for the year
ended December 31, 20X8. Round all computations to the nearest dollar.

5-37

Chapter 5

18.
On January 1, 20X7, Parent Company purchased 80% of
the common stock of Subsidiary Company for $402,000. On this date Subsidiary
had total owners’ equity of $440,000. Any excess of cost over book value is due
to goodwill.

During 20X7, 20X8, and 20X9, Parent has appropriately accounted
for its investment in Subsidiary using the simple equity method.
On January
1, 20X9, Parent held merchandise acquired from Subsidiary for $50,000. During 20X9,
Subsidiary sold merchandise to Parent for $120,000, of which Parent holds
$30,000 on December 31, 20X9. Subsidiary’s gross profit on sales is 40%. On
December 31, 20X9, Parent still owes Subsidiary $5,000 for merchandise.

On December
31, 20X9, Parent sold $100,000 par value of 11%, 10-year bonds for $106,232,
which resulted in an effective interest rate of 10%. The bonds pay interest
semi-annually on June 30 and December 31. Parent uses the effective-interest
method of amortization for the premium.

An amortization table for 20X2 and 20X3 is
presented below:

Carrying

Carrying

Effective

Interest

Nominal

Premium

Value on

Value

Interest

Expense

Interest

Write-off

12-31-X7

$106,232

5%

$5,312

$5,500

$188

6-30-X8

188

5%

5,302

5,500

198

106,044

12-31-X8

198

5%

5,292

5,500

208

105,846

6-30-X9

208

5%

5,282

5,000

218

105,638

12-31-X9

218

$105,420

========

On December
31, 20X8, Subsidiary repurchased $50,000 par value of the bonds, paying a price
equal to par. The bonds are still held on December 31, 20X9.

On December
31, 20X9, Parent sold equipment with a cost of $50,000 and accumulated
depreciation of $30,000 to Subsidiary for $40,000. Subsidiary will use the
equipment beginning in 20X0.

Required:

Complete
the Figure 5-17 worksheet for consolidated financial statements for the year
ended December 31, 20X9. Round all computations to the nearest dollar.

5-38

Chapter 5

5-39

Chapter 5

19.
On January 1, 20X7, Parent Company purchased 80% of
the common stock of Subsidiary Company for $402,000. On this date Subsidiary
had total owners’ equity of $440,000 including retained earnings of $140,000.
Any excess of cost over book value is due to goodwill.

During 20X7, 20X8, and 20X9, Parent has appropriately accounted
for its investment in Subsidiary using the cost method.
On January
1, 20X9, Parent held merchandise acquired from Subsidiary for $50,000. During
20X9, Subsidiary sold merchandise to Parent for $120,000, of which $30,000 is
held by Parent on December 31, 20X9. Subsidiary’s usual gross profit on
affiliated sales is 40%. On December 31, 20X9, Parent still owes Subsidiary
$5,000 for merchandise acquired in December.

On December
31, 20X7, Parent sold $100,000 par value of 10%, 10-year bonds for $102,000.
Parent uses the straight-line method of amortization for the premium. The bonds
pay interest semi-annually on June 30 and December 31.

On December
31, 20X8, Subsidiary repurchased $50,000 par value of the bonds, paying
$49,100. Subsidiary uses the straight-line method of amortization for the
discount. The bonds are still held on December 31, 20X9.

Required:

Complete
the Figure 5-18 worksheet for consolidated financial statements for the year
ended December 31, 20X9. Round all computations to the nearest dollar.

5-40

Chapter 5

5-41

Chapter 5

ESSAY

1.
The Park Company owns 80% of the outstanding common
stock of the Sea Company. Park is about to lease a machine with a 5-year life
to the Sea Company. The lease would begin January 1, 20X8.

Required:

Explain the adjustments that will be required in the
consolidation process if each of the following occurs.
a. The lease is an operating
lease.

b. The lease
is a direct financing lease with a bargain purchase option.
c. The lease
is a sales-type lease with a bargain purchase option.

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