Introduction: A reciprocal relationship is a situation where two affiliated companies have intercompany stock holdings. Under reciprocal relationships, the stock acquired by parents is treated the same way as, repurchase of own stock by the parent and held in the treasury. This investment by a subsidiary in parent stock is recognized using the cost method because the size of the investment is usually very small and not capable of influencing parental ownership significantly. Income assigned to the non-controlling interest includes the subsidiary’s separate income excluding the dividend income from investment in the parent.
The action that will be best for the consolidated entity, and the factors that it must consider in making decision that can maximize consolidated net income.
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Advanced Financial Accounting
- Assume that the parent company acquires its subsidiary by exchanging 80,000 shares of its Common Stock, with a fair value on the acquisition date of $24 per share, for all of the outstanding voting shares of the investee. In its analysis of the investee company, the parent values all of the subsidiary’s assets and liabilities at an amount equaling their book values except for a building that is undervalued by $400,000, an unrecorded License Agreement with a fair value of $200,000, and an unrecorded Customer List owned by the subsidiary with a fair value of $100,000. Any further discrepancy between the purchase price and the book value of the subsidiary’s Stockholders’ Equity is attributed to expected synergies to be realized by the consolidated company as a result of the acquisition. a. Given the following acquisition-date balance sheets of the parent and subsidiary, at what amounts will each of the following be reported on the consolidated balance sheet? (see table numbered 1-7 to…arrow_forwardParent Company purchases 80% of the outstanding shares of Subsidiary Company for P9,000,000. The carrying value of SubsidiaryCompany’s net assets at the time of acquisition was P6,000,000 and had a fair value of P8,000,000. Determine the following:1. Goodwill arising from the consolidation if it is to be computed using the proportionate basis or “PartialGoodwill”2. Non-controlling arising from the consolidation if it is to be computed using the proportionate basis or“Partial Goodwill”3. Goodwill arising from the consolidation if it is to be computed using the full (fair value basis of“Full/Gross-up” Goodwill, assuming the cost of acquisition includes a control premium of P400,000.arrow_forwardChoose the correct.Arryn, Inc., owns 95 percent of Stark Corporation’s voting stock. The acquisition price exceeded book and fair value by $85,500 which was appropriately attributed to goodwill. Stark holds 15 percent of Arryn’s voting stock. The price paid for the shares by Stark equaled 15 percent of the parent’s book value and the net fair values of its assets and liabilities.During the current year, Arryn reported separate operating income of $228,000 and dividend income from Stark of $52,500. At the same time, Stark reported separate operating income of $78,000 and dividend income from Arryn of $18,000.What is the net income attributable to the noncontrolling interest under the treasury stock approach?a. $4,800b. $2,700c. $24,600d. $26,700arrow_forward
- Company A owns 40 percent of Company B and exercisessignificant influence over the management of Company B.Therefore, Company A uses what accounting method forreporting its ownership of stock in Company B?a. The consolidation method.b. The fair value method for available-for-sale securities.c. The equity method.d. The fair value method for trading securitiesarrow_forwardParent Company purchases 80% of the outstanding shares of Subsidiary Company for P9,000,000. The carrying value of SubsidiaryCompany’s net assets at the time of acquisition was P6,000,000 and had a fair value of P8,000,000. Determine the following: Assume Parent purchased 80% of Subsidiary shares for P6,300,000; determine the goodwill arisingfrom the consolidation if the non-controlling interest is stated at fair value of P2,000,000.arrow_forwardParent Company purchases 80% of the outstanding shares of Subsidiary Company for P9,000,000. The carrying value of Subsidiary Company’s net assets at the time of acquisition was P6,000,000 and had a fair value of P8,000,000. Determine the GOODWILL arising from the consolidation if the 100,000, P50 par value shares of the subsidiary are currently selling at 90 per share.arrow_forward
- Alfonso Inc. acquired 100 percent of the voting shares of BelAire Company on January 1, 2020. In exchange, Alfonso paid $387,250 in cash and issued 100,000 shares of its own $1 par value common stock. On this date, Alfonso’s stock had a fair value of $15 per share. The combination is a statutory merger with BelAire subsequently dissolved as a legal corporation. BelAire’s assets and liabilities are assigned to a new reporting unit. The following shows fair values for the BelAire reporting unit for January 1, 2020 along with respective carrying amounts on December 31, 2021. BelAire Reporting Unit Fair Values1/1/20 Carrying Amounts12/31/21 Cash $ 95,000 $ 50,000 Receivables 193,000 245,000 Inventory 217,500 260,000 Patents 638,000 741,000 Customer relationships 599,250 570,000 Equipment (net) 354,000 267,000 Goodwill ? 516,000 Accounts payable (161,000 ) (219,000 ) Long-term liabilities (564,500 )…arrow_forwardKochin Corporation (KC) owns an 85% stake in Doha Corporation (DC). On January 1, 20XX, KC decided to sell the 50% interest in DC to a third party in exchange for € cash 600,000. On the disposal date, DC's fair value amounted to € 1,000,000. Furthermore, in the report In KC's consolidated financial statements, the carrying amount of DC's net assets is € 1,000,000 and the carrying amount of the interest non-controlling interest in DC (including non-controlling interest's share of accumulated income another comprehensive) is € 100,000. As a result of this transaction, KC lost control of DC however retains 35% interest in the previous subsidiary, amounting to € 350,000 as of that date. Instructions: 1. Discuss and determine the accounting treatment for recording the transaction accordingly with IFRS 10 (PSAK 65) 2.Calculate how much profit or loss from the transaction (if any) 3. Discuss and determine how the accounting treatment would have been different if it assumed that KC didn't lose…arrow_forwardKochin Corporation (KC) owns an 85% stake in Doha Corporation (DC). On 1 January 20XX, KC decided to sell its 50% interest in DC to a third party in exchange for € 600,000 in cash. On the disposal date, DC's fair value amounted to € 1,000,000. Furthermore, in KC's consolidated financial statements, the carrying amount of DC's net assets is € 1,000,000 and the carrying value of non-controlling interests in DC (including non-controlling interests' share of accumulated other comprehensive income) is € 100,000. As a result of this transaction, KC lost control of DC but retained 35% interest in the previous subsidiary, amounting to € 350,000 as of that date. Instructions: 1. Discuss and determine the accounting treatment for recording the transaction in accordance with IFRS 10 2.Calculate how much profit or loss from the transaction (if any) 3. Discuss and determine how the accounting treatment would have been different if it had been assumed that KC had not lost control after the…arrow_forward
- Parent Company purchases 80% of the outstanding shares of Subsidiary Company for P9,000,000. The carrying value of Subsidiary Company’s net assets at the time of acquisition was P6,000,000 and had a fair value of P8,000,000. Determine the following: 6. Goodwill arising from the consolidation if the 100,000, P50 par value shares of the subsidiary are currently selling at 90/share.7. Assume Parent purchased 80% of Subsidiary shares for P6,300,000; determine the goodwill arising from the consolidation if the non-controlling interest is stated at fair value of P2,000,000.arrow_forwardChoose the correct. A parent buys 32 percent of a subsidiary in one year and then buys an additional 40 percent in the next year. In a step acquisition of this type, the original 32 percent acquisition should bea. Maintained at its initial value.b. Adjusted to its equity method balance at the date of the second acquisition.c. Adjusted to fair value at the date of the second acquisition with a resulting gain or loss recorded.d. Adjusted to fair value at the date of the second acquisition with a resulting adjustment to additional paid-in capital.arrow_forwardAssume that Company A acquires 70 per cent of Company B for a cash price of $14 million when the share capital and reserves of Company B are: Share capital $8 million Retained earnings $2 million $10 million. A)Pass the necessary consolidation journal entries and the journal entries to record the non-controlling interest if the non-controlling interest in the acquirer is measured at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets. b) What are some of the implications of allowing the group to have two options in accounting for goodwill on consolidation?arrow_forward