Scenario or Tasks
Task 1
Pie Company acquired 75 percent of Strawberry Company's stock at the underlying book value on January 1, 20X8. At that date, the fair value of the non-controlling interest was equal to 25 percent of the book value of Strawberry Company. Strawberry Company reported shares outstanding of $350,000 and retained earnings of $100,000. During 20X8, Strawberry Company reported net income of $60,000 and paid dividends of $3,000. In 20X9, Strawberry Company reported net income of $90,000 and paid dividends of $15,000. The following transactions occurred between Pie Company and Strawberry Company in 20X8 and 20X9:
Strawberry Co. sold equipment to Pie Co. for a $42,000 gain on December 31, 20X8. Strawberry Co. had originally purchased the equipment for $140,000 and it had a carrying value of $28,000 on December 31, 20X8. At the time of the purchase, Pie Co. estimated that the equipment still had a seven-year remaining useful life.
Pie Co. sold land costing $90,000 to Strawberry Co. on June 28, 20X9, for $110,000.
Required:
1. Discuss and briefly explain the concept of eliminating entries and its carried forward Implication on the consolidated statement of financial position?
2. Give all eliminating entries needed to prepare a consolidation worksheet for 20X9 assuming that Pie Co. uses the fully adjusted equity method to account for its investment in Strawberry Company.
Task 2
A subsidiary issues bonds. The parent can then acquire the bonds either directly from the subsidiary or from a nonaffiliate that had originally acquired the subsidiary's bonds.
Required:
a) Discuss the parent's accounting as it relates to the preparation of consolidated financial statements, for their acquisition of the bonds
1. from the nonaffiliate.
2. Directly from the subsidiary.
b) Why does it matter who the bonds are acquired from? Critically evaluate the statement with reference to consolidation of financial statements?