Question

On January 2, year 1, ABC Company purchased 75% of XYZ's outstanding common stock. On that date, the fair value of the 2...


On January 2, year 1, ABC Company purchased 75% of XYZ's outstanding common stock. On that date, the fair value of the 25% noncontrolling interest was $35,000. During year 1, XYZ had net income of $20,000. Selected balance sheet data at December 31, year 1, is as follows: ABC (Column 1), XYZ (Column 2)

During year 1, ABC and XYZ paid cash dividends of $25,000 and $5,000, respectively, to their shareholders. There were no other intercompany transactions.

a) In its December 31, year 1 consolidated statement of retained earnings, what amount should ABC report as dividends paid?

b) In ABC's December 31, year 1, consolidated balance sheet, what amount should be reported as noncontrolling interest in net assets?

c) In its December 31, year 1 consolidated balance sheet, what amount should ABC report as common stock?

 

Transcribed: Total assets $420,000 $120,000 $180,000 $ 60,000 Liabilities Common stock 100,000 200,000 $420,000 50,000 Retained carnings 70,000 $180,000

Answer

a) In its December 31, year 1 consolidated statement of retained earnings, what amount should ABC report as dividends paid?

Dividend paid = Cash dividend paid by ABC + Cash dividend paid by XYZ – ABC’s Share in XYZ cash dividend

 

Dividend paid = $25,000 + $5,000 - $5,000 x 75%

                       = $25,000 + $1,250 

                       = $26,250

 

b) In ABC's December 31, year 1, consolidated balance sheet, what amount should be reported as noncontrolling interest in net assets?

 

Non-controlling interest (NCI) = Fair value of NCI on January 2, year 1 + NCI share in net income of XYZ – Dividend paid

= $35,000 + $20,000 x 25% - $5,000 x 25%

= $41,250

c) In its December 31, year 1 consolidated balance sheet, what amount should ABC report as common stock?

 

In the given question, since ABC has not issued any fresh common stock, therefore, the amount of common stock would remain the same.

Hence ABC should report $100,000 on Dec 31, Year 1.

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