Question

Consolidated Balance Sheet with Reciprocal Ownership

Talbott Company purchased 80 percent of Short Company’s stock on January 1, 20X8, at underlying book value. At that date, the fair value of the noncontrolling interest was equal to 20 percent of the book value of Short Company. On December 31, 20X9, Short purchased 10 percent of Talbott’s stock. Balance sheets for the two companies on December 31, 20X9, are as follows:

TALBOTT COMPANY Condensed Balance Sheet December 31, 20X9
Cash Accounts Receivable Inventory Buildings and Equipment (net) Investment in Short Company Common Stock	$ 78,000 120,000 150,000 400,000 352,000	Accounts Payable Bonds Payable Common Stock Retained Earnings	$90,000 400,000 300,000 310,000
Total Assets	$1,100,000	Total Liabilities and Equities	$1,100,000

SHORT COMPANY Condensed Balance Sheet December 31, 20X9
Cash Accounts Receivable Inventory Buildings and Equipment (net) Investment in Talbott Company Common Stock	$ 39,000 80,000 120,000 300,000 61,000	Accounts Payable Bonds Payable Common Stock Retained Earnings	$ 60,000 100,000 200,000 240,000
Total Assets	$600,000	Total Liabilities and Equities	$600,000

Required

Assuming that the treasury stock method is used in reporting Talbott’s shares held by Short, prepare a consolidated balance sheet worksheet and consolidated balance sheet for December 31, 20X9.

Answer 1

Treasury stock method:

The treasury stock method is referred as an approach that is utilized by the company to determine the number of new shares created due to unexercised in money warrants. The purchase of additional shares through treasury stock method should be considered as diluted earnings per share (EPS). This method is mostly followed by the company to determine the diluted EPS.

Eliminating entries:

The investment and other holdings are eliminated in certain cases through preparing eliminating entries. It is the journal entry prepared for eliminating the necessary accounts.

Consolidated balance sheet:

The consolidated balance sheet represents the financial position of a combination of two companies. It includes the single firm data into a group of data. The information included in the consolidated balance sheet is the same as that of the general balance sheet. It includes the information about the assets, liabilities, and stockholder’s equity of the combined firm.

Prepare consolidated balance sheet work paper as on December 31 ^st , 20X9:

Therefore, the total amount of consolidated balance sheet work paper is.

Prepare consolidated balance sheet as on December 31 ^st , 20X3:

Therefore, the total amount of assets and liabilities and stockholder’s equity is.

Working notes:

Prepare eliminating entry to reject the investment balance:

E1)

The subsidiary stock held within the consolidated entity and it does not represent the claims from the outsiders. Hence, the subsidiary stock and retained earnings account should be eliminated.

As per the single entity viewpoint, the company cannot hold investment itself. It also double counts the same set of assets. Hence, the amount of investment should be eliminated and should not be carried forwarded to the consolidated balance sheet.

Explanation:

• The common stock and retained earnings are considered as stockholder’s equity. Increase in the stockholder’s equity should be debited and eliminated.

• Investment is considered as asset. Thus, increase in the asset account should be credited and eliminated.

• The amount of non-controlling interest should be reported in the work paper.

E2)

Prepare eliminating entry to reject the treasury stock:

Explanation:

• The treasury stock is considered as stockholder’s equity. Increase in the stockholder’s equity should be debited and eliminated.

• Investment is considered as asset. Thus, increase in the asset account should be credited and eliminated.