acc 642 - ch 01 solutions
TRANSCRIPT
Chapter 01 - The Equity Method of Accounting for Investments
CHAPTER 01THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
Answers to Problems
1. D
2. B
3. C
4. B
5. D
6. A Acquisition price.............................................................................. $1,600,000
Equity income ($560,000 × 40%)..................................................... 224,000
Dividends (50,000 shares × $2.00).................................................. (100,000)
Investment in Harrison Corporation as of December 31............. $1,724,000
7. A Acquisition price........................................................ $700,000
Income accruals: 2010—$170,000 × 20%................. 34,000
2011—$210,000 × 20%................. 42,000
Amortization (see below): 2010................................. (10,000)
Amortization: 2011..................................................... (10,000)
Dividends: 2010—$70,000 × 20%.............................. (14,000)
2011—$70,000 × 20%............................... (14,000)
Investment in Bremm, December 31, 2011............... $728,000
Acquisition price........................................................ $700,000
Bremm’s net assets acquired ($3,000,000 × 20%)... (600,000)
Excess cost to patent................................................ $100,000
Annual amortization (10 year life) ............................ $10,000
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Chapter 01 - The Equity Method of Accounting for Investments
8. B Purchase price of Baskett stock.................... $500,000
Book value of Baskett ($900,000 × 40%)....... (360,000)
Cost in excess of book value.................... $140,000 Life Annual
Payment identified with undervalued............ Amortization
Building ($140,000 × 40%)......................... 56,000 7 yrs. $8,000
Trademark ($210,000 × 40%)..................... 84,000 10 yrs. 8,400
Total ................................................................. $ -0- $16,400
Cost of investment.......................................................... $500,000
Basic income accrual ($90,000 × 40%)..................... 36,000
Amortization (above).................................................. (16,400)
Dividend collected ($30,000 × 40%)......................... (12,000)
Investment in Baskett...................................................... $507,600
9. D The 2010 purchase is reported using the equity method.
Purchase price of Goldman stock.................................................. $600,000
Book value of Goldman stock ($1,200,000 × 40%)....................... (480,000)
Goodwill............................................................................................ $120,000
Life of goodwill................................................................................ indefinite
Annual amortization........................................................................ (-0-)
Cost on January 1, 2010.................................................................. $600,000
2010 Income accrued ($140,000 x 40%)......................................... 56,000
2010 Dividend collected ($50,000 × 40%)...................................... (20,000)
2011 Income accrued ($140,000 × 40%)......................................... 56,000
2011 Dividend collected ($50,000 × 40%)...................................... (20,000)
2012 Income accrued ($140,000 × 40%)......................................... 56,000
2012 Dividend collected ($50,000 × 40%)...................................... (20,000)
Investment in Goldman, 12/31/12.............................................. $708,000
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Chapter 01 - The Equity Method of Accounting for Investments
10. D
11. A Gross profit rate (GPR): $36,000 ÷ $90,000 = 40%
Inventory remaining at year-end.................................................... $20,000
GPR................................................................................................... × 40%
Unrealized gain........................................................................... $8,000
Ownership........................................................................................ × 30%
Intra-entity unrealized gain—deferred...................................... $2,400
12.B Purchase price of Steinbart shares................................................ $530,000
Book value of Steinbart shares ($1,200,000 × 40%)..................... (480,000)
Trade name....................................................................................... $50,000
Life of trade name............................................................................ 20 years
Annual amortization........................................................................ $2,500
2010 Gross profit rate = $30,000 ÷ $100,000 = 30%
2011 Gross profit rate = $54,000 ÷ $150,000 = 36%
2011—Equity income in Steinbart:
Income accrual ($110,000 × 40%)................................................... $44,000
Amortization (above)....................................................................... (2,500)
Recognition of 2010 unrealized gain
($25,000 × 30% GPR × 40% ownership).................................... 3,000
Deferral of 2011 unrealized gain
($45,000 × 36% GPR × 40% ownership..................................... (6,480)
Equity income in Steinbart—2011............................................ $38,020
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Chapter 01 - The Equity Method of Accounting for Investments
16. (20 Minutes) (Equity entries for one year, includes conversion to equity method)
The 2010 purchase must be restated to the equity method.
FIRST PURCHASE—JANUARY 1, 2010
Purchase price of Denton stock............................................ $210,000
Book value of Denton stock ($1,700,000 × 10%).................. (170,000)
Cost in excess of book value................................................. $40,000
Excess cost assigned to undervalued land
($100,000 × 10%).................................................................. (10,000)
Trademark................................................................................ $30,000
Life of trademark..................................................................... 10 years
Annual amortization................................................................ $3,000
BOOK VALUE—DENTON—JANUARY 1, 2010
January 1, 2010 book value (given)....................................... $1,700,000
2010 Net income...................................................................... 240,000
2010 Dividends........................................................................ (90,000)
January 1, 2011 book value................................................ $1,850,000
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Chapter 01 - The Equity Method of Accounting for Investments
16. (continued)
SECOND PURCHASE—JANUARY 1, 2011
Purchase price of Denton stock........................................ $600,000
Book value of Denton stock (above) ($1,850,000 × 30%) (555,000)
Cost in excess of book value............................................. $45,000
Excess cost assigned to undervalued land
($120,000 × 30%).............................................................. (36,000)
Trademark............................................................................ $9,000
Life of trademark................................................................. 9 years
Annual amortization............................................................ $1,000
Entry One—To record second acquisition of Denton stock.
Investment in Denton................................................. 600,000
Cash....................................................................... 600,000
Entry Two—To restate reported figures for 2010 to the equity method for comparability. Reported income will be $24,000 (10% of Denton’s income) less $3,000 (amortization on first purchase) for a net figure of $21,000. Originally, $9,000 would have been reported by Walters (10% of the dividends). The adjustment increases the $9,000 to $21,000 for 2010.
Investment in Denton................................................. 12,000
Retained Earnings—Prior Period Adjustment—
2010 Equity Income.............................................. 12,000
Entry Three—To record income for the year: 40% of the $300,000 reported income.
Investment in Denton................................................. 120,000
Equity Income—Investment in Denton............... 120,000
Entry Four—To record collection of dividends from Denton (40%).
Cash............................................................................. 44,000
Investment in Denton........................................... 44,000
Entry Five—To record amortization for 2011: $3,000 from first purchase and $1,000 from second.
Equity Income—Investment in Denton.................... 4,000
Investment in Denton........................................... 4,000
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Chapter 01 - The Equity Method of Accounting for Investments
19. (20 minutes) (Conversion from fair-value method to equity method with a subsequent sale of a portion of the investment)
Equity method income accrual for 2011
30 percent of $500,000 for ½ year = ..................................... $ 75,000
28 percent of $500,000 for ½ year = ..................................... 70,000
Total income accrual (no amortization or unearned gains).. . . $145,000
Gain on sale of 2,000 shares of Brown:
Cost of initial acquisition—2009.................................................... $250,00010% income accrual (conversion made to equity method)...... 35,000
10% of dividends............................................................................. (10,000)
Cost of second acquisition—2010................................................. 590,000
30% income accrual (conversion made to equity method)....... 144,000
30% of dividends—2010.................................................................. (33,000)
30% income accrual for ½ year...................................................... 75,000
30% of dividends for ½ year........................................................... (18,000)
Book value on July 1, 2011 ....................................................... $1,033,000
Cash proceeds from the sale: 2,000 shares × $46....................... $ 92,000
Less: book value of shares sold: $1,033,000 × 2,000 ÷ 30,000... 68,867
Gain on sale................................................................................ $ 23,133
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Chapter 01 - The Equity Method of Accounting for Investments
24. (20 Minutes) (Equity method balances after conversion to equity method. Must determine investee’s book value)
Part a
1. Allocation and annual amortization—first purchase
Purchase price of 15 percent interest........................................ $62,000
Net book value ($280,000 × 15%)............................................... (42,000)
Franchise agreements................................................................. $20,000
Life of franchise agreements...................................................... ÷ 10 years
Annual amortization............................................................... $2,000
Allocation and annual amortization—second purchase
Purchase price of 10 percent interest........................................ $43,800
Net book value ($330,000 × 10%)............................................... (33,000)
Franchise agreements................................................................. $10,800
Life of franchise agreements...................................................... ÷ 9 years
Annual amortization............................................................... $1,200
Investment in Bellevue account
January 1, 2010 purchase........................................................... $62,000
2010 basic equity income accrual ($80,000 × 15%).................. 12,000
2010 amortization on first purchase (above)............................ (2,000)
2010 dividend payments ($30,000 × 15%)................................. (4,500)
January 1, 2011 purchase........................................................... 43,800
2011 basic equity income accrual ($100,000 × 25%)................ 25,000
2011 amortization on first purchase (above)............................ (2,000)
2011 amortization on second purchase (above)...................... (1,200)
2011 dividend payments ($40,000 × 25%)................................. (10,000)
Investment in Bellevue—December 31, 2011...................... $123,100
2. Equity Income—2011
2011 basic equity income accrual ($100,000 × 25%)................ $25,000
2011 amortization on first purchase (above)............................ (2,000)
2011 amortization on second purchase (above)...................... (1,200)
Equity income—2011............................................................. $21,800
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Chapter 01 - The Equity Method of Accounting for Investments
24. (continued)
3. The January 1, 2011 retrospective adjustments to convert the Investment in Bellevue to the equity method is as follows:
Unrealized holding gain—shareholders’ equity 3,700
Fair value adjustment (available-for-sale securities) 3,700
To eliminate AFS fair value adjustment account balances for the investment in Bellevue (15% × $438,000 = $65,700 less $62,000 = $3,700)
Investment in Bellevue 5,500
Retaining earnings (January 1, 2011) 5,500
Retrospective adjustment to retained earnings to record 2010 equity method income for 15% investment (15% × $80,000 less $2,000 excess amortization less $4,500 dividend income recognized in 2010)
Part b
1. Dividend income (25% × 40,000) $10,000
Increase in fair value (25% × $30,000) 7,500
Reported income from Investment in Bellevue $17,500
2. Investment in Bellevue (25% × 468,000) $117,000
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Chapter 01 - The Equity Method of Accounting for Investments
27. (25 Minutes) (Preparation of journal entries for two years, includes losses and intra-entity transfers of inventory)
Journal Entries for Hobson Co.
1/1/10 Investment in Stokes Co.............. 210,000
Cash.......................................... 210,000
(To record initial investment)
During Cash............................................... 4,000
2010 Investment in Stokes Co......... 4,000
(To record receipt of dividend)
12/31/10 Equity in Stokes Income—Loss. . 16,000
Extraordinary Loss of Stokes...... 8,000
Investment in Stokes Co......... 24,000
(To record accrual of income as earned by
equity investee, 40% of reported balances)
12/31/10 Equity in Stokes Income—Loss. . 3,300
Investment in Stokes Co......... 3,300
(To record amortization relating to acquisition
of Stokes—see Schedule 1 below)
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Chapter 01 - The Equity Method of Accounting for Investments
27. (continued)
12/31/10 Equity in Stokes Income-Loss..... 2,000
Investment in Stokes Co......... 2,000
(To defer unrealized gain on intra-entity
sale see Schedule 2 below)
During Cash............................................... 4,800
2011 Investment in Stokes Co......... 4,800
(To record receipt of dividend)
12/31/11 Investment in Stokes Co.............. 16,000
Equity in Stokes Income......... 16,000
(To record 40% accrual of income as earned by
equity investee)
12/31/11 Equity in Stokes Income.............. 3,300
Investment in Stokes Co......... 3,300
(To record amortization relating to acquisition
of Stokes)
12/31/11 Investment in Stokes Co.............. 2,000
Equity in Stokes Income......... 2,000
(To recognize income deferred from 2010)
12/31/11 Equity in Stokes Income.............. 3,600
Investment in Stokes Co......... 3,600
(To defer unrealized gain on intra-entity
sale—see Schedule 3 below)
Schedule 1—Allocation of Purchase Price and Related Amortization
Purchase price ........................................................ $210,000
Percentage of book value acquired
($400,000 × 40%)..................................................... (160,000)
Payment in excess of book value.............................. $50,000
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Chapter 01 - The Equity Method of Accounting for Investments
27. (continued)
Annual
Excess payment identified with specific Life Amortization
assets
Building ($40,000 × 40%) 16,000 10 yrs. $1,600
Royalty agreement ($85,000 × 40%) $34,000 20 yrs. 1,700
Total annual amortization $3,300
Schedule 2—Deferral of Unrealized Gain—2010
Inventory remaining at end of year................................................. $15,000
Gross profit percentage ($30,000 ÷ $90,000).................................. × 33⅓%
Gross profit remaining in inventory........................................... $5,000
Ownership percentage..................................................................... × 40%
Unrealized gain to be deferred until 2011.................................. $2,000
Schedule 3—Deferral of Unrealized Gain—2011
Inventory remaining at end of year (30%)....................................... $24,000
Gross profit percentage ($30,000 ÷ $80,000).................................. × 37½%
Gross profit remaining in inventory........................................... $9,000
Ownership percentage..................................................................... × 40%
Unrealized gain to be deferred until 2012.................................. $3,600
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Chapter 01 - The Equity Method of Accounting for Investments
29. (30 Minutes) (Compute equity balances for three years. Includes
intra-entity inventory transfer)
Part a.
Equity Income 2009
Basic equity accrual ($550,000 × ½ year × 35%)....................... $96,250
Amortization (½ year—see Schedule 1).................................... (26,500)
Equity income—2009............................................................. $69,750
Equity Income 2010
Basic equity accrual ($575,000 × 35%)..................................... $201,250
Amortization (see Schedule 1).................................................. (53,000)
Deferral of unrealized gain (see Schedule 2)........................... (9,800)
Equity Income—2010............................................................ $138,450
Equity Income 2011
Basic equity accrual ($620,000 × 35%)..................................... $217,000
Amortization (see Schedule 1).................................................. (53,000)
Recognition of deferred gain (see Schedule 2)....................... 9,800
Equity Income—2011............................................................ $173,800
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Chapter 01 - The Equity Method of Accounting for Investments
29. (continued)
Schedule 1—Acquisition Price Allocation and Amortization
Acquisition price (75,000 shares × $12) $900,000
Book value acquired ($1,600,000 × 35%) 560,000
Payment in excess of book value $340,000
Excess payment identified with specific Annual
assets Life Amortization
Equipment ($150,000 × 35%) $52,500 7 yrs. $7,500
Copyright 227,500 5 yrs. 45,500
Goodwill 60,000 indefinite -0-
Total annual amortization (full year) $53,000
Schedule 2—Deferral of Unrealized Intra-entity Gain
Inventory remaining at December 31, 2010.................................. $70,000
Gross profit percentage ($60,000 ÷ $150,000)............................. × 40%
Total profit on intra-entity sale still held by affiliate................... $28,000
Investor ownership percentage.................................................... × 35%
Unrealized intra-entity gain (profit deferred from
2010 until 2011)......................................................................... $9,800
Part b.
Investment in Miller—December 31, 2011 balance
Acquisition price............................................................................ $900,000
2009 Equity income (above).......................................................... 69,750
2009 Dividends received during half year (75,000 shares × $1.00) (75,000)
2010 Equity income (above).......................................................... 138,450
2010 Dividends received (75,000 shares × $1.00 × 2)................. (150,000)
2011 Equity income (above).......................................................... 173,800
2011 Dividends received (75,000 shares × $1.00 × 2)................. (150,000)
Investment in Miller—12/31/11............................................. $907,000
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Chapter 01 - The Equity Method of Accounting for Investments
30. (65 Minutes) (Journal entries for several years. Includes conversion to
equity method and a sale of a portion of the investment)
1/1/09 Investment in Sumter...................... 192,000
Cash............................................ 192,000
(To record cost of 16,000 shares of Sumter
Company.)
9/15/09 Cash.................................................. 8,000
Dividend Income........................ 8,000
(Annual dividends received from Sumter
Company.)
9/15/10 Cash.................................................. 8,000
Dividend Income........................ 8,000
(Annual dividends received from Sumter
Company.)
1/1/11 Investment in Sumter...................... 965,750
Cash............................................ 965,750
(To record cost of 64,000 additional shares of
Sumter Company.)
1/1/11 Investment in Sumter...................... 36,800
Retained Earnings—Prior Period
Adjustment—Equity in Investee Income 36,800
(Retroactive adjustment necessitated by change
to equity method. Change in figures previously
reported for 2009 and 2010 are calculated as
follows.)
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Chapter 01 - The Equity Method of Accounting for Investments
30. (continued)
2009 as reported
Income (dividends).........$8,000
Change in investment
Balance...................................-0-
2009—equity method (as restated)
Income (8% of $300,000
reported income)..............................$24,000
Change in investment balance (equity income less dividends)....................$16,000
2010 as reported
Income (dividends).........$8,000
Change in investment
Balance...................................-0-
2010—equity method (as restated)
Income (8% of $360,000
reported income)..............................$28,800
Change in investment balance (equity income less dividends)....................$20,800
2009 increase in reported income ($24,000 – $8,000)................. $16,000
2010 increase in reported income ($28,800 – $8,000)................. 20,800
Retroactive adjustment—income (above).................................... $36,800
2009 increase in investment in Sumter balance—equity method $16,000
2010 increase in investment in Sumter balance—equity method 20,800
Retroactive adjustment—Investment in Sumter (above)...... $36,800
9/15/11 Cash............................................................. 40,000
Investment in Sumter........................... 40,000
(Annual dividend received from Sumter
[40% × $100,000])
12/31/11 Investment in Sumter................................. 160,000
Equity in Investee Income.................... 160,000
(To accrue 2011 income based on 40%
ownership of Sumter)
12/31/11 Equity in Investee Income......................... 3,370
Investment in Sumter........................... 3,370
(Amortization of $50,550 patent
[indicated in problem] over 15 years)
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Chapter 01 - The Equity Method of Accounting for Investments
30. (continued)
7/1/12 Investment in Sumter................................. 76,000
Equity in Investee Income.................... 76,000
(To accrue ½ year income of 40% owner-
ship—$380,000 × ½ × 40%)
7/1/12 Equity in Investee Income......................... 1,685
Investment in Sumter........................... 1,685
(To record ½ year amortization of patent
to establish correct book value for invest-
ment as of 7/1/12)
7/1/12 Cash ............................................................ 425,000
Investment in Sumter (rounded)......... 346,374
Gain on Sale of Investment.................. 78,626
(20,000 shares of Sumter Company sold;
write-off of investment computed below.)
Investment in Sumter and cost of shares sold
1/1/09 Acquisition ..................................................................... $192,000
1/1/11 Acquisition...................................................................... 965,750
1/1/11 Retrospective adjustment............................................. 36,800
9/15/11 Dividends...................................................................... (40,000)
12/31/11 Basic equity accrual.................................................. 160,000
12/31/11 Amortization............................................................... (3,370)
7/1/12 Basic equity accrual...................................................... 76,000
7/1/12 Amortization................................................................... (1,685)
Investment in Sumter—7/1/12 balance.............................. $1,385,495
Percentage of shares sold (20,000 ÷ 80,000)..................... × 25%
Cost of shares sold (rounded)........................................... $346,374
9/15/12 Cash........................................................... 30,000
Investment in Sumter.......................... 30,000
(To record annual dividend received)
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Chapter 01 - The Equity Method of Accounting for Investments
30. (continued)
12/31/12 Equity in Sumter......................................... 57,000
Equity in Investee income.................... 57,000
(To record ½year income based on
remaining 30% ownership – $380,000 ×
6/12 × 30%)
12/31/12 Equity in Investee Income......................... 1,264 (rounded)
Investment in Sumter........................... 1,264
(To record ½ year of patent amortiza-
tion—computation presented below)
Annual patent amortization—original computation.................... $3,370
Percentage of shares retained (60,000 ÷ 80,000)......................... × 75%
Annual patent amortization—current .......................................... $2,527.50
Patent amortization for half year................................................... $1,263.75
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