ch02 beams12ge sm

8/17/2019 Ch02 Beams12ge SM

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Chapter 2

STOCK INVESTMENTS — INVESTOR ACCOUNTING AND REPORTING

Answers to Questions

1 Investor should use the equit !ethod "hen it h#s the #$ilit to e%er&ise si'ni(int in(luen&e over the investee)T"ent *er&ent o"nershi* test is used to deter!ine the si'ni(int in(luen&e) Invest!ent o( !ore th#n +, *er&ent o( the investee-s votin' sto&. sh#ll le#d to # *resu!*tion th#t the investor h#s the #$ilit to e%er&ise si'ni(intin(luen&e over the investee other"ise there is *redo!in#nt eviden&e in the &ontr#r ) On the other h#nd/ Invest!ento( less th#n +, *er&ent investee-s votin' sto&. sh#ll le#d to # *resu!*tion th#t the investor doesn-t h#ve the #$ilit toe%er&ise si'ni(int in(luen&e over the investee unless su&h #$ilit n $e de!onstr#ted) I( the l#tter &ondition is !et/investor should use the (#ir v#lue !ethod)

2 Good"ill #risin' (ro! #n equit invest!ent o( +, *er&ent or !ore is not re&orded se*#r#tel (ro! the invest!ent#&&ount) Under the equit !ethod/ the invest!ent is *resented on one line o( the $#l#n&e sheet in #&&ord#n&e "iththe one0line &onsolid#tion &on&e*t)

3 Under the (#ir v#lue !ethod/ invest!ents #re re&orded #t &ost #nd #d1ust it to the (#ir v#lue #t the end o( there*ortin' *eriod) Dividends re&eived #re tre#ted #s dividend in&o!e/ e%&e*t dividends re&eived in e%&ess o( investor sh#re o( e#rnin's #re &onsidered #s return on o( *it#l 2liquid#tin' dividend3) 4iquid#tin' dividend is tre#ted #s #dedu&tion o( invest!ents #&&ount)Under the equit !ethod/ invest!ents #re re&orded #t &ost/ $ut #t the end o( the re*ortin' *eriod it is not #d1usted to

the (#ir v#lue) Invest!ents #re #d1usted "ith the *ro(it or loss #nd the dividends o( the investee) Investor in&re#sesthe invest!ents #&&ount $#sed on the sh#re o( the investee-s *ro(it or de&re#se the invest!ents #&&ount $#sed on thesh#re o( the investee-s loss) Dividends #re #l"# s tre#ted #s # disinvest!ents #nd #l"# s de&re#se the invest!ents#&&ount)

4 The equit !ethod o( #&&ountin' (or invest!ents in&re#ses the invest!ent #&&ount (or the investor-s sh#re o( theinvestee-s in&o!e #nd de&re#ses it (or the investor-s sh#re o( the investee-s losses #nd (or dividends re&eived (ro!the investee) In #ddition/ the invest!ent #nd invest!ent in&o!e #&&ounts #re #d1usted (or #!orti5#tion o( #ninvest!ent &ost0$oo. v#lue di((erenti#ls rel#ted to the interest #&quired) Ad1ust!ents to the invest!ent #ndinvest!ent in&o!e #&&ounts #re #lso needed (or unre#li5ed *ro(its #nd losses (ro! tr#ns#&tions $et"een the investor #nd investee &o!*#nies) A (#ir v#lue #d1ust!ent is o*tion#l under S6AS No) 789)

5 The equit !ethod is re(erred to #s # one0line &onsolid#tion $euse the invest!ent #&&ount is re*orted on one lineo( the investor-s $#l#n&e sheet #nd invest!ent in&o!e is re*orted on one line o( the investor-s in&o!e st#te!ent2e%&e*t "hen the investee h#s e%tr#ordin#r '#in:loss or dis&ontinued o*er#tions3) In #ddition/ the invest!entin&o!e is &o!*uted su&h th#t the *#rent &o!*#n -s in&o!e #nd sto&.holders- equit #re equ#l to the &onsolid#tednet in&o!e #nd &onsolid#ted sto&.holders- equit th#t "ould result i( the st#te!ents o( the investor #nd investee"ere &onsolid#ted)

6 I( the equit !ethod o( #&&ountin' is #**lied &orre&tl / the in&o!e o( the *#rent &o!*#n "ill 'ener#ll equ#l the&ontrollin' interest sh#re o( &onsolid#ted net in&o!e)

7 I( overv#lued #ssets #re identi(ied durin' the #&quisition/ it "ill in&re#se the in&o!e (ro! invest!ent re&orded $

the investor $euse the e%*enses #sso&i#ted "ith the overv#lued #ssets #re overv#lued) The overv#lu#tion "ill $eeli!in#ted *eriodill #nd &h#r'ed to the in&o!e (ro! invest!ent) ;o"ever/ i( the overv#lued #ssets h#d inde(initeli(e (e#ture/ the overv#lu#tion "ill not $e eli!in#ted *eriodill su&h #s l#nd #nd int#n'i$le #ssets h#vin' #ninde(inite li(e) Thus the overv#lu#tion o( these #ssets "ill not #((e&t the in&o!e (ro! invest!ent/ unless the #ssets#re dis*osed or i!*#ired)

8 The invest!ent #&&ount $#l#n&e o( the investor "ill equ#l underl in' $oo. v#lue o( the investee i( 2#3 the equit!ethod is &orre&tl #**lied/ 2$3 the invest!ent "#s #&quired #t $oo. v#lue "hi&h "#s equ#l to (#ir v#lue/ the

*oolin' !ethod "#s used/ or the &ost0$oo. v#lue di((erenti#ls h#ve #ll $een #!orti5ed/ #nd 2&3 there h#ve $een nointer&o!*#n tr#ns#&tions $et"een the #((ili#ted &o!*#nies th#t h#ve &re#ted invest!ent #&&ount0$oo. v#luedi((eren&es)

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Chapter 2 2-2

9 The invest!ent #&&ount $#l#n&e !ust $e &onverted (ro! the &ost to the equit !ethod "hen #&quisitions in&re#sethe interest held to +, *er&ent or !ore) The #!ount o( the #d1ust!ent is the di((eren&e $et"een the invest!entin&o!e re*orted under the &ost !ethod in *rior e#rs #nd the in&o!e th#t "ould h#ve $een re*orted i( the equit!ethod o( #&&ountin' h#d $een used) Ch#n'es (ro! the &ost to the equit !ethod o( #&&ountin' (or equitinvest!ents #re &h#n'es in the re*ortin' entit th#t require rest#te!ent o( *rior e#rs- (in#n&i#l st#te!ents "hen the

e((e&t is !#teri#l)

10 The one0line &onsolid#tion is #d1usted "hen the investee-s in&o!e in&ludes e%tr#ordin#r ite!s #nd '#ins or losses(ro! dis&ontinued o*er#tions) In this se/ the investor-s sh#re o( the investee-s ordin#r in&o!e is re*orted #sinvest!ent in&o!e under # one0line &onsolid#tion/ $ut the investor-s sh#re o( e%tr#ordin#r ite!s#nd '#ins #ndlosses (ro! dis&ontinued o*er#tions is &o!$ined "ith si!il#r ite!s o( the investor)

11 The re!#inin' 78 *er&ent interest in the investee is #&&ounted (or under the (#ir v#lue:&ost !ethod/ #nd theinvest!ent #&&ount $#l#n&e i!!edi#tel #(ter the s#le $e&o!es the ne" &ost $#sis)

12 =es) >hen #n investee h#s *re(erred sto&. in its *it#l stru&ture/ the investor h#s to #llote the investee-s in&o!eto *re(erred #nd &o!!on sto&.holders) Then/ the investor t#.es u* its sh#re o( the investee-s in&o!e #lloted to&o!!on sto&.holders in #**l in' the equit !ethod) The #llotion is not ne&ess#r "hen the investee h#s onl&o!!on sto&. outst#ndin')

13 Good"ill i!*#ir!ent losses #re l&ul#ted $ $usiness re*ortin' units) 6or e#&h re*ortin' unit/ the &o!*#n !ust(irst deter!ine the (#ir v#lues o( the net #ssets) The (#ir v#lue o( the re*ortin' unit is the #!ount #t "hi&h it &ould $e

*ur&h#sed in # &urrent !#r.et tr#ns#&tion) This !# $e $#sed on !#r.et *ri&es/ dis&ounted sh (lo" #n#l ses/ orsi!il#r &urrent tr#ns#&tions) This is done in the s#!e !#nner #s is done to ori'in#ll re&ord # &o!$in#tion) The (irstste* requires # &o!*#rison o( the rr in' v#lue #nd (#ir v#lue o( #ll the net #ssets #t the $usiness re*ortin' level) I(the (#ir v#lue e%&eeds the rr in' v#lue/ 'ood"ill is not i!*#ired #nd no (urther tests #re needed) I( the rr in'v#lue e%&eeds the (#ir v#lue/ then "e *ro&eed to ste* t"o) In ste* t"o/ "e l&ul#te the i!*lied v#lue o( 'ood"ill)An e%&ess !e#sured (#ir v#lue over the net identi(i#$le #ssets is the i!*lied (#ir v#lue o( 'ood"ill) The &o!*#nthen &o!*#res the 'ood"ill-s i!*lied (#ir v#lue esti!#te to the rr in' v#lue o( 'ood"ill to deter!ine i( there h#s

$een #n i!*#ir!ent durin' the *eriod)

14 =es) I!*#ir!ent losses (or su$sidi#ries #re &o!*uted #s outlined in the solution to question 7?) Co!*#nies &o!*#re(#ir v#lues to $oo. v#lues(or equit !ethod invest!ents #s # "hole) 6ir!s !# re&o'ni5e i!*#ir!ents (or equit!ethod invest!ents #s # "hole/ $ut *er(or! no se*#r#te 'ood"ill i!*#ir!ent tests)

SOLUTIONS TO EXERCISES

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Chapter 2 2-3

Solution E2-1

1 d2 c3 c4 d

5 b

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2-4 Stock Investments — Investor Accounting and Reporting

Solution E2-2 [AICPA adapted]

1 d2 b3 d4 b

Gar’s investment is reported at its $600,000 cost because the equity method isnot appropriate and because Gar’s share o !ed’s income e"ceeds dividendsreceived since acquisition [#$ %0,000 & '( ) $*0,000]+

5 cividends received rom -e or the t.o years .ere $&0, 00 #$/0,000 & ' a11

in %0&%(, but on1y $2,000 #& ' o -e ’s income o $60,000 or the t.o years(can be sho.n on 3.o’s income statement as dividend income rom the -einvestment+ 3he remainin4 $&, 00 reduces the investment account ba1ance+

6 c[$&00,000 5 $ 00,000 5 #$600,000 &0'(]

7 a8 d

Investment ba1ance 7anuary % $% 0,000Add8 Income rom Pod #$&00,000 0'( 0,000Investment in Pod ecember & $%90,000

Solution E2-3

&+ :1aus AG recorded investment in !a" AG usin4 air va1ue;cost method because nosi4ni icant in 1uence .as obtained+

Journal entrie on !lau "#$ %oo&

March 2Investment in !a" AG #5A( &0,000

Cash # A( &0,000

3o record purchase o !a" AG’s outstandin4 shares

April 1Cash #5A( % ,000

ividend income [] % ,0003o record dividends received rom !a" AG[$ 00,000 " 00 ; &0,000]

?ote8 under the air va1ue;cost method, there is no need to reco4ni@e a portion o!a" AG earnin4s+

Solution E2-4

Income from Med for 2011

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Chapter 2 2-5

=hare o !ed’s income #$%00,000 &;% year 0'( $ 0,000

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Solution E2-5

Interest acquired # ,000 shares ; %0,000 shares( % '

Cost o % ' interest in Atah P C $%2,000,000

Boo va1ue acquired #$&00,000,000 " % '( $% ,000,000>"cess air va1ue over boo va1ue $*,000,000

>"cess a11ocated to8Dverva1ued Inventories #$*,000,000 " % '( [$&,000,000

]Enderva1ued equipment #$%*,000,000 " % '( $6,000,000Enderva1ued notes payab1e #$9,000,000 " % '( [$%,000,000]Good.i11 or remainder $&,000,000

>"cess air va1ue over boo va1ue $*,000,000

Good.i11 rom Fenry P C investment in Atah P C .as $&,000,000

Solution E2-6

Journal entry on Man’s books

Investment in ?ib #$&,%00,000 " *0'( *90,000oss rom discontinued operations 90,000

Income rom ?ib 60,000

3o reco4ni@e income rom *0' investment in ?ib+

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Chapter 2 2-7

Solution E2-7

1 aividends received rom Ben #$&%0,000 & '( $ &9,000

=hare o income since acquisition o interest%0&& #$%0,000 & '( # ,000(

%0&% #$90,000 & '( #&%,000(>"cess dividends received over share o income $ ,000

Investment in Ben 7anuary , %0&& $ 0,000ess8 >"cess dividends received over share o income # ,000(

Investment in Ben ecember &, %0&% $ */,000

2 bCost o &0,000 o *0,000 shares outstandin4 $&,*00,000Boo va1ue o % ' interest acquired #$*,000,000stoc ho1ders’ equity at ecember &, %0&& 5$&,*00,000 rom additiona1 stoc issuance( % ' &, 0,000

>"cess air va1ue over boo va1ue#4ood.i11( $ 0,000

3 d3he investment in !oe ba1ance remains at the ori4ina1 cost+

4 cIncome be ore e"traordinary item $ %00,000Percent o.ned *0'

Income rom :a@ Products $ 90,000

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Solution E2-8

Preliminary computationsCost o *0' interest 7anuary &, %0&& $*,900,000Boo va1ue acquired #$9,000,000 *0'( # ,%00,000(

>"cess air va1ue over boo va1ue $&,600,000

Excess allocated toInventories $%00,000 *0' $ 90,000>quipment $*00,000 *0' &60,000Good.i11 or the remainder &, 60,000

>"cess air va1ue over boo va1ue $&,600,000

"cess a11ocated to inventories #$90,000 &00'( #90,000(ess8 >"cess a11ocated to equipment #$&60,000;* years * years( #&60,000(

Increase in investment account 260,000Dri4ina1 investment *,900,000Investment ba1ance ecember &, %0&* $ ,/60,000

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Chapter 2 2-9

Solution E2-'

1 Cost o 0' common interest in i11iam td $ , 00,000Boo va1ue #and air va1ue( acquired8

Common stoc , $&0 par $ ,000,000

Additiona1 paid in capita1 $ ,000,000"penses 900,000 600,000?et Income $*00,000 $ 00,000

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Solution E2-11

Preliminary computationsGood.i11 rom irst &0' interest8Cost o investment $ % ,000

Boo va1ue acquired #$%&0,000 &0'( #%&,000(>"cess air va1ue over boo va1ue $ *,000

Good.i11 rom second &0' interest8Cost o investment $ 0,000Boo va1ue acquired #$% 0,000 &0'( #% ,000(

>"cess air va1ue over boo va1ue $ % ,000

&+ Correctin4 entry as o 7anuary %, %0&%toconvert investment to the equity basisAccumu1ated 4ain;1oss on stoc avai1ab1e or=a1e % ,000

a1uation a11o.ance to record Jed at air a1ue

% ,000

3o remove the va1uation a11o.ance entered onecember &, %0&& under the air va1ue methodor an avai1ab1e or sa1e security+

Investment in Jed *,000


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Chapter 2 2-11

Solution E2-12

Preliminary computations=toc ho1ders’ equity o 3a1 on ecember &, %0&& $ 90,000=a1e o &%,000 previous1y unissued shares on 7anuary &, %0&% % 0,000=toc ho1ders’ equity a ter issuance on 7anuary &, %0&% $6 0,000

Cost o &%,000 shares to "cess air va1ue over boo va1ue $ *0,000

Excess is allocated as follo%sBui1din4s $60,000 &%,000; 6,000 shares $ %0,000Good.i11 %0,000

>"cess air va1ue over boo va1ue $ *0,000

Journal entries on &i ’s books durin' 2012

January 1Investment in 3a1 % 0,000

Cash % 0,0003o record acquisition o a &; interest in 3a1+

"urin' 2012Cash 0,000

Investment in 3a1 0,0003o record dividends received rom 3a1 #$20,000 &; (+

"ecember #1Investment in 3a1 9,000

Income rom 3a1 9,000

3o record investment income rom 3a1 computed aso11o.s8

=hare o 3a1’s income #$&%0,000 &; ( $ *0,000epreciation on bui1din4 #$%0,000;&0 years( #%,000(

Income rom 3a1 $ 9,000

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Solution E2-13

1 Journal entries on (IP’s books for 2012

Cash &%0,000Investment in Co. # 0'( &%0,000

3o record dividends received rom Co.#$*00,000 0'(+

Investment in Co. # 0'( %*0,000>"traordinary 1oss # rom Co.( %*,000

Income rom Co. %6*,0003o record investment income rom Co. computedas o11o.s8

=hare o income be ore e"traordinary item $690,000 0' $ %0*,000

Add8 >"cess air va1ue over cost rea1i@ed in %0&%

$%00,000 0' 60,000Income rom Co. be ore e"traordinary1oss

$ %6*,000

2 In estment in )o% balance "ecember #1* 2012

Investment cost $ /90,000Add8 Income rom Co. a ter e"traordinary 1oss %*0,000

ess8 ividends received rom Co. #&%0,000(Investment in Co. ecember & $200,000

Chec 8 Investment ba1ance is equa1 to under1yin4 boo va1ue#$%,900,000 5 $600,000 $*00,000( 0' L $200,000

3 )I* Cor+orationIncome =tatement

or the year ended ecember &, %0&%=a1es $*,000,000>"penses %,900,000

Dperatin4 income &,%00,000Income rom Co. #be ore e"traordinary item( %6*,000

Income be ore e"traordinary item &,*6*,000>"traordinary 1oss #net o ta" e ect( %*,000

?et income $&,**0,000

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Chapter 2 2-13

Solution E2-14

1 Income from +at for 2012

>quity in income #$&09,000 $9,000 pre erred( *0' $ *0,000

2 In estment in +at "ecember #1* 2012

Cost o investment in at common $ %20,000Add8 Income rom at *0,000

ess8 ividends #$*0,000M " *0'( #&6,000(Investment in at ecember & $ &*,000

M $*9,000 tota1 dividends 1ess $9,000 pre erred dividend

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Solution E2-15

=ince the tota1 airva1ue o =e1 has dec1ined by $ 0,000 .hi1e the air va1ue o thenet identi iab1e assets is unchan4ed, the $ 0,000 dec1ine is the impairment in4ood.i11 or the period+ 3he $ 0,000 impairment 1oss is deducted in ca1cu1atin4Par’s income rom continuin4 operations+

Solution E2-16

Good.i11 impairments are ca1cu1ated at the business reportin4 unit 1eve1+ Increasesand decreases in air va1ues across business units are not o settin4+ J1ash mustreport an impairment 1oss o $ ,000 in ca1cu1atin4 %0&% income rom continuin4operations+

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Chapter 2 2-15

SOLUTIONS TO *RO)LE,S

Solution *2-1

1 ,ood%illCost o investment in 3e1 on Apri1 & $696,000

Boo va1ue acquired8?et assets at ecember & $%,000,000Add8 Income or &;* year #$ %0,000 % '( 90,000

ess8 ividends paid !arch & #*0,000(Boo va1ue at Apri1 &

%,0*0,000Interest acquired 0'

6&%,000Good.i11 rom investment in 3e1 $/*,000

2 Income from !el for 2011>quity in income be ore e"traordinary item

#$%*0,000 ;* year 0'( $ *,000

3 In estment in !el at "ecember #1* 2011Investment cost Apri1 & $ 696,000Add8 Income rom 3e1 p1us e"traordinary 4ain /9,000

ess8 ividends #$*0,000 quarters( 0' # 6,000(Investment in 3e1 ecember & $ /%9,000

4 E-uity in !el’s net assets at "ecember #1* 20113e1’s stoc ho1ders’ equity 7anuary & $%,000,000Add8 ?et income %0,000

ess8 ividends #&60,000(3e1’s stoc ho1ders’ equity ecember & %,&60,000Investment interest 0'>quity in 3e1’s net assets $ 6*9,000

5 Extraordinary 'ain for 2011 to be reported by &it3e1’s e"traordinary 4ain 0' $ %*,000

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Solution *2-2

1 )ost method

Investment in =e1 7u1y &, %0&& #at cost( $%%0,000ividends char4ed to investment #9,900(

Investment in =e1 ba1ance at ecember &, %0&&

$%&&,%00

July 1* 2011Investment in =e1 %%0,000

Cash %%0,0003o record initia1 investment or90' interest+

.o ember 1* 2011Cash &%,900

ividend income &%,9003o record receipt o dividends #$&6,000 90'(+

"ecember #1* 2011ividend income 9,900

Investment in =e1 9,9003o reduce investment or dividends in e"cess oearnin4s #$&6,000 dividends $ ,000 earnin4s(90'+

2 E-uity method

Investment in =e1 7u1y &, %0&& $%%0,000Add8 =hare o reported income *,000

educt8 ividends char4ed to investment #&%,900(educt8 >"cess epreciation #6,600(

Investment in =e1 ba1ance at ecember &, %0&& $%0*,600

July 1* 2011Investment in =e1 %%0,000

Cash %%0,0003o record initia1 investment or 90' interest o =e1+

.o ember 1* 2011Cash &%,900

Investment in =e1 &%,9003o record receipt o dividends #$&6,000 90'(+

"ecember #1* 2011Income rom =e1 %,600

Investment in =e1 %,6003o record income rom =e1 computed as o11o.s8

=hare o =e1’s income #$&0,000 &;% year 90'(1ess e"cess depreciation #$& %,000;&0 years &;% year(+

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Chapter 2 2-17

Solution *2-3

1. Schedule for allocating the investment cost over the book values/fair values interest acquired:RAJ LTD AND ITS 40 PERCENT-OWNED EQUITY INVESTEE

"!"S LT. /IN T OUS"N.S0

R"J LT. "N. ITS 4( -O NE. E UIT IN ESTEE

"!"S LT. /IN T OUS"N.S0Investment in A ash

td $ 900Boo va1ue o the interest acquired #*0' "$%,% 0,000( $ 200>"cess o cost over boo va1ueacquired $ &00

Jaira1ue

Booa1ue

"'

InterestAcquired

L AmountAssi4ned

Inventory $ & 0 $ & 0 *0' $ 9>quipment

net $ *60 $ 00 *0' $ &6?otes

payab1e $ %%0 $ 00 *0' $ %3ota1 assi4ned to identi iab1e netassets $ %*


18/27


*0' o A ash td’s $*00,000 net income $&00,000>"cess a11ocated to inventories #$ 9,000(>"cess a11ocated to equipment

#$&6,000 ; * years( $ *,000>"cess a11ocated to notes payab1e #$ *,000(

#$ %,000 ; 9 years( $2 %,000

+ Investment in A ash td Ba1ance at ecember &, %0&*8Initia1 cost $900,000Gains on bar4ain purchase $&%*,000

ividends received #$6*,000(Income rom A ash td $ 2%,000>ndin4 ba1ance $2 %,000

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Chapter 2 2-19

Solution *2-4

Preliminary computationsInvestment cost o *0' interest $ 90,000Boo va1ue acquired [$ 00,000 5 #$&00,000 &;% year(] *0' %%0,000

>"cess air va1ue over boo va1ue $&60,000

Excess allocated and $ 0,000 *0' $ &%,000

>quipment $ 0,000 *0' %0,000"cess air va1ue over boo va1ue $&60,000

July 1* 2011Investment in 7i11 90,000

Cash 90,0003o record initia1 investment or *0' interest in 7i11+

.o ember 2011Cash #other receivab1es( %0,000

Investment in 7i11 %0,0003o record receipt o dividends #$ 0,000 *0'(+

"ecember #1* 2011Investment in 7i11 %0,000

Income rom 7i11 %0,0003o record share o 7i11’s income #$&00,000 &;% year *0'(+

"ecember #1* 2011Income rom 7i11 %,000

Investment in 7i11 %,0003o record depreciation on e"cess a11ocated toEnderva1uedequipment #$%0,000; years &;% year(+

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Solution *2-5

1 /chedule to allocate fair alue — book alue differentialsInvestment cost 7anuary & $&,690,000Boo va1ue acquired #$ ,200,000 net assets 0'( &,&/0,000

>"cess air va1ue over boo va1ue $ &0,000

Allocation of excessJair a1ue — Percent Boo a1ue Acquired A11ocation

Inventories $%00,000 0' $ 60,000and 900,000 0' %*0,000

Bui1din4s — net 00,000 0' & 0,000>quipment — net #/00,000( 0' #%&0,000(Bonds payab1e #&00,000( 0' # 0,000(Assi4ned to identi iab1e netassets %&0,000"cess air va1ue over boo va1ue $ &0,000

2 Income from !remor for 2011>quity in income #$&,%00,000 0'( $ 60,000ess8 Amorti@ation o di erentia1s

Inventories #so1d in %0&&( #60,000(Bui1din4s — net #$& 0,000;&0 years( #& ,000(>quipment — net #$%&0,000;/ years( 0,000Bonds payab1e #$ 0,000; years( 6,000

Income rom 3remor $ %&,000

3 In estment in !remor balance "ecember #1* 2011Investment cost $&,690,000Add8 Income rom 3remor %&,000

ess8 ividends #$600,000 0'( #&90,000(Investment in 3remor ecember & $&,9%&,000

)heckEnder1yin4 equity #$*, 00,000 0'( $&, 0,000Enamorti@ed e"cess8

and %*0,000Bui1din4s — net #$& 0,000 $& ,000( & ,000>quipment — net #$%&0,000 $ 0,000( #&90,000(Bonds payab1e #$ 0,000 $6,000( #%*,000(Good.i11 00,000

Investment in 3remor account $&,9%&,000

Co* ri'ht


21/27

Chapter 2 2-21

Solution *2-6

1 Pre1iminary computations87avier CA’s net assets at 7anuary & $&,%00,000Income or the irst quarter #$&00,000 " ; &%( /9,000

7avier CA’s net assets at !arch & $&,%% ,000

ERO C" "N. ITS 4( -O NE. E UIT IN ESTEE

J" IER C" /IN T OUS"N.S0

Investment in 7avier CA $ * 0

Boo va1ue o the interest acquired # 0' " $&,%% ,000( $ 6/+

>"cess o cost over boo va1ue acquired $ 9%+

Enderva1ued#Dverva1ued(

" ' InterestAcquired

L Amount Assi4ned

Inventory $ &00 0' $ 0

>quipment net $ 00 0' $ 203ota1 assi4ned to identi iab1e net

assets $ 60

"cess a11ocated to inventories $ 0,000>"cess a11ocated to equipment #$20,000 ; 6 years( #$& ,000(

$* ,000

3 + Investment in 7avier CA Ba1ance at ecember &, %0&*8Initia1 cost $* 0,000

ividends received #$& ,000(Income rom 7avier CA $* ,000>ndin4 ba1ance $*90,000

Co* ri'ht


22/27


Solution *2-7

.il Cor+orationPartia1 Income =tatement

or the year ended ecember &, %0&

In estment incomeIncome rom ar #equity basis( $* ,000

Income be ore e"traordinary item * ,000

Extraordinary 'ain=hare o ar’s operatin4 1oss carry or.ard 0,000

?et income $ / ,000

Co* ri'ht


23/27

Chapter 2 2-23

Solution *2-8

Preliminary computationsInvestment cost o 20' interest in 7en $&,290,000

Imp1ied tota1 air va1ue o 7en #$&,290,000 ; 20'( $%,%00,000

Boo va1ue#$%, % ,000 5 $&% ,000( #%,6 0,000(>"cess boo va1ue over air va1ue $ #* 0,000(

Excess allocated Dverva1ued p1ant assets $ # 00,000(Enderva1ued inventories 0,000

>"cess boo va1ue over air va1ue $ #* 0,000(

1 In estment income for 2011=hare o reported income #$% 0,000 &;% year 20'( $ &&%, 00Add8 epreciation on overva1ued p1ant assets

##$ 00,000 " 20'( ;2 years( &;% year % ,000ess8 20' o Enderva1uation a11ocated to inventories #* ,000(

Income rom 7en — %0&& $ 2%, 00

2 In estment balance at "ecember #1* 2012Ender1yin4 boo va1ue o 20' interest in 7en#7en’s ecember &, %0&% equity o $%,/00,000 20'( $%,* 0,000

ess8 Enamorti@ed overva1uation o p1ant assets#$ 0,000 per year / &;% years( # / ,000(

Investment ba1ance ecember &, %0&% $%,0 ,000

3 Journal entries to account for in estment in 201#Cash #or ividends receivab1e( & ,000

Investment in 7en & ,0003o record receipt o dividends #$& 0,000 20'(+

Investment in 7en % 0,000Income rom 7en % 0,0003o record income rom 7en computed as o11o.s8 aura’sshare o 7en’sreported net income #$%00,000 20'( p1us$ 0,000 amorti@ation ooverva1ued p1ant assets+

Chec 8 Investment ba1ance ecember &, %0&% o $%,0 ,000 5 $% 0,000 incomerom 7en $& ,000 dividends L $%,& 0,000 ba1ance ecember &, %0&

A1ternative1y, 7en’s under1yin4 equity #$%,000,000 paid in capita1 5 $/ 0,000retained earnin4s( 20' interest $ % ,000 unamorti@ed e"cess a11ocated top1ant assets L $%,& 0,000 ba1ance ecember &, %0& +

Co* ri'ht


24/27


Solution *2-'

1 Market price of 2 for !ricia’s sharesCost o investment in isa#*0,000 shares $%*( 3he $90,000 direct costs must bee"pensed+

$ 260,000

Boo va1ue acquired #$%,000,000 net assets *0'( 900,000>"cess air va1ue over boo va1ue $ &60,000

Allocation of excessJair a1ue — Percent B oo a1ue Acquired A11ocation

Inventories $ %00,000 *0' $ 90,000and *00,000 *0' &60,000

Bui1din4s — net #*00,000( *0' #&60,000(>quipment — net %00,000 *0' 90,000

Assi4ned to identi iab1e net assets &60,000quipment — net %00,000 *0' 90,000Bar4ain purchase4ain # %0,000(

$#&60,000(

Co* ri'ht


25/27

Chapter 2 2-25

Solution *2-1(

1 Income from Prima — 2011Jred’s share o Prima’s income or %0&&

$*0,000 &;% year & ' $ ,000

2 In estment in Prima balance "ecember #1* 2011Investment in Prima at cost $ *9,/ 0Add8 Income rom Prima ,000

ess8 ividends rom Prima ?ovember $& ,000 & '( #%,% 0(Investment in Prima ba1ance ecember & $ *2, 00

3 Income from Prima — 2012Jred’s share o Prima’s income or %0&%8

$60,000 income & ' interest & year $ 2,000$60,000 income 0' interest & year &9,000$60,000 income * ' interest &;* year 6,/ 0Jred’s share o Prima’s income or %0&% $ ,/ 0

4In estment in Prima "ecember #1* 2012Investment ba1ance ecember &, %0&& # rom %( $ *2, 00Add8 Additiona1 investments #$22,000 5 $&6%,000( %6&,000Add8 Income or %0&% # rom ( ,/ 0

ess8 ividends or %0&% #$& ,000 * '( 5 #$& ,000 20'( #%0,% 0(Investment in Prima ba1ance at ecember & $ %*,000

Alternati e solutionInvestment cost #$*9,/ 0 5 $22,000 5 $&6%,000( $ 02,/ 0Add8 =hare o reported income

%0&& — $*0,000 &;% year & ' $ ,000%0&% — $60,000 & year * ' %/,000%0&% — $60,000 &;* year * ' 6,/ 0 6,/ 0

ess8 ividends%0&& — $& ,000 & ' $ %,% 0%0&% — $& ,000 * ' 6,/ 0%0&% — $& ,000 20' & , 00 #%%, 00(

Investment in Prima $ %*,000

?ote8 =ince Jred’s investment in Prima consisted o 2,000 shares #a * 'interest( on 7anuary &, %0&%, Jred correct1y used the equity method oaccountin4 or the & ' investment interest he1d durin4 %0&&+ 3he a1ternativeo reportin4 income or %0&& on a air va1ue;cost basis and recordin4 a priorperiod adKustment or %0&% is not appropriate in vie. o the over.he1min4evidence o an abi1ity to e"ercise si4ni icant in 1uence by the time %0&&income is recorded+

Co* ri'ht


26/27


Solution *2-11

Income from /ue

%0&& %0&% %0& %0&* 3ota1

As reported $*0,000 $ %,000 $ %,000 $*9,000 $&/%,000Correct amounts %0,000 a %,000 b %,000 c *9,000 d & %,000Dverstatement $%0,000 $ 0 $ 0 $ 0 $ %0,000

a #$&00,000 &;% year *0'(b #$90,000 *0'(c #$& 0,000 *0'(d #$&%0,000 *0'(

1 In estment in /ue balance "ecember #1* 201

Investment in =ue per boo s ecember & $*00,000ess8 Dverstatement %0,000

Correct investment in =ue ba1ance ecember & $ 90,000

)heckEnder1yin4 equity in =ue #$200,000 *0'( $ 60,000Add8 Good.i11 #$ 00,000 #/00,000 *0'(( %0,000Investment ba1ance $ 90,000

2 )orrectin' entry 4before closin' for 201 5


27/27

Chapter 2 2-27

Solution *2-12

1 /chedule to allocate excess cost o er book alueInvestment cost #&*,000 shares $& ( $&0,000 direct costsmust be e"pensed+

$&9%,000

Boo va1ue acquired $&20,000 /0' & ,000

>"cess air va1ue over boo va1ue $ *2,000

Excess allocated Interest

Jair a1ue — Boo a1ue Acquired L A11ocationInventories $ 0,000 $60,000 /0' $ #/,000(

and 0,000 0,000 /0' &*,000>quipment — net & ,000 2 ,000 /0' %9,000"cess air va1ue over boo va1ue $ *2,000

2 In estment income from Jo6o

=hare o 7oKo’s reported income $60,000 /0' $ *%,000Add8 Dverva1ued inventory items /,000

ess8 epreciation on underva1ued equipment#$%9,000;* years( ;* year # ,% 0(

Investment income rom 7oKo $ * ,/ 0

3 In estment in Jo6o account at "ecember #1* 2011

Investment cost $&9%,000Add8 Income rom 7oKo * ,/ 0

ess8 ividends received #&*,000 shares $%( #%9,000(Investment in 7oKo ba1ance ecember & $&2/,/ 0

)heck

Ender1yin4 equity at ecember &, %0&& #$%&0,000M /0'( $&*/,000Add8 Enamorti@ed e"cess o cost over boo va1ue

and &*,000>quipment %%,/ 0Good.i11 &*,000

Investment ba1ance $&2/,/ 0

M $&00,000 #C;=( 5 $/0,000 #( 5 $90,000 #current earnin4s($*0,000 # ividends( L $%&0,000

Co* ri'ht

ch02 beams12ge sm

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