Homework Lance
Answers to Questions
Only the investor’s accounts are affected when outstanding stock is acquired from existing stockholders. The investor records the investment at its cost. Since the investee company is not a party to the transaction, its accounts are not affected.
Both investor and investee accounts are affected when unissued stock is acquired directly from the investee. The investor records the investment at its cost and the investee adjusts its asset and owners’ equity accounts to reflect the issuance of previously unissued stock.
Goodwill arising from an equity investment of 20 percent or more is not recorded separately from the investment account. Under the equity method, the investment is presented on one line of the balance sheet in accordance with the one-line consolidation concept.
Dividends received from earnings accumulated before an investment is acquired are treated as decreases in the investment account balance under the fair value/cost method. Such dividends are considered a return of a part of the original investment.
The equity method of accounting for investments increases the investment account for the investor’s share of the investee’s income and decreases it for the investor’s share of the investee’s losses and for dividends received from the investee. In addition, the investment and investment income accounts are adjusted for amortization of any investment cost-book value differentials related to the interest acquired. Adjustments to the investment and investment income accounts are also needed for unrealized profits and losses from transactions between the investor and investee companies. A fair value adjustment is optional under SFAS No. 159.
The equity method is referred to as a one-line consolidation because the investment account is reported on one line of the investor’s balance sheet and investment income is reported on one line of the investor’s income statement (except when the investee has extraordinary gains/losses or gains/losses from discontinued operations). In addition, the investment income is computed such that the parent company’s income and stockholders’ equity are equal to the consolidated net income and consolidated stockholders’ equity that would result if the statements of the investor and investee were consolidated.
If the equity method of accounting is applied correctly, the income of the parent company will generally equal the controlling interest share of consolidated net income. If the subsidiary is 100% owned by the parent, the parent’s net income under the equity method will equal the consolidated net income of the parent and it’s subsidiary.
The difference in the equity method and consolidation lies in the detail reported, but not in the amount of income reported. The equity method reports investment income on one line of the income statement whereas the details of revenues and expenses are reported in the consolidated income statement.
The investment account balance of the investor will equal underlying book value of the investee if (a) the equity method is correctly applied, (b) the investment was acquired at book value which was equal to fair value, the pooling method was used, or the cost-book value differentials have all been amortized or written off as impairment losses, and (c) there have been no intercompany transactions between the affiliated companies that have created investment account-book value differences.
The investment account balance must be converted from the cost to the equity method when acquisitions increase the interest held to 20 percent or more. The amount of the adjustment is the difference between the investment income reported under the cost method in prior years and the income that would have been reported if the equity method of accounting had been used. The offsetting account in the journal entry is
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2-1
2-2 Stock Investments — Investor Accounting and Reporting
Retained Earnings. Changes from the cost to the equity method of accounting for equity investments are changes in the reporting entity that require restatement of prior years’ financial statements when the effect is material.
The one-line consolidation is adjusted when the investee’s income includes extraordinary items or gains or losses from discontinued operations. In this case, the investor’s share of the investee’s ordinary income is reported as investment income under a one-line consolidation, but the investor’s share of extraordinary items, and gains and losses from discontinued operations is combined with similar items of the investor.
The remaining 15 percent interest in the investee is accounted for under the fair value/cost method, and the investment account balance immediately after the sale becomes the new cost basis.
Yes. When an investee has preferred stock in its capital structure, the investor has to allocate the investee’s income to preferred and common stockholders. Then, the investor takes up its share of the investee’s income allocated to common stockholders in applying the equity method. The allocation is not necessary when the investee has only common stock outstanding.
Goodwill impairment losses are calculated by business reporting units. For each reporting unit, the company must first determine the fair values of net assets. The fair value of the reporting unit is the amount at which it could be purchased in a current market transaction. This may be based on market prices, discounted cash flow analyses, or similar current transactions. This is done in the same manner as is done to originally record a combination. Any excess measured fair value over identifiable assets and liabilities is the implied fair value of goodwill. The company then compares the implied goodwill fair value to the carrying value of goodwill to determine if there has been an impairment loss during the period. If the carrying value exceeds the implied fair value, an impairment loss equal to the difference is recognized.
Yes. Goodwill impairment losses for subsidiaries are computed as outlined in the solution to question 13. Companies compare fair values to book values for equity method investments as a whole. Firms may recognize impairment losses for equity method investments as a whole, but perform no separate impairment tests for goodwill associated with an equity method investment.
SOLUTIONS TO EXERCISES
Solution E2-1
d
c
c
d
b
Solution E2-2 [AICPA adapted]
d
b
d
b
Gar’s investment is reported at its $600,000 cost because the equity method is not appropriate and because Gar’s share of Med’s income exceeds dividends received since acquisition [($520,000 15%) > $40,000].
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c
Dividends received from Zef for the two years were $10,500 ($70,000
15% – all in 2012), but only $9,000 (15% of Zef’s income of $60,000 for the two years) can be shown on Two’s income statement as dividend income from the Zef investment. The remaining $1,500 reduces the investment account balance.
c
[$100,000 + $300,000 + ($600,000 10%)]
a
d
Investment balance January
2
$250,000
Add: Income from Pod ($100,000 30%)
30,000
Investment in Pod December
31
$280,000
Solution E2-3
Bow’s percentage ownership in Tre
Bow’s 20,000 shares/(60,000 + 20,000) shares = 25%
Goodwill
Investment cost
$500,000
Book value ($1,000,000 + $500,000) 25%
(375,000)
Goodwill
$125,000
Solution E2-4
Income from Med for 2011
Share of Med’s income ($200,000 1/2 year 30%)
$ 30,000
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2-4 Stock Investments — Investor Accounting and Reporting
Solution E2-5
1
Income from Oak
Share of Oak’s reported income ($800,000 30%)
$
240,000
Less: Excess allocated to inventory
(100,000)
Less: Depreciation of excess allocated to building
(50,000)
($200,000/4 years)
$
90,000
Income from Oak
Investment account balance at December 31
Cost of investment in Oak
$2,000,000
Add: Income from Oak
90,000
Less: Dividends ($200,000 x 30%)
(60,000)
Investment in Oak December 31
$2,030,000
Alternative solution
$5,000,000
Underlying equity in Oak at January 1 ($1,500,000/.3)
Income less dividends
600,000
Underlying equity December 31
5,600,000
Interest owned
30%
Book value of interest owned December 31
1,680,000
Add: Unamortized excess
350,000
Investment in Oak December 31
$2,030,000
Solution E2-6
Journal entry on Man’s books
Investment in Nib ($600,000 x 40%)
240,000
Loss from discontinued operations
40,000
280,000
Income from Nib
To recognize income from 40% investment in Nib.
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Chapter 2
2-5
Solution E2-7
1
a
$
18,000
Dividends received from Ben ($120,000 15%)
Share of income since acquisition of interest
(3,000)
2011 ($20,000 15%)
2012 ($80,000 15%)
(12,000)
Excess dividends received over share of income
$
3,000
Investment in Ben January 3, 2011
$
50,000
Less: Excess dividends received over share of income
(3,000)
Investment in Ben December 31, 2012
$
47,000
2
b
$1,400,000
Cost of 10,000 of 40,000 shares outstanding
Book value of 25% interest acquired ($4,000,000
stockholders’ equity at December 31, 2011 +
1,350,000
$1,400,000 from additional stock issuance) 25%
Excess cost over book value(goodwill)
$
50,000
d
The investment in Moe balance remains at the original cost.
c
Income before extraordinary item
$
200,000
Percent owned
40%
Income from Kaz Products
$
80,000
Solution E2-8
Preliminary computations
$2,400,000
Cost of 40% interest January 1, 2011
Book value acquired ($4,000,000 40%)
(1,600,000)
Excess cost over book value
$
800,000
Excess allocated to
$
40,000
Inventories $100,000 40%
Equipment $200,000 40%
80,000
Goodwill for the remainder
680,000
Excess cost over book value
$
800,000
Ray’s underlying equity in Ton ($5,500,000 40%)
$2,200,000
Add: Goodwill
680,000
Investment balance December 31, 2016
$2,880,000
Alternative computation
Ray’s share of the change in Ton’s stockholders’
$
600,000
equity ($1,500,000 40%)
Less: Excess allocated to inventories ($40,000 100%)
(40,000)
Less: Excess allocated to equipment ($80,000/4 years 4 years)
(80,000)
Increase in investment account
480,000
Original investment
2,400,000
Investment balance December 31, 2016
$2,880,000
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2-6 Stock Investments — Investor Accounting and Reporting
Solution E2-9
Income from Run
Share of income to common ($400,000 – $30,000 preferred
dividends) 30%
$
111,000
2
Investment in Run December 31, 2012
NOTE: The $50,000 direct costs of acquiring the investment
are a part of the cost of the investment. They are charged
against additional piad-in capital.
$1,200,000
Investment cost
Add: Income from Run
111,000
Less: Dividends from Run ($200,000 dividends – $30,000
(51,000)
dividends to preferred) 30%
Investment in Run December 31, 2012
$1,260,000
Solution E2-10
1
2
Income from Tee ($400,000 – $300,000) 25%
$
25,000
Investment income October 1 to December 31
Investment balance December 31
$
600,000
Investment cost October 1
Add: Income from Tee
25,000
Less: Dividends
—
Investment in Tee at December 31
$
625,000
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Chapter 2
2-7
Solution E2-11
Preliminary computations
Goodwill from first 10% interest:
$
25,000
Cost of investment
Book value acquired ($210,000 10%)
(21,000)
Excess cost over book value
$
4,000
Goodwill from second 10% interest:
$
50,000
Cost of investment
Book value acquired ($250,000 10%)
(25,000)
Excess cost over book value
$
25,000
1
Correcting entry as of January 2, 2012 to
convert investment to the equity basis
Unrealized gain/loss on available-for-sale
25,000
securities
25,000
Allowance to adjust available-for-sale
Securities to market value
To remove the valuation allowance entered on
December 31, 2011 under the fair value method
for an available for sale security.
4,000
Investment in Fed
4,000
Retained earnings
To adjust investment account to an equity basis
computed as follows:
$
10,000
Share of Fed’s income for 2011
Less: Share of dividends for 2011
(6,000)
$
4,000
2
Income from Fed for 2012
Income from Fed on original 10% investment
$
5,000
Income from Fed on second 10% investment
5,000
Income from Fed
$
10,000
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2-8
Stock Investments — Investor Accounting and Reporting
Solution E2-12
Preliminary computations
$380,000
Stockholders’ equity of Tal on December 31, 2011
Sale of 12,000 previously unissued shares on January 1, 2012
250,000
Stockholders’ equity after issuance on January 1, 2012
$630,000
Cost of 12,000 shares to Riv
$250,000
Book value of 12,000 shares acquired
210,000
$630,000 12,000/36,000 shares
Excess cost over book value
$ 40,000
Excess is allocated as follows
$ 20,000
Buildings $60,000 12,000/36,000 shares
Goodwill
20,000
Excess cost over book value
$ 40,000
Journal entries on Riv’s books during 2012
January 1
250,000
Investment in Tal
250,000
Cash
To record acquisition of a 1/3 interest in Tal.
During 2012
30,000
Cash
30,000
Investment in Tal
To record dividends received from Tal ($90,000 1/3).
December 31
38,000
Investment in Tal
38,000
Income from Tal
To record investment income from Tal computed as
follows:
$ 40,000
Share of Tal’s income ($120,000 1/3)
Depreciation on building ($20,000/10 years)
(2,000)
Income from Tal
$ 38,000
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Chapter 2
2-9
Solution E2-13
1
Journal entries on BIP’s books for 2012
Cash
60,000
60,000
Investment in Cow (30%)
To record dividends received from Cow
($200,000 30%).
Investment in Cow (30%)
120,000
Extraordinary loss (from Cow)
12,000
132,000
Income from Cow
To record investment income from Cow computed as
follows:
Share of income before extraordinary item
$340,000 30%
$
102,000
Add: Excess fair value over cost realized
in 2012
30,000
$100,000 30%
Income from Cow before extraordinary
$
132,000
loss
Investment in Cow balance December 31, 2012
Investment cost
$
390,000
Add: Income from Cow after extraordinary loss
120,000
Less: Dividends received from Cow
(60,000)
Investment in Cow December 31
$450,000
Check: Investment balance is equal to underlying book value
($1,400,000 + $300,000 – $200,000) 30% = $450,000
3
BIP Corporation
Income Statement
for the year ended December 31, 2012
$2,000,000
Sales
Expenses
1,400,000
Operating income
600,000
Income from Cow (before extraordinary item)
132,000
Income before extraordinary item
732,000
Extraordinary loss (net of tax effect)
12,000
Net income
$
720,000
Solution E2-14
Income from Wat for 2012
Equity in income ($108,000 – $8,000 preferred) 40%
$
40,000
2
Investment in Wat December 31, 2012
Cost of investment in Wat common
$
290,000
Add: Income from Wat
40,000
Less: Dividends * ($40,000 x 40%)
(16,000)
Investment in Wat December 31
$
314,000
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2-10 Stock Investments — Investor Accounting and Reporting
* $48,000 total dividends less $8,000 preferred dividend
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Chapter 2
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Solution E2-15
December 31, 2012:
$320,000
Total fair value of Sel
Fair value of identifiable assets(net)
$250,000
Implied fair value of goodwill
$70,000
Goodwill carrying value
$100,000
Goodwill implied fair value
$70,000
Impairment loss
$
30,000
The $30,000 impairment loss is deducted in calculating Par’s income from continuing operations.
Solution E2-16
Goodwill impairments are calculated at the business reporting unit level. Increases and decreases in fair values across business units are not offsetting. Flash must report an impairment loss of $5,000 in calculating 2012 income from continuing operations. The calculation follows:
Carrying value of goodwill
$35,000
Estimated value of goodwill
30,000
Impairment loss
$5,000
SOLUTIONS TO PROBLEMS
Solution P2-1
1
Goodwill
$1,372,000
Cost of investment in Tel on April 1
Book value acquired:
$4,000,000
Net assets at December 31
Add: Income for 1/4 year ($480,000 25%)
120,000
Less: Dividends paid March 15
(80,000)
Book value at April 1
4,040,000
1,212,000
Interest acquired
30%
Goodwill from investment in Tel
$
160,000
Income from Tel for 2011
Equity in income before extraordinary item
($480,000 3/4 year 30%)
$
108,000
Extraordinary gain from Tel ($160,000 30%)
48,000
3
Investment in Tel at December 31, 2011
$1,372,000
Investment cost April 1
Add: Income from Tel plus extraordinary gain
156,000
Less: Dividends ($80,000 3 quarters) 30%
(72,000)
Investment in Tel December 31
$1,456,000
Equity in Tel’s net assets at December 31, 2011
Tel’s stockholders’ equity January 1
$4,000,000
Add: Net income
640,000
Less: Dividends
(320,000)
Tel’s stockholders’ equity December 31
4,320,000
Investment interest
30%
Equity in Tel’s net assets
$1,296,000
Extraordinary gain for 2011 to be reported by Rit
Tel’s extraordinary gain 30%
$ 48,000
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2-12 Stock Investments — Investor Accounting and Reporting
Solution P2-2
Cost method
Investment in Sel July 1, 2011 (at cost)
$220,000
Dividends charged to investment
(2,400)
Investment in Sel balance at December 31,
$217,600
2011
July 1, 2011
220,000
Investment in Sel
Cash
220,000
To record initial investment for 80% interest.
November 1, 2011
6,400
Cash
Dividend income
6,400
To record receipt of dividends ($8,000 80%).
December 31, 2011
2,400
Dividend income
Investment in Sel
2,400
To reduce investment for dividends in excess of
earnings ($6,400 dividends – $4,000 earnings).
2
Equity method
Investment in Sel July 1, 2011
$220,000
Add: Share of reported income
4,000
Deduct: Dividends charged to investment
(6,400)
Deduct: Excess Depreciation
(6,600)
Investment in Sel balance at December 31, 2011
$211,000
July 1, 2011
220,000
Investment in Sel
Cash
220,000
To record initial investment for 80% interest
of Sel.
November 1, 2011
6,400
Cash
Investment in Sel
6,400
To record receipt of dividends ($8,000 80%).
December 31, 2011
2,600
Loss from Sel(Income from Sel)
Investment in Sel
2,600
To record loss from Sel computed as follows:
Share of Sel’s income ($10,000 1/2 year 80%)
less excess depreciation ($132,000/10 years 1/2 year).
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2-13
Solution P2-3
Preliminary computations
$331,000
Cost of investment in Zel
Book value acquired ($1,000,000 30%)
300,000
Excess cost over book value
$
31,000
Excess allocated
$
9,000
Undervalued inventories ($30,000 30%)
Overvalued building (-$60,000 30%)
(18,000)
Goodwill for the remainder
40,000
Excess cost over book value
$
31,000
Income from Zel
Share of Zel’s reported income ($100,000 30%) Less: Excess allocated to inventories sold in 2011 Add: Amortization of excess allocated to overvalued
building $18,000/10 years Income from Zel — 2011
Investment balance December 31, 2011 Cost of investment
Add: Income from Zel
Less: Share of Zel’s dividends ($50,000 30%) Investment in Zel balance December 31
$ 30,000
(9,000)
1,800
$ 22,800
$331,000
22,800
(15,000)
$338,800
3
Vat’s share of Zel’s net assets
Share of stockholders’ equity
$315,000
($1,000,000 + $100,000 income – $50,000 dividends) 30%
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2-14 Stock Investments — Investor Accounting and Reporting
Solution P2-4
Preliminary computations
Investment cost of 40% interest
Book value acquired [$500,000 + ($100,000 1/2 year)] 40% Excess cost over book value
Excess allocated
Land $30,000 40%
Equipment $50,000 40%
Remainder to goodwill
Excess cost over book value
July 1, 2011
Investment in Jill 380,000 Cash
To record initial investment for 40% interest in Jill. November 2011
Cash (other receivables) 20,000 Investment in Jill
To record receipt of dividends ($50,000 40%).
$380,000
220,000
$160,000
$ 12,000
20,000
128,000
$160,000
380,000
20,000
December 31, 2011
20,000
Investment in Jill
Income from Jill
20,000
To record share of Jill’s income ($100,000 1/2 year 40%).
December 31, 2011
2,000
Income from Jill
Investment in Jill
2,000
To record depreciation on excess allocated to
Undervalued equipment ($20,000/5 years 1/2 year).
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Solution P2-5
Schedule to allocate fair value — book value differentials
Investment cost January 1
$1,680,000
Book value acquired ($3,900,000 net assets 30%)
1,170,000
Excess cost over book value
$
510,000
Allocation of excess
Fair Value — Percent
Allocation
Inventories
Book Value
Acquired
$200,000
30%
$
60,000
Land
800,000
30%
240,000
Buildings — net
500,000
30%
150,000
Equipment — net
(700,000)
30%
(210,000)
Bonds payable
(100,000)
30%
(30,000)
Assigned to identifiable net assets
210,000
Remainder to goodwill
300,000
Excess cost over book value
$
510,000
2
Income from Tremor for 2011
$
360,000
Equity in income ($1,200,000 30%)
Less: Amortization of differentials
(60,000)
Inventories (sold in 2011)
Buildings — net ($150,000/10 years)
(15,000)
Equipment — net ($210,000/7 years)
30,000
Bonds payable ($30,000/5 years)
6,000
Income from Tremor
$
321,000
3
Investment in Tremor balance December 31, 2011
$1,680,000
Investment cost
Add: Income from Tremor
321,000
Less: Dividends ($600,000 30%)
(180,000)
Investment in Tremor December 31
$1,821,000
Check:
$1,350,000
Underlying equity ($4,500,000 30%)
Unamortized excess:
240,000
Land
Buildings — net ($150,000 – $15,000)
135,000
Equipment — net ($210,000 – $30,000)
(180,000)
Bonds payable ($30,000 – $6,000)
(24,000)
Goodwill
300,000
Investment in Tremor account
$1,821,000
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2-16 Stock Investments — Investor Accounting and Reporting
Solution P2-6
1
Income from Sap
$96,000
Investment in Sap July 1, 2011 at cost
Book value acquired ($130,000 60%)
78,000
Excess cost over book value
$18,000
Pal’s share of Sap’s income for 2011
$ 6,000
($20,000 1/2 year 60%)
Less: Excess Depreciation ($18,000/10 years 1/2 year)
900
Income from Sap for 2011
$ 5,100
2
Investment balance December 31, 2011
$96,000
Investment cost July 1
Add: Income from Sap
5,100
Less: Dividends ($12,000 60%)
(7,200)
Investment in Sap December 31
$93,900
Solution P2-7
Dil Corporation
Partial Income Statement
for the year ended December 31, 2013
Investment income
$90,000
Income from Lar (equity basis)
Income before extraordinary item
90,000
Extraordinary gain
60,000
Share of Lar’s operating loss carryforward
Net income
$150,000
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Chapter 2
2-17
Solution P2-8
Preliminary computations
$1,980,000
Investment cost of 90% interest in Jen
Book value acquired($2,525,000 + $125,000) x 90%
(2,385,000)
Excess book value over cost
)
$ (405,000
Excess allocated
$ (450,000)
Overvalued plant assets($500,000 x 90%)
Undervalued inventories ($50,000 x 90%)
45,000
Excess book value over cost
)
$ (405,000
Investment income for 2011
Share of reported income ($250,000
1/2 year 90%)
$
112,500
Add: Depreciation on overvalued plant assets
25,000
(($500,000 x 90%) / 9 years)
1/2 year
Less: 90% of Undervaluation allocated to inventories
(45,000)
2
Income from Jen — 2011
$
92,500
Investment balance at December 31,
2012
Underlying book value of 90% interest in Jen
$2,430,000
(Jen’s December 31, 2012 equity of $2,700,000 90%)
Less: Unamortized overvaluation of plant assets
(375,000)
($50,000 per year 7 1/2 years)
Investment balance December 31, 2012
$2,055,000
Journal entries to account for investment in 2013
Cash (or Dividends receivable)
135,000
Investment in Jen
135,000
To record receipt of dividends ($150,000 90%).
Investment in Jen
230,000
Income from Jen
230,000
To record income from Jen computed as follows: Laura’s share of
Jen’s reported net income ($200,000 90%) plus $50,000 amortization of overvalued plant assets.
Check: Investment balance December 31, 2012 of $2,055,000 + $230,000 income from Jen – $135,000 dividends = $2,150,000 balance December 31, 2013
Alternatively, Jen’s underlying equity ($2,000,000 paid-in capital +
$750,000 retained earnings) 90% interest – $325,000 unamortized excess allocated to plant assets = $2,150,000 balance December 31, 2013.
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2-18 Stock Investments — Investor Accounting and Reporting
Solution P2-9
Market price of $24 for Tricia’s shares Cost of investment in Lisa
(40,000 shares $24) The $80,000 direct costs must be
$
960,000
expensed. The direct costs of issuing shares of stock
should reduce Additional paid-in capital.
800,000
Book value acquired ($2,000,000 net assets 40%)
Excess cost over book value
$
160,000
Allocation of excess
Fair Value —
Percent
Allocation
Inventories
Book Value
Acquired
$ 200,000
40%
$
80,000
Land
400,000
40%
160,000
Buildings — net
(400,000)
40%
(160,000)
Equipment — net
200,000
40%
80,000
Assigned to identifiable net assets
160,000
Remainder assigned to goodwill
0
Total allocated
$
160,000
Market price of $16 for Tricia’s shares Cost of investment in Lisa
(40,000 shares $16) Other direct costs are $0
$
640,000
Direct costs of issuing shares of stock should reduce
Additional Paid-in Capital.
800,000
Book value acquired ($2,000,000 net assets 40%)
Excess book value over cost
$
(160,000
)
Excess allocated to
Fair Value — Percent
Allocation
Inventories
Book Value
Acquired
$200,000
40%
$ 80,000
Land
400,000
40%
160,000
Buildings — net
(400,000)
40%
(160,000)
Equipment — net
200,000
40%
80,000
Bargain purchase
(320,000)
gain
$(160,000)
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Chapter 2
Solution P2-10
Income from Prima — 2011
Fred’s share of Prima’s income for 2011 $40,000 1/2 year 15%
Investment in Prima balance December 31, 2011 Investment in Prima at cost
Add: Income from Prima
Less: Dividends from Prima November 1 ($15,000 15%) Investment in Prima balance December 31
Income from Prima — 2012
Fred’s share of Prima’s income for 2012: $60,000 income 15% interest 1 year
$60,000 income 30% interest 1 year
$60,000 income 45% interest 1/4 year Fred’s share of Prima’s income for 2012
Investment in Prima December 31, 2012 Investment balance December 31, 2011 (from 2) Add: Additional investments ($99,000 + $162,000) Add: Income for 2012 (from 3)
Less: Dividends for 2012 ($15,000 45%) + ($15,000 90%) Investment in Prima balance at December 31
Alternative solution
Investment cost ($48,750 + $99,000 + $162,000)
Add: Share of reported income
2011 — $40,000
1/2 year 15%
$ 3,000
2012 — $60,000
1 year 45%
27,000
2012 — $60,000
1/4 year 45%
6,750
Less: Dividends
15%
$ 2,250
2011 — $15,000
2012 — $15,000
45%
6,750
2012 — $15,000
90%
13,500
Investment in Prima
2-19
$ 3,000
$ 48,750 3,000 (2,250)
$ 49,500
$ 9,000 18,000 6,750
$ 33,750
$ 49,500 261,000 33,750
(20,250)
$324,000
$309,750
36,750
(22,500)
$324,000
Note: Since Fred’s investment in Prima consisted of 9,000 shares (a 45% interest) on January 1, 2012, Fred correctly used the equity method of accounting for the 15% investment interest held during 2011. The alternative of reporting income for 2011 on a fair value/cost basis and recording a prior period adjustment for 2012 is not appropriate in view of the overwhelming evidence of an ability to exercise significant influence by the time 2011 income is recorded.
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2-20
Stock Investments — Investor Accounting and Reporting
Solution P2-11
Income from Sue
2011
2012
2013
2014
Total
As reported
$40,000
$32,000
$52,000
$48,000
$172,000
Correct amounts
19,000a
30,000b
50,000c
46,000d
145,000
Overstatement
$21,000
$ 2,000
$ 2,000
$ 2,000
$ 27,000
a($100,000 1/2 year 40%)- ($20,000/10 x 1/2 year)=19,000 b($80,000 40%)- ($20,000/10)= 30,000 c($130,000 40%)-($20,000/10)= 50,000
d($120,000 40%)-($20,000/10) = 46,000
Investment in Sue balance December 31, 2014
Investment in Sue per books December 31
$400,000
Less: Overstatement
27,000
Correct investment in Sue balance December 31
$
373,000
Check
$360,000
Underlying equity in Sue ($900,000 40%)
Add: Building ($20,000 – $7,000)
13,000
Investment balance
$373,000
2
Correcting entry (before closing for 2014)
Retained earnings
25,000
Investment income
2,000
Investment in Sue
27,000
To correct errors in investment account. Current year error $2,000.
Solution P2-12
Schedule to allocate excess cost over book value
Investment cost (14,000 shares $13) $10,000 direct costs
$182,000
must be expensed.
133,000
Book value acquired $190,000 70%
Excess cost over book value
$ 49,000
Excess allocated
Interest
Fair Value — Book Value
Allocation
Inventories
Acquired =
70%
$ (7,000)
$ 50,000
$60,000
Land
50,000
30,000
70%
14,000
Equipment — net
135,000
95,000
70%
28,000
Remainder to goodwill
14,000
Excess cost over book value
$ 49,000
2
Investment income from Jojo
Share of Jojo’s reported income $60,000 70%
$ 42,000
Add: Overvalued inventory items
7,000
Less: Depreciation on undervalued equipment
(5,250)
($28,000/4 years) 3/4 year
Investment income from Jojo
$ 43,750
©2011 Pearson Education, Inc. publishing as Prentice Hall
Chapter 2
2-21
Investment in Jojo account at December 31, 2011
Investment
cost
$182,000
Add: Income from Jojo
43,750
Less: Dividends received (14,000 shares $2)
(28,000)
Investment in Jojo balance December 31
$197,750
Check
$147,000
Underlying equity at December 31, 2011 ($210,000 70%)*
Add: Unamortized excess of cost over book value
14,000
Land
Equipment
22,750
Goodwill
14,000
Investment balance
$197,750
$100,000 (C/S) + $70,000 (R/E) + $80,000 (current earnings) -$40,000 (Dividends) = $210,000
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