Advanced Financial Accounting 9e Richard Baker


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CHAPTER 2

REPORTING INTERCORPORATE INVESTMENTS AND CONSOLIDATION OF WHOLLY OWNED SUBSIDIARIES WITH NO DIFFERENTIAL


Questions LO1
Q2-1
What types of investments in common stock normally are accounted for using ( a ) the equity method and ( b ) the cost method? LO1
Q2-2
How is the ability to significantly influence the operating and financial policies of a company normally Demonstrated 
Q2-3*
When is equity-method reporting considered inappropriate even though sufficient common shares are owned to allow the exercise of significant influence? LO4
Q2-4
When will the balance in the intercorporate investment account be the same under the cost method and the equity method? LO2, LO3
Q2-5
Describe an investor’s treatment of an investee’s prior-period dividends and earnings when the investor acquires significant influence through a purchase of additional stock. LO2, LO3
Q2-6
From the point of view of an investor in common stock, what is a liquidating dividend? Is a liquidating dividend viewed in the same way by the investee? LO2, LO3
Q2-7
What effect does a liquidating dividend have on the balance in the investment account under the cost method and the equity method? LO2, LO3
Q2-8
How is the receipt of a dividend recorded under the equity method? Under the cost method? LO5
Q2-9
How does the fair value method differ from the cost method and equity method in reporting income from nonsubsidiary investments? LO3
Q2-10 *
How does the fully adjusted equity method differ from the modified equity method? LO4
Q2-11
Explain the concept of a one-line consolidation. LO3
Q2-12 *
What is the modified equity method? When might a company choose to use the modified equity method rather than the fully adjusted equity method? LO3
Q2-13 *
How are extraordinary items of the investee disclosed by the investor under equity-method reporting? LO6
Q2-14
How does an eliminating entry differ from an adjusting entry? LO6, LO7
Q2-15
What portion of the balances of subsidiary stockholders’ equity accounts is included in the consolidated balance sheet? LO6
Q2-16
How does the elimination process change when consolidated statements are prepared after—rather than at—the date of acquisition? LO7
Q2-17
What are the three parts of the consolidation worksheet, and what sequence is used in completing the worksheet parts? LO6
Q2-18
How are a subsidiary’s dividend declarations reported in the consolidated retained earnings statement? LO7
Q2-19
How is consolidated net income computed in a consolidation worksheet? LO6
Q2-20
Give a definition of consolidated retained earnings. LO6, LO7
Q2-21
How is the amount reported as consolidated retained earnings determined? LO7
Q2-22
Why is the beginning retained earnings balance for each company entered in the three-part consolidation worksheet rather than just the ending balance?

Cases
LO2, LO3
C2-1 Choice of Accounting Method

Slanted Building Supplies purchased 32 percent of the voting shares of Flat Flooring Company in March 20X
3. On December 31, 20X3, the officers of Slanted Building Supplies indicated they needed advice on whether to use the equity method or cost method in reporting their ownership in Flat Flooring.
Required
 


a.
What factors should be considered in determining whether equity-method reporting is appropriate?

b.
Which of the two methods is likely to show the larger reported contribution to Slanted’s earnings in 20X4? Explain.

c.
Why might the use of the equity method become more appropriate as the percentage of ownership increases? LO2, LO3
C2-2 Intercorporate Ownership
Most Company purchased 90 percent of the voting common stock of Port Company on January 1, 20X4, and 15 percent of the voting common stock of Adams Company on July 1, 20X
4. In preparing the financial statements for Most Company at December 31, 20X4, you discover that Port Company purchased 10 percent of the common stock of Adams Company in 20X2 and continues to hold those shares. Adams Company reported net income of $200,000 for 20X4 and paid a dividend of $70,000 on December 20, 20X4.
Required
 
Most Company’s chief accountant instructs you to review the current accounting literature, including pronouncements of the FASB and other appropriate bodies, and prepare a memo discussing whether the cost or equity method should be used in reporting the investment in Adams Company in Most’s consolidated statements prepared at December 31, 20X
4. Support your recommendations with citations and quotations from the authoritative financial reporting standards or other literature. LO2
C2-3 Application of the Equity Method
Forth Company owned 85,000 of Brown Company’s 100,000 shares of common stock until January 1, 20X2, at which time it sold 70,000 of the shares to a group of seven investors, each of whom purchased 10,000 shares. On December 3, 20X2, Forth received a dividend of $9,000 from Brown. Forth continues to purchase a substantial portion of Brown’s output under a contract that runs until the end of 20X9. Because of this arrangement, Forth is permitted to place two of its employees on the board of directors of Brown.

Required
 
Forth Company’s controller is not sure whether the company should use the cost or equity method in accounting for its investment in Brown Company. The controller asked you to review the relevant accounting literature and prepare a memo containing your recommendations. Support your recommendations with citations and quotations from the appropriate authoritative financial reporting standards or other literature. LO6
C2-4 Need for Consolidation Process
At a recent staff meeting, the vice president of marketing appeared confused. The controller had assured him that the parent company and each of the subsidiary companies had properly accounted for all transactions during the year. After several other questions, he finally asked, “If it has been done properly, then why must you spend so much time and make so many changes to the amounts reported by the individual companies when you prepare the consolidated financial statements each month? You should be able to just add the reported balances together.”
Required
 
Prepare an appropriate response to help the controller answer the marketing vice president’s question. LO1
C2-5 Account Presentation
Prime Company has been expanding rapidly and is now an extremely diversified company for its size. It currently owns three companies with manufacturing facilities, two companies primarily in retail sales, a consumer finance company, and two natural gas pipeline companies. This has led to some conflict between the company’s chief accountant and its treasurer. The treasurer advocates presenting no more than five assets and three liabilities on its balance sheet. The chief accountant has resisted combining balances from substantially different subsidiaries and has asked for your assistance.
Required
 
Review the appropriate authoritative pronouncements or other relevant accounting literature to see what guidance is provided and prepare a memo to the chief accountant with your findings. Include citations to and quotations from the most relevant references. Include in your memo at least two examples of situations in which it may be inappropriate to combine similar-appearing accounts of two subsidiaries. LO6
C2-6 Consolidating an Unprofitable Subsidiary
Amazing Chemical Corporation’s president had always wanted his own yacht and crew and concluded that Amazing Chemical should diversify its investments by purchasing an existing boatyard and repair facility on the lake-shore near his summer home. He could then purchase a yacht and have a convenient place to store it and have it repaired. Although the board of directors was never formally asked to approve this new venture, the president moved forward with optimism and a rather substantial amount of corporate money to purchase full ownership of the boatyard, which had lost rather significant amounts of money each of the five prior years and had never reported a profit for the original owners. Not surprisingly, the boatyard continued to lose money after Amazing Chemical purchased it, and the losses grew larger each month. Amazing Chemical, a very profitable chemical company, reported net income of $780,000 in 20X2 and $850,000 in 20X3 even though the boatyard reported net losses of $160,000 in 20X2 and $210,000 in 20X3 and was fully consolidated.
Required
 
Amazing Chemical’s chief accountant has become concerned that members of the board of directors or company shareholders will accuse him of improperly preparing the consolidated statements. The president does not plan to tell anyone about the losses, which do not show up in the consolidated income statement that the chief accountant prepared. You have been asked to prepare a memo to the chief accountant indicating the way to include subsidiaries in the consolidated income statement and to provide citations to or quotations from the authoritative accounting literature that would assist the chief accountant in dealing with this matter. You have also been asked to search the accounting literature to see whether any reporting requirements require disclosure of the boatyard in notes to the financial statements or in management’s discussion and analysis.

Exercises
LO2, LO3
E2-1 Multiple-Choice Questions on Use of Cost and Equity Methods [AICPA Adapted]
Select the correct answer for each of the following questions.
1. Peel Company received a cash dividend from a common stock investment. Should Peel report an increase in the investment account if it uses the cost method or equity method of accounting? Cost Equity
a.
No No
b.
Yes Yes
c.
Yes No
d.
No Yes

2. In 20X0, Neil Company held the following investments in common stock: • 25,000 shares of B&K Inc.’s 100,000 outstanding shares. Neil’s level of ownership gives it the ability to exercise significant influence over the financial and operating policies of B&K. • 6,000 shares of Amal Corporation’s 309,000 outstanding shares. During 20X0, Neil received the following distributions from its common stock investments:

November 6 $30,000 cash dividend from B&K November 11 $1,500 cash dividend from Amal December 26 3 percent common stock dividend from Amal The closing price of this stock was $115 per share. What amount of dividend revenue should Neil report for 20X0?
a.
$1,500.
b.
$4,200.
c.
$31,500.
d.
$34,200.
3. What is the most appropriate basis for recording the acquisition of 100 percent of the stock in another company if the acquisition was a noncash transaction?
a.
At the book value of the consideration given.
b.
At the par value of the stock acquired.
c.
At the book value of the stock acquired.
d.
At the fair value of the consideration given.
4. An investor uses the equity method to account for an investment in common stock. Assume that (1) the investor owns more than 50 percent of the outstanding common stock of the investee, (2) the investee company reports net income and declares dividends during the year, and (3) the investee’s net income is greater than the dividends it declares. How would the investor’s investment in the common stock of the investee company under the equity method differ at year end from what it would have been if the investor had accounted for the investment under the cost method?
a.
The balance under the equity method is higher than it would have been under the cost method.
b.
The balance under the equity method is lower than it would have been under the cost method.
c.
The balance under the equity method is higher than it would have been under the cost method, but only if the investee company actually paid the dividends before year end.
d.
The balance under the equity method is lower than it would have been under the cost method, but only if the investee company actually paid the dividends before year end.
5. A corporation exercises significant influence over an affiliate in which it holds a 40 percent common stock interest. If its affiliate completed a fiscal year profitably but paid no dividends, how would this affect the investor corporation?
a.
Result in an increased current ratio.
b.
Result in increased earnings per share.
 
c.
Increase several turnover ratios.
d.
Decrease book value per share.
6. An investor in common stock received dividends in excess of the investor’s share of investee’s earnings subsequent to the date of the investment. How will the investor’s investment account be affected by those dividends under each of the following methods? Cost Method Equity Method
a.
No effect No effect
b.
Decrease No effect
c.
No effect Decrease
d.
Decrease Decrease
7. An investor uses the cost method to account for an investment in common stock. A portion of the dividends received this year was in excess of the investor’s share of investee’s earnings subsequent to the date of investment. The amount of dividend revenue that should be reported in the investor’s income statement for this year would be
a.
Zero.
b.
The total amount of dividends received this year.
c.
The portion of the dividends received this year that was in excess of the investor’s share of investee’s earnings subsequent to the date of investment.
d.
The portion of the dividends received this year that was not in excess of the investor’s share of investee’s earnings subsequent to the date of investment. LO4
E2-2 Multiple-Choice Questions on Intercorporate Investments
Select the correct answer for each of the following questions.
1. Companies often acquire ownership in other companies using a variety of ownership arrangements. Equity-method reporting should be used by the investor whenever
a.
The investor purchases voting common stock of the investee.
b.
The investor has significant influence over the operating and financing decisions of the investee.
c.
The investor purchases goods and services from the investee.
d.
The carrying value of the investment is less than the market value of the investee’s shares held by the investor.
2. The carrying amount of an investment in stock accounted for under the equity method is equal to
a.
The original price paid to purchase the investment.
b.
The original price paid to purchase the investment plus cumulative net income plus cumulative dividends declared by the investee since the date the investment was acquired.
c.
The original price paid to purchase the investment plus cumulative net income minus cumulative dividends declared by the investee since the date the investment was acquired.
d.
The original price paid to purchase the investment minus cumulative net income minus cumulative dividends declared by the investee since the date the investment was acquired. LO3
E2-3 Multiple-Choice Questions on Applying Equity Method [AICPA Adapted]
Select the correct answer for each of the following questions.
1. Green Corporation owns 30 percent of the outstanding common stock and 100 percent of the outstanding noncumulative nonvoting preferred stock of Axel Corporation. In 20X1, Axel declared dividends of $100,000 on its common stock and $60,000 on its preferred stock. Green exercises significant influence over Axel’s operations. What amount of dividend revenue should Green report in its income statement for the year ended December 31, 20X1?
a.
$0.
b.
$30,000.
c.
$60,000.
d.
$90,000.
2. On January 2, 20X3, Kean Company purchased a 30 percent interest in Pod Company for $250,000. Pod reported net income of $100,000 for 20X3 and paid a dividend of $10,000. Kean accounts for this investment using the equity method. In its December 31, 20X3, balance sheet, what amount should Kean report as its investment in Pod?
a.
$160,000.
b.
$223,000.
c.
$340,000.
d.
$277,000.
3. On January 1, 20X8, Mega Corporation acquired 10 percent of the outstanding voting stock of Penny Inc. On January 2, 20X9, Mega gained the ability to exercise significant influence over Penny’s financial and operating decisions by acquiring an additional 20 percent of Penny’s outstanding stock. The two purchases were made at prices proportionate to the value assigned to Penny’s net assets, which equaled their carrying amounts. For the years ended December 31, 20X8 and 20X9, Penny reported the following: 20X8 20X9 Dividends Paid $200,000 $300,000 Net Income 600,000 650,000
In 20X9, what amounts should Mega report as current year investment income and as an adjustment, before income taxes, to 20X8 investment income?

20X9 Investment
Income
Adjustment to 20X8
Investment Income

a.
$195,000 $160,000
b.
$195,000 $100,000
c.
$195,000 $ 40,000
d.
$105,000 $ 40,000

4. Investor Inc. owns 40 percent of Alimand Corporation. During the calendar year 20X5, Alimand had net earnings of $100,000 and paid dividends of $10,000. Investor mistakenly recorded these transactions using the cost method rather than the equity method of accounting.
What effect would this have on the investment account, net earnings, and retained earnings, respectively?
a.
Understate, overstate, overstate.
b.
Overstate, understate, understate.
c.
Overstate, overstate, overstate.
d.
Understate, understate, understate.
5. A corporation using the equity method of accounting for its investment in a 40 percent–owned investee, which earned $20,000 and paid $5,000 in dividends, made the following entries:

Investment in Investee 8,000
Equity in Earnings of Investee 8,000
Cash 2,000
Dividend Revenue 2,000

What effect will these entries have on the investor’s statement of financial position?
a.
Financial position will be fairly stated.
b.
Investment in the investee will be overstated, retained earnings understated.
c.
Investment in the investee will be understated, retained earnings understated.
d.
Investment in the investee will be overstated, retained earnings overstated.


E2-4 Cost versus Equity Reporting

Winston Corporation purchased 40 percent of the stock of Fullbright Company on January 1, 20X2, at underlying book value. The companies reported the following operating results and dividend payments during the first three years of intercorporate ownership:
Winston Corporation Fullbright Company
Year Operating Income Dividends Net Income Dividends

20X2 $100,000 $ 40,000 $70,000 $30,000
20X3 60,000 80,000 40,000 60,000
20X4 250,000 120,000 25,000 50,000


Required
Compute the net income reported by Winston for each of the three years, assuming it accounts for its investment in Fullbright using ( a ) the cost method and ( b ) the equity method. LO2, LO3
E2-5 Acquisition Price

Phillips Company bought 40 percent ownership in Jones Bag Company on January 1, 20X1, at underlying book value. In 20X1, 20X2, and 20X3, Jones Bag reported net income of $8,000, $12,000, and $20,000, and dividends of $15,000, $10,000, and $10,000, respectively. The balance in Phillips Company’s investment account on December 31, 20X3, was $54,000. Required
In each of the following independent cases, determine the amount that Phillips paid for its investment in Jones Bag stock assuming that Phillips accounted for its investment using the ( a ) cost method and ( b ) equity method. LO2, LO3
E2-6 Investment Income

Ravine Corporation purchased 30 percent ownership of Valley Industries for $90,000 on January 1, 20X6, when Valley had capital stock of $240,000 and retained earnings of $60,000. The following data were reported by the companies for the years 20X6 through 20X9:
Year
Operating Income,
Ravine Corporation
Net Income,
Valley Industries
Dividends Declared
Ravine Valley

20X6 $140,000 $30,000 $ 70,000 $20,000
20X7 80,000 50,000 70,000 40,000
20X8 220,000 10,000 90,000 40,000
20X9 160,000 40,000 100,000 20,000
Required

a.
What net income would Ravine Corporation have reported for each of the years, assuming Ravine accounts for the intercorporate investment using (1) the cost method and (2) the equity method?
b.
Give all appropriate journal entries for 20X8 that Ravine made under both the cost and the equity methods. LO5
E2-7 Investment Value
Port Company purchased 30,000 of the 100,000 outstanding shares of Sund Company common stock on January 1, 20X2, for $180,000. The purchase price was equal to the book value of the shares purchased. Sund reported net income of $40,000, $30,000, and $5,000 for 20X2, 20X3, and 20X4, respectively. It paid a dividend of $25,000 in 20X2, but paid no dividends in 20X3 and 20X4.
Required

Compute the amounts Port Company should report as the carrying values of its investment in Sund Company at December 31, 20X2, 20X3, and 20X4. LO2, LO3
E2-8* Income Reporting

Grandview Company purchased 40 percent of the stock of Spinet Corporation on January 1, 20X8, at underlying book value. Spinet recorded the following income for 20X9:
Income before Extraordinary Gain $60,000
Extraordinary Gain 30,000
Net Income $90,000

Required
Prepare all journal entries on Grandview’s books for 20X9 to account for its investment in Spinet. LO5
E2-9 Fair Value Method

Small Company reported 20X7 net income of $40,000 and paid dividends of $15,000 during the year. Mock Corporation acquired 20 percent of Small’s shares on January 1, 20X7, for $105,000.
At December 31, 20X7, Mock determined the fair value of the shares of Small to be $121,000. Mock reported operating income of $90,000 for 20X7.
Required

Compute Mock’s net income for 20X7 assuming it uses
a.
The cost method in accounting for its investment in Small.
b.
The equity method in accounting for its investment in Small.
c.
The fair value method in accounting for its investment in Small. LO4, LO5
E2-10 Fair Value Recognition
Kent Company purchased 35 percent ownership of Lomm Company on January 1, 20X8, for $140,000. Lomm reported 20X8 net income of $80,000 and paid dividends of $20,000. At December 31, 20X8, Kent determined the fair value of its investment in Lomm to be $174,000.
Required
 
Give all journal entries recorded by Kent with respect to its investment in Lomm in 20X8 assuming it uses
a.
The equity method.
b.
The fair value method. LO2, LO3
E2-11 * Investee with Preferred Stock Outstanding

Reden Corporation purchased 45 percent of Montgomery Company’s common stock on January 1, 20X9, at underlying book value of $288,000. Montgomery’s balance sheet contained the following stockholders’ equity balances:

Preferred Stock ($5 par value, 50,000 shares issued and outstanding) $250,000
Common Stock ($1 par value, 150,000 shares issued and outstanding) 150,000
Additional Paid-In Capital 180,000
Retained Earnings 310,000
Total Stockholders’ Equity $890,000
Montgomery’s preferred stock is cumulative and pays a 10 percent annual dividend. Montgomery reported net income of $95,000 for 20X9 and paid total dividends of $40,000.

Required
 
Give the journal entries recorded by Reden Corporation for 20X9 related to its investment in Montgomery Company common stock. LO2, LO3
E2-12 * Other Comprehensive Income Reported by Investee

Callas Corporation paid $380,000 to acquire 40 percent ownership of Thinbill Company on January 1, 20X9. The amount paid was equal to underlying book value. During 20X9, Thinbill reported operating income of $45,000, an increase of $10,000 in the market value of trading securities held for the year, and an increase of $20,000 in the market value of available-for-sale securities held for the year. Thinbill paid dividends of $9,000 on December 10, 20X9.
Required
 
Give all journal entries that Callas Corporation recorded in 20X9, including closing entries at December 31, 20X9, associated with its investment in Thinbill Company. LO2, LO3
E2-13 * Other Comprehensive Income Reported by Investee

Baldwin Corporation purchased 25 percent of Gwin Company’s common stock on January 1, 20X8, at underlying book value. In 20X8, Gwin reported a net loss of $20,000 and paid dividends of $10,000, and in 20X9 the company reported net income of $68,000 and paid dividends of $16,000. Gwin also purchased marketable securities classified as available-for-sale on February 8, 20X9, and reported an increase of $12,000 in their fair value at December 31, 20X9. Baldwin reported a balance of $67,000 in its investment in Gwin at December 31, 20X9.
Required
 
Compute the amount paid by Baldwin Corporation to purchase the shares of Gwin Company. LO6
E2-14 Basic Elimination Entry

On December 31, 20X3, Broadway Corporation reported common stock outstanding of $200,000, additional paid-in capital of $300,000, and retained earnings of $100,000. On January 1, 20X4, Johe Company acquired control of Broadway in a business combination.
Required
 
Give the eliminating entry that would be needed in preparing a consolidated balance sheet immediately following the combination if Johe acquired all of Broadway’s outstanding common stock for $600,000. LO6, LO7
E2-15 Balance Sheet Worksheet

Blank Corporation acquired 100 percent of Faith Corporation’s common stock on December 31, 20X2, for $150,000. Data from the balance sheets of the two companies included the following amounts as of the date of acquisition:
Item Blank Corporation Faith Corporation

Cash $ 65,000 $ 18,000
Accounts Receivable 87,000 37,000
Inventory 110,000 60,000
Buildings and Equipment (net) 220,000 150,000
Investment in Faith Corporation Stock 150,000
Total Assets $632,000 $265,000
Accounts Payable $ 92,000 $ 35,000
Notes Payable 150,000 80,000
Common Stock 100,000 60,000
Retained Earnings 290,000 90,000
Total Liabilities and Stockholders’ Equity $632,000 $265,000

At the date of the business combination, the book values of Faith’s net assets and liabilities approximated fair value. Assume Faith Corporation’s accumulated depreciation on buildings and equipment on the acquisition date was $30,000.

Required
 

a.
Give the eliminating entry or entries needed to prepare a consolidated balance sheet immediately following the business combination.
b.
Prepare a consolidated balance sheet worksheet. LO3, LO6
E2-16 Consolidation Entries for Wholly Owned Subsidiary

Trim Corporation acquired 100 percent of Round Corporation’s voting common stock on January 1, 20X2, for $400,000. At that date, the book values and fair values of Round’s assets and liabilities were equal. Round reported the following summarized balance sheet data:
Assets $700,000 Accounts Payable $100,000
Bonds Payable 200,000
Common Stock 120,000
Total $700,000 Total $700,000

Round reported net income of $80,000 for 20X2 and paid dividends of $25,000.
Required
 

a.
Give the journal entries recorded by Trim Corporation during 20X2 on its books if Trim accounts for its investment in Round using the equity method.
b.
Give the eliminating entries needed at December 31, 20X2, to prepare consolidated financial statements. LO3, LO6
E2-17 Basic Consolidation Entries for Fully Owned Subsidiary
Amber Corporation reported the following summarized balance sheet data on December 31, 20X6:

Assets $600,000 Liabilities $100,000
Common Stock 300,000
Retained Earnings 200,000
Total $600,000 Total $600,000
On January 1, 20X7, Purple Company acquired 100 percent of Amber’s stock for $500,000. At the acquisition date, the book values and fair values of Amber’s assets and liabilities were equal.
Amber reported net income of $50,000 for 20X7 and paid dividends of $20,000.
Required
 

a.
Give the journal entries recorded by Purple on its books during 20X7 if it accounts for its investment in Amber using the equity method.
b.
Give the eliminating entries needed on December 31, 20X7, to prepare consolidated financial statements.

Problems
LO2, LO3
P2-18 Retroactive Recognition
Idle Corporation has been acquiring shares of Fast Track Enterprises at book value for the last several years. Data provided by Fast Track included the following: 20X2 20X3 20X4 20X5 Net Income $40,000 $60,000 $40,000 $50,000 Dividends 20,000 20,000 10,000 20,000
Fast Track declares and pays its annual dividend on November 15 each year. Its net book value on January 1, 20X2, was $250,000. Idle purchased shares of Fast Track on three occasions:
Date
Percent of Ownership Purchased Amount Paid

January 1, 20X2 10% $25,000
July 1, 20X3 5 15,000
January 1, 20X5 10 34,000

Required
 
Give the journal entries to be recorded on Idle’s books in 20X5 related to its investment in Fast Track. LO5
P2-19 Fair Value Method

Gant Company purchased 20 percent of the outstanding shares of Temp Company for $70,000 on January 1, 20X6. The following results are reported for Temp Company:

20X6 20X7 20X8
Net income $40,000 $35,000 $60,000
Dividends paid 15,000 30,000 20,000
Fair value of shares held by Gant:
January 1 70,000 89,000 86,000
December 31 89,000 86,000 97,000

Required
 
Determine the amounts reported by Gant as income from its investment in Temp for each year and the balance in Gant’s investment in Temp at the end of each year assuming Gant uses the following methods in accounting for its investment in Temp:
a.
Cost method.
b.
Equity method
c.
Fair value method. LO5
P2-20 Fair Value Journal Entries

Marlow Company acquired 40 percent of the voting shares of Brown Company on January 1, 20X8, for $85,000. The following results are reported for Brown Company:

20X8 20X9
Net income $20,000 $30,000
Dividends paid 10,000 15,000
Fair value of shares held by Marlow:
January 1 85,000 97,000
December 31 97,000 92,000
Required
 
Give all journal entries recorded by Marlow for 20X8 and 20X9 assuming it uses the fair value method in accounting for its investment in Brown. LO3
P2-21 * Other Comprehensive Income Reported by Investee

Dewey Corporation owns 30 percent of the common stock of Jimm Company, which it purchased at underlying book value on January 1, 20X5. Dewey reported a balance of $245,000 for its investment in Jimm Company on January 1, 20X5, and $276,800 at December 31, 20X5.
During 20X5, Dewey and Jimm Company reported operating income of $340,000 and $70,000,
respectively. Jimm received dividends from investments in marketable equity securities in the amount of $7,000 during 20X5. It also reported an increase of $18,000 in the market value of its portfolio of trading securities and an increase in the value of its portfolio of securities classified as available-for-sale. Jimm paid dividends of $20,000 in 20X5. Ignore income taxes in determining your solution.
Required
 

a.
Assuming that Dewey uses the equity method in accounting for its investment in Jimm, compute the amount of income from Jimm recorded by Dewey in 20X5.
b.
Compute the amount added to the investment account during 20X5.
c.
Compute the amount reported by Jimm as other comprehensive income in 20X5.
d.
If all of Jimm’s other comprehensive income arose solely from its investment in available-forsale securities purchased on March 10, 20X5, for $130,000, what was the market value of those securities at December 31, 20X5? LO3, LO6
P2-22 * Equity-Method Income Statement

Wealthy Manufacturing Company purchased 40 percent of the voting shares of Diversified Products Corporation on March 23, 20X4. On December 31, 20X8, Wealthy Manufacturing’s controller attempted to prepare income statements and retained earnings statements for the two companies using the following summarized 20X8 data:
Wealthy Manufacturing Diversifi ed Products

Net Sales $850,000 $400,000
Cost of Goods Sold 670,000 320,000
Other Expenses 90,000 25,000
Dividends Paid 30,000 10,000
Retained Earnings, 1/1/X8 420,000 260,000

Wealthy Manufacturing uses the equity method in accounting for its investment in Diversified Products. The controller was also aware of the following specific transactions for Diversified Products in 20X8, which were not included in the preceding data:
1. On June 30, 20X8, Diversified incurred a $5,000 extraordinary loss from a volcanic eruption near its Greenland facility.
2. Diversified sold its entire Health Technologies division on September 30, 20X8, for $375,000. The book value of Health Technologies division’s net assets on that date was $331,000. The division incurred an operating loss of $15,000 in the first nine months of 20X8.
3. On January 1, 20X8, Diversified switched from FIFO inventory costing to the weighted-average method. Had Diversified always used the weighted-average method, prior years’ income would have been lower by $20,000.
4. During 20X8, Diversified sold one of its delivery trucks after it was involved in an accident and recorded a gain of $10,000.
Required
 

a.
Prepare an income statement and retained earnings statement for Diversified Products for 20X8.
b.
Prepare an income statement and retained earnings statement for Wealthy Manufacturing for 20X8. LO3, LO6,
P2-23 Consolidated Worksheet at End of the First Year of Ownership (Equity Method)

Peanut Company acquired 100 percent of Snoopy Company’s outstanding common stock for $300,000 on January 1, 20X8, when the book value of Snoopy’s net assets was equal to $300,000. Peanut uses the equity method to account for investments. Trial balance data for Peanut and Snoopy as of December 31, 20X8, are as follows:

Peanut Company Snoopy Company Debit Credit Debit Credit
Cash $ 130,000 $ 80,000
Accounts Receivable 165,000 65,000
Inventory 200,000 75,000
Investment in Snoopy Stock 355,000 0
Land 200,000 100,000
Buildings and Equipment 700,000 200,000
Cost of Goods Sold 200,000 125,000
Depreciation Expense 50,000 10,000
Selling & Administrative Expense 225,000 40,000
Dividends Declared 100,000 20,000
Accumulated Depreciation $ 450,000 $ 20,000
Accounts Payable 75,000 60,000
Bonds Payable 200,000 85,000
Common Stock 500,000 200,000
Retained Earnings 225,000 100,000
Sales 800,000 250,000
Income from Snoopy 75,000 0
Total $2,325,000 $2,325,000 $715,000 $715,000
Required
 

a.
Prepare the journal entries on Peanut’s books for the acquisition of Snoopy on January 1, 20X8, as well as any normal equity method entry(ies) related to the investment in Snoopy Company during 20X8.
b.
Prepare a consolidation worksheet for 20X8 in good form. LO3, LO6,
P2-24 Consolidated Worksheet at End of the Second Year of Ownership (Equity Method)

Peanut Company acquired 100 percent of Snoopy Company’s outstanding common stock for $300,000 on January 1, 20X8, when the book value of Snoopy’s net assets was equal to $300,000. Problem 2-23 summarizes the first year of Peanut’s ownership of Snoopy. Peanut uses the equity method to account for investments. The following trial balance summarizes the financial position and operations for Peanut and Snoopy as of December 31, 20X9:

Peanut Company Snoopy Company Debit Credit Debit Credit

Cash $ 230,000 $ 75,000
Accounts Receivable 190,000 80,000
Inventory 180,000 100,000
Investment in Snoopy Stock 405,000 0
Land 200,000 100,000
Buildings and Equipment 700,000 200,000
Cost of Goods Sold 270,000 150,000
Depreciation Expense 50,000 10,000
Selling & Administrative Expense 230,000 60,000
Dividends Declared 225,000 30,000
Accumulated Depreciation $ 500,000 $ 30,000
Accounts Payable 75,000 35,000
Bonds Payable 150,000 85,000
Common Stock 500,000 200,000
Retained Earnings 525,000 155,000
Sales 850,000 300,000
Income from Snoopy 80,000 0
Total $2,680,000 $2,680,000 $805,000 $805,000

Required
 

a.
Prepare any equity method journal entry(ies) related to the investment in Snoopy Company during 20X9.
b.
Prepare a consolidation worksheet for 20X9 in good form. LO3, LO6,
P2-25 Consolidated Worksheet at End of the First Year of Ownership (Equity Method)

Paper Company acquired 100 percent of Scissor Company’s outstanding common stock for $370,000 on January 1, 20X8, when the book value of Scissor’s net assets was equal to $370,000.
Paper uses the equity method to account for investments. Trial balance data for Paper and Scissor as of December 31, 20X8, are as follows:
Paper Company Scissor Company Debit Credit Debit Credit

Cash $ 122,000 $ 46,000
Accounts Receivable 140,000 60,000
Inventory 190,000 120,000
Investment in Scissor Stock 438,000 0
Land 250,000 125,000
Buildings and Equipment 875,000 250,000
Cost of Goods Sold 250,000 155,000
Depreciation Expense 65,000 12,000
Selling & Administrative Expense 280,000 50,000
Dividends Declared 80,000 25,000
Accumulated Depreciation $ 565,000 $ 36,000
Accounts Payable 77,000 27,000
Bonds Payable 250,000 100,000
Common Stock 625,000 250,000
Retained Earnings 280,000 120,000
Sales 800,000 310,000
Income from Scissor 93,000 0
Total $2,690,000 $2,690,000 $843,000 $843,000

Required
 

a.
Prepare the journal entries on Paper’s books for the acquisition of Scissor on January 1, 20X8 as well as any normal equity method entry(ies) related to the investment in Scissor Company during 20X8.
b.
Prepare a consolidation worksheet for 20X8 in good form. LO3, LO6,
P2-26 Consolidated Worksheet at End of the Second Year of Ownership (Equity Method)

Paper Company acquired 100 percent of Scissor Company’s outstanding common stock for $370,000 on January 1, 20X8, when the book value of Scissor’s net assets was equal to $370,000. Problem 2-25 summarizes the first year of Paper’s ownership of Scissor. Paper uses the equity method to account for investments. The following trial balance summarizes the financial position and operations for Paper and Scissor as of December 31, 20X9:

Paper Company Scissor Company Debit Credit Debit Credit

Cash $232,000 $116,000
Accounts Receivable 165,000 97,000
Inventory 193,000 115,000
Investment in Scissor Stock 515,000 0
Land 250,000 125,000
Buildings and Equipment 875,000 250,000

Cost of Goods Sold $ 278,000 $178,000
Depreciation Expense 65,000 12,000
Selling & Administrative Expense 312,000 58,000
Dividends Declared 90,000 30,000
Accumulated Depreciation $ 630,000 $ 48,000
Accounts Payable 85,000 40,000
Bonds Payable 150,000 100,000
Common Stock 625,000 250,000
Retained Earnings 498,000 188,000
Sales 880,000 355,000
Income from Scissor 107,000 0
Total $2,975,000 $2,975,000 $981,000 $981,000

Required
 

a.
Prepare any equity method journal entry(ies) related to the investment in Scissor Company during 20X9.
b.
Prepare a consolidation worksheet for 20X9 in good form. LO2, LO6,
P2-27 * Consolidated Worksheet at End of the First Year of Ownership (Cost Method)

Peanut Company acquired 100 percent of Snoopy Company’s outstanding common stock for $300,000 on January 1, 20X8, when the book value of Snoopy’s net assets was equal to $300,000. Peanut uses the cost method to account for investments. Trial balance data for Peanut and Snoopy as of December 31, 20X8, are as follows:
Peanut Company Snoopy Company Debit Credit Debit Credit

Cash $ 130,000 $ 80,000
Accounts Receivable 165,000 65,000
Inventory 200,000 75,000
Investment in Snoopy Stock 300,000 0
Land 200,000 100,000
Buildings and Equipment 700,000 200,000
Cost of Goods Sold 200,000 125,000
Depreciation Expense 50,000 10,000
Selling & Administrative Expense 225,000 40,000
Dividends Declared 100,000 20,000
Accumulated Depreciation $ 450,000 $ 20,000
Accounts Payable 75,000 60,000
Bonds Payable 200,000 85,000
Common Stock 500,000 200,000
Retained Earnings 225,000 100,000
Sales 800,000 250,000
Dividend Income 20,000 0
Total $2,270,000 $2,270,000 $715,000 $715,000

Required
 

a.
Prepare the journal entries on Peanut’s books for the acquisition of Snoopy on January 1, 20X8 as well as any normal cost method entry(ies) related to the investment in Snoopy Company during 20X8.
b.
Prepare a consolidation worksheet for 20X8 in good form. LO2, LO6,
P2-28 * Consolidated Worksheet at End of the Second Year of Ownership (Cost Method)

Peanut Company acquired 100 percent of Snoopy Company’s outstanding common stock for $300,000 on January 1, 20X8, when the book value of Snoopy’s net assets was equal to $300,000.

Problem 2-25 summarizes the first year of Peanut’s ownership of Snoopy. Peanut uses the cost method to account for investments. The following trial balance summarizes the financial position and operations for Peanut and Snoopy as of December 31, 20X9:
Peanut Company Snoopy Company Debit Credit Debit Credit

Cash $ 230,000 $ 75,000
Accounts Receivable 190,000 80,000
Inventory 180,000 100,000
Investment in Snoopy Stock 300,000 0
Land 200,000 100,000
Buildings and Equipment 700,000 200,000
Cost of Goods Sold 270,000 150,000
Depreciation Expense 50,000 10,000
Selling & Administrative Expense 230,000 60,000
Dividends Declared 225,000 30,000
Accumulated Depreciation $ 500,000 $ 30,000
Accounts Payable 75,000 35,000
Bonds Payable 150,000 85,000
Common Stock 500,000 200,000
Retained Earnings 470,000 155,000
Sales 850,000 300,000
Dividend Income 30,000 0
Total $2,575,000 $2,575,000 $805,000 $805,000
Required
 

a.
Prepare any cost method journal entry(ies) related to the investment in Snoopy Company during 20X9.
b.
Prepare a consolidation worksheet for 20X9 in good form.  




ANSWERS TO QUESTIONS

Q2-1   (a)  An investment in the voting common stock of another company is reported on an equity-method basis when the investor is able to significantly influence the operating and financial policies of the investee.

(b)  The cost method normally is used for investments in common stock when the investor does not have significant influence and for investments in preferred stock and other securities. The amounts reported in the financial statements may require adjustment to fair value if they fall under the provisions of FASB Statement No. 115 (ASC 320). The cost method may also be used when the investor owns a controlling interest because the investment account is eliminated in the consolidation process.

Q2-2   Significant influence occurs when the investor has the ability to influence the operating and financial policies of the investee. Representation on the board of directors of the investee is perhaps the strongest evidence, but other evidence such as routine participation in management decisions or entering into formal agreements that give the investor some degree of influence over the investee also may be used.

Q2-3*   Equity-method reporting should not be used when (a) the investee has initiated litigation or complaints challenging the investor's ability to exercise significant influence, (b) the investor signs an agreement surrendering important shareholder rights, (c) majority ownership is concentrated in a small group that operates the company without regard to the investor's desires, (d) the investor is not able to acquire the information from the investee, or (e) the investor tries and fails to gain representation on the board of directors.

Q2-4   The balances will be the same at the date of acquisition and in the periods that follow whenever the cumulative dividends paid by the investee equal or exceed the investee's cumulative earnings since the date of acquisition. The latter case assumes there are no other adjustments needed under the equity method for amortization of differential or other factors.

Q2-5   When a company has used the cost method and purchases additional shares which cause it to gain significant influence, a retroactive adjustment is recorded to move from a cost basis to an equity-method basis in the preceding periods. Dividend income is replaced by income from the investee and dividends received are treated as an adjustment to the investment account.

Q2-6   An investor considers a dividend to be a liquidating dividend when the cumulative dividends received from the investee exceed a proportionate share of the cumulative earnings of the investee from the date ownership was acquired. For example, an investor would consider a dividend to be liquidating if it purchases shares of another company in early December and receives a dividend at year-end substantially in excess of its portion of the investee's net income for December. On the other hand, the investee may have reported net income well in excess of the total dividends paid for the year and would not consider the dividends to be liquidating dividends.

Q2-7   Liquidating dividends decrease the investment account in both cases. All dividends are treated as a reduction of the investment account when equity-method reporting is used. When the cost method is used and dividends are received in excess of a proportionate share of investee earnings since acquisition, they are treated as a reduction of the investment account as well.

Q2-8  A dividend is treated as a reduction of the investment account under equity-method reporting. Unless it is a liquidating dividend, it is treated as dividend income under the cost method.

Q2-9  Dividends received by the investor are recorded as dividend income under both the cost and fair value methods. The change in the fair value of the shares held by the investor is recorded as an unrealized gain or loss under the fair value method. The fair value method differs from the equity method in two respects. Under the equity method the investor’s share of the earnings of the investee are included as investment income and dividends received from the investee are treated as a reduction of the investment account.

Q2-10* When the modified equity method is used, a proportionate share of subsidiary net income and dividends is recorded on the parent's books and an appropriate amount of any differential is amortized each period. No other adjustments are recorded. Under the fully adjusted equity method, the parent's books also are adjusted for unrealized profits and any other items that are needed to bring the investor's net income into agreement with the income to the controlling interest that would be reported if consolidation were used.

Q2-11 One-line consolidation implies that under equity-method reporting the investor's net income and stockholders' equity will be the same as if the investee were consolidated. Income from the investee is included in a single line in the investor's income statement and the investment is reported as a single line in the investor's balance sheet.

Q2-12* The term modified equity method generally is used when the investor records its portion of the reported net income and dividends of the investee and amortizes an appropriate portion of any differential. Unlike the fully adjusted equity method, no adjustment for unrealized profit on intercompany transfers normally is made on the investor's books. When an investee is consolidated for financial reporting purposes, the investor may not feel it is necessary to record fully adjusted equity method entries on its books since income from the investee and the balance in the investment account must be eliminated in preparing the consolidated statements.

Q2-13* The investor reports a proportionate share of an investee's extraordinary item as an extraordinary item in its own income statement.

Q2-14   An adjusting entry is recorded on the company's books and causes the balances reported by the company to change. Eliminating entries, on the other hand, are not recorded on the books of the companies. Instead, they are entered in the consolidation worksheet so that when the amounts included in the eliminating entries are added to, or deducted from, the balances reported by the individual companies, the appropriate balances for the consolidated entity are reported.

Q2-15   Each of the stockholders' equity accounts of the subsidiary is eliminated in the consolidation process. Thus, none of the balances is included in the stockholders' equity accounts of the consolidated entity. That portion of the stockholders' equity claim assigned to the noncontrolling shareholders is reported indirectly in the balance assigned to the noncontrolling shareholders.

Q2-16   Additional entries are needed to eliminate all income statement and retained earnings statement effects of intercorporate ownership and any transfers of goods and services between related companies.

Q2-17   Separate parts of the consolidation worksheet are used to develop the consolidated income statement, retained earnings statement, and balance sheet. All eliminating entries needed to complete the entire worksheet normally are entered before any of the three statements are prepared. The income statement portion of the worksheet is completed first so that net income can be carried forward to the retained earnings statement portion of the worksheet. When the retained earnings portion is completed, the ending balances are carried forward and entered in the consolidated balance sheet portion of the worksheet.

Q2-18   None of the dividends declared by the subsidiary are included in the consolidated retained earnings statement. Those which are paid to the parent have not gone outside the consolidated entity and therefore must be eliminated in preparing the consolidated statements. Those paid to noncontrolling shareholders are treated as a reduction in the net assets assigned to noncontrolling interest and also must be eliminated.

Q2-19   Consolidated net income includes 100 percent of the revenues and expenses of the individual consolidating companies arising from transactions with unaffiliated companies.

Q2-20   Consolidated retained earnings is defined in current accounting practice as that portion of the undistributed earnings of the consolidated entity accruing to the parent company shareholders.

Q2-21  Consolidated retained earnings at the end of the period is equal to the beginning  consolidated retained earnings balance plus consolidated net income attributable to the controlling interest, less consolidated dividends. Under the equity method, consolidated retained earnings should equal the parent company’s retained earnings.

Q2-22  The retained earnings statement shows the increase or decrease in retained earnings during the period. Thus, income for the period is added to the beginning balance and dividends are deducted in deriving the ending balance in retained earnings. Because the consolidation worksheet includes the retained earnings statement, the beginning retained earnings balance must be entered in the worksheet.

SOLUTIONS TO CASES
C2-1  Choice of Accounting Method

a. The equity method is to be used when an investor has significant influence over an investee. Significant influence normally is assumed when more than 20 percent ownership is held. Factors to be considered in determining whether to apply equity-method reporting include the following:

1. Is the investee under the control of the courts or other parties as a result of filing for reorganization or entering into liquidation procedures?

2. Does the investor have representation on the board of directors, or has it attempted to gain representation and been unable to do so?

3. Has the investee initiated litigation or complaints challenging the investor's ability to exercise significant influence?

4. Has the investor signed an agreement surrendering its ability to exercise significant influence?

5. Is majority ownership concentrated in a small group that operates the company without regard of the wishes of the investor?

6. Is the investor able to acquire the information needed to use equity-method reporting?

b. When subsidiary net income is greater than dividends paid, equity-method reporting is likely to show a larger reported contribution to the earnings of Slanted Building Supplies. If 20X4 earnings are negative or less than dividends distributed in 20X4, the cost basis is likely to result in a larger contribution to Slanted's reported earnings.

c. As the investor uses more of its resources to acquire ownership of the investee, and as the investor has a greater share of the investee's profits and losses, the success of the investee's operations may have more of an impact on the overall financial well-being of the investor. In many cases, the investor will want to participate in key decisions of the investee once the investor's ownership share reaches a certain level. Also, use of the equity method eliminates the possibility of the investor manipulating its own income by influencing investee dividend distributions, as might occur under the cost method.
C2-2  Intercorporate Ownership

MEMO

To:    Chief Accountant
         Most Company

From:                           , CPA

Re:    Equity Method Reporting for Investment in Adams Company


The equity method should be used in reporting investments in which the reporting company has a significant influence over the operating and financing decisions of another company. In this case, Most Company holds 15 percent of the voting common stock of Adams Company and Port Company holds an additional 10 percent. During the course of the year, both Most and Port are likely to use the cost method in recording their respective investments in Adams. However, when consolidated statements are prepared for Most, the combined ownership must be used in determining whether significant influence exists. Both direct and indirect ownership must be taken into consideration. [APB 18, Par. 17; ASC 323-10-15-6 through 15-8]

A total of 15 percent of the voting common stock of Adams is held directly by Most Company and an additional 10 percent is controlled indirectly though Most’s ownership of Port Company. Equity-method reporting for the investment in Adams Company therefore appears to be required.

If the cost method has been used by Most and Port in recording their investments during the year, at the time consolidated statements are prepared, adjustments must be made to (a) increase the balance in the investment account for a proportionate share of the investee’s reported net income (25 percent) and reduce the balance in the investment account for a proportionate share of the dividend paid by the investee, (b) include a proportionate share of the investee’s net income in the consolidated income statement, (c) delete any dividend income recorded by Most and Port, and (d) if ownership was purchased at an amount greater than a proportionate share of the fair value of the investee’s net assets at the date of purchase, it may be necessary to amortize a portion of the differential assigned to depreciable or amortizable assets.

Primary citation
APB 18, par. 17; ASC 323-10-15-6 through 15-8
C2-3  Application of the Equity Method

MEMO

To:    Controller
         Forth Company

From:                           , CPA

Re:    Equity Method Reporting for Investment in Brown Company

This memo is prepared in response to your request regarding use of the cost or equity methods in accounting for Forth’s investment in Brown Company.

Forth Company held 85 percent of the common stock of Brown Company prior to January 1, 20X2, and was required to fully consolidate Brown Company in its financial statements prepared prior to that date [FASB 94; ASC 810]. Forth now holds only 15 percent of the common stock of Brown. The cost method is normally used in accounting for ownership when less than 20 percent of the stock is directly or indirectly held by the investor.

Equity-method reporting should be used when the investor has “significant influence over operating and financing policies of the investee.” While 20 percent ownership is regarded as the level at which the investor is presumed to have significant influence, other factors must be considered as well. [APB 18, Par. 17; ASC 323-10-15-6 through 15-8]

Although Forth currently holds only 15 percent of Brown’s common stock, the other factors associated with its ownership indicate that Forth does exercise significant influence over Brown. Forth has two members on Brown’s board of directors, it purchases a substantial portion of Brown’s output, and Forth appears to be the largest single shareholder by virtue of its sale of 10,000 shares to each of 7 other investors.

These factors provide strong evidence that Forth has significant influence over Brown and points to the need to use equity-method reporting for its investment in Brown. Your office should monitor the activities of the FASB with respect to consolidation standards [www.fasb.org]. Active consideration is being given to situations in which control may be exercised even though the investor does not hold majority ownership. It is conceivable that your situation might be one in which consolidation could be required.

Primary citations
APB 18, par. 17; ASC 323-10-15-6 through 15-8
FASB 94; ASC 810

C2-4  Need for Consolidation Process

After the financial statements of each of the individual companies are prepared in accordance with generally accepted accounting principles, consolidated financial statements must be prepared for the economic entity as a whole. The individual companies generally record transactions with other subsidiaries on the same basis as transactions with unrelated enterprises. In preparing consolidated financial statements, the effects of all transactions with related companies must be removed, just as all transactions within a single company must be removed in preparing financial statements for that individual company. It therefore is necessary to prepare a consolidation worksheet and to enter a number of special journal entries in the worksheet to remove the effects of the intercorporate transactions. The parent company also reports an investment in each of the subsidiary companies and investment income or loss in its financial statements. Each of these accounts must be eliminated as well as the stockholders' equity accounts of the subsidiaries. The latter must be eliminated because only the parent's ownership is held by parties outside the consolidated entity.


C2-5  Account Presentation

MEMO

To:            Chief Accountant
                 Prime Company

From:                                 , Accounting Staff

Re:           Combining Broadly Diversified Balance Sheet Accounts

Many manufacturing and merchandising enterprises excluded finance, insurance, real estate, leasing, and perhaps other types of subsidiaries from consolidation prior to 1987 on the basis of “nonhomogeneous” operations. Companies generally argued that the accounts of these companies were dissimilar in nature and combining them in the consolidated financial statements would mislead investors. FASB 94 specifically eliminated the exception for nonhomogeneous operations. [FASB 94, Par. 9; ASC 810]  FASB 160 (ASC 810-10-65-1) affirms the requirement for consolidating entities in which a controlling financial interest is held.

Prime Company controls companies in very different industries and combining the accounts of its subsidiaries may lead to confusion by some investors; however, it may be equally confusing to provide detailed listings of assets and liabilities by industry or other breakdowns in the consolidated balance sheet. The actual number of assets and liabilities presented in the consolidated balance sheet must be carefully considered, but is the decision of Prime’s management.

It is important to recognize that the notes to the consolidated financial statements are regarded as an integral part of the financial statements and Prime Company is required to include in its notes to the financial statements certain information on its reportable segments [FASB 131; ASC 280-10]. Because of the diversity of its ownership, Prime may wish to provide more than the minimum disclosures specified in FASB 131. Segment information appears to be used quite broadly by investors and permits the company to provide sufficient detail to assist the financial statement user in gaining a better understanding of the various operating divisions of the company.

You have requested information on those situations in which it may not be appropriate to combine similar appearing accounts of two or more subsidiaries. The following is a partial listing of such situations: (a) the accounts of a subsidiary should not be included along with other subsidiaries if control of the assets and liabilities does not rest with Prime Company, as when a subsidiary is in receivership; (b) while the assets and liability accounts of the subsidiary should be combined with the parent, the equity account balances should not; (c) negative account balances in cash or accounts receivable should be reclassified as liabilities rather than being added to the positive balances of other affiliates, and (d) assets pledged for a specific purpose and not available for other use by the consolidated entity generally should be separately reported.

Primary citations:
FASB 94; ASC 810
FASB 131; ASC 280-10
FASB 160; ASC 810-10-65-1
Secondary sources:
ARB 51; ASC 810
C2-6  Consolidating an Unprofitable Subsidiary

MEMO

TO:                  Chief Accountant
                        Amazing Chemical Corporation

FROM:                                                         , Accounting Staff

Re:                  Consolidation of Unprofitable Boatyard

This memo is intended to provide recommendations on the presentation of the boatyard in Amazing Chemical’s consolidated financial statements. Amazing Chemical Corporation currently has full ownership of the boatyard and should fully consolidate the boatyard in its financial statements. Consolidated statements should be prepared when a company directly or indirectly has a controlling financial interest in one or more other companies. [ARB 51, Par. 1; ASC 810-10-10-1]  This requirement has been reaffirmed by FASB 160 (ASC 810-10-65-1).

Prior to the issuance of FASB 94 (ASC 810), Amazing Chemical may have justified excluding the boatyard from consolidation based on the differences in operating characteristics between the subsidiary and the parent company; however, FASB 94 specifically deleted the nonhomogeneity exclusion [FASB 94, Par. 9]. Thus, Amazing Chemical appears to be following generally accepted accounting procedures in fully consolidating the boatyard in its financial statements and should continue to do so.

The operations of the boatyard appear to be distinct from the other operations of the parent company and its losses appear to be sufficient to establish it as a reportable segment [FASB 131, Par. 10 and 18; ASC 280-10-50]. While the operating losses of the boatyard may not be evident in analyzing the consolidated income statement, a review of the notes to the consolidated statements should provide adequate disclosure of its operations as a reportable segment. The financial statements for the current period should contain these disclosures and if prior period statements have not included the boatyard as a reportable segment it may be necessary to restate those statements.

Failure of the president of Amazing Chemical to receive approval by the board of directors for the purchase of the boatyard and his subsequent actions to keep information about its operations from the board members appears to be a serious breach of ethics. These actions by the president should immediately be brought to the attention of the board of directors for appropriate action by the board.

Primary citations:
ARB 51, Par. 1; ASC 810-10-10-1
FASB 94, Par. 9 ; ASC 810
FASB 131, Par. 10 and 18; ASCO 280-10-50
FASB 160; ASC 810-10-65-1

SOLUTIONS TO EXERCISES

E2-1  Multiple-Choice Questions on Use of Cost and Equity Methods
          [AICPA Adapted]

1. a

2. a

3. d

4. a

5. b

6. d

7. d


E2-2  Multiple-Choice Questions on Intercorporate Investments

1. b

2. c


E2-3  Multiple-Choice Questions on Applying Equity Method
          [AICPA Adapted]

1. c  (Preferred stock is not accounted for under the equity method, thus dividends are income.)

2. d   $250,000 + ($100,000 x 0.30) – ($10,000 x 0.30)

3. c

4. d

5. d


E2-4  Cost versus Equity Reporting

a. Winston Corporation net income – cost method:

20X2 $100,000 + .40($30,000) $112,000
20X3 $  60,000 + .40($60,000) 84,000
20X4 $250,000 + .40($20,000 + $25,000)a 268,000

a Dividends paid from undistributed earnings of prior years
  ($70,000 + $40,000 - $30,000 - $60,000 = $20,000)
  and $25,000 earnings of current period.

b. Winston Corporation net income – equity method:
20X2 $100,000 + .40($70,000) $128,000
20X3 $  60,000 + .40($40,000) 76,000
20X4 $250,000 + .40($25,000) 260,000


E2-5  Acquisition Price

Balance at date of acquisition:

a. Cost method      $54,000 + $2,800 = $56,800

b. Equity method    $54,000 - $2,000 = $52,000

  Change in Investment Account
Year Net Income Dividends Cost Method Equity Method
20X1 $ 8,000 $15,000 $(2,800) $(2,800)  
20X2 12,000 10,000 800    
20X3 20,000 10,000 ______   4,000    
     Change in account balance $(2,800) $ 2,000    



E2-6  Investment Income

a. (1)  Ravine Corporation net income under Cost Method:

20X6 $140,000 + 0.30($20,000) = $146,000
20X7 $  80,000 + 0.30($40,000) = $  92,000
20X8 $220,000 + 0.30($20,000 + $10,000)a = $229,000
20X9 $160,000 + 0.30($20,000) = $166,000
a Dividends paid from undistributed earnings of prior years
  ($30,000 + $50,000 - $20,000 - $40,000= $20,000) and $10,000
   earnings of current period.

     (2)  Ravine Corporation net income under Equity Method:

20X6 $140,000 + 0.30($30,000) = $149,000
20X7 $  80,000 + 0.30($50,000) = $  95,000
20X8 $220,000 + 0.30($10,000) = $223,000
20X9 $160,000 + 0.30($40,000) = $172,000


b. Journal entries recorded by Ravine Corporation in 20X8:

    (1)  Cost method:

  Cash 12,000
      Dividend Income 9,000
      Investment in Valley Stock 3,000

    (2)  Equity method:

  Cash 12,000
      Investment in Valley Stock 12,000
 
  Investment in Valley Stock 3,000
      Income from Valley 3,000


E2-7  Investment Value

The following amounts would be reported as the carrying value of Port’s investment in Sund:

20X2 $184,500 = $180,000 + ($40,000 x 0.30) - ($25,000 x 0.30)
20X3 $193,500 = $184,500 + ($30,000 x 0.30)
20X4 $195,000 = $193,500     +  ($5,000    x 0.30)
 



E2-8*  Income Reporting

Journal entry recorded by Grandview Company:

  Investment in Spinet Corporation Stock 36,000
      Income from Spinet Corporation 24,000
      Extraordinary Gain (from Spinet Corporation) 12,000

E2-9  Fair Value Method

a.  Cost method:

  Operating income reported by Mock $90,000
  Dividend income from Small ($15,000 x 0.20)    3,000
  Net income reported by Mock $93,000

b.  Equity method:

  Operating income reported by Mock $90,000
  Income from investee ($40,000 x 0.20)    8,000
  Net income reported by Mock $98,000

b.  Fair value method:

  Operating income reported by Mock $90,000
  Unrealized gain on increase in value of Small stock 16,000
  Dividend income from Small ($15,000 x 0.20)   3,000
  Net income reported by Mock $ 109,000


E2-10  Fair Value Recognition

a. Journal entries under the equity method:

(1) Investment in Lomm Company Stock 140,000
      Cash 140,000
   Record purchase of Lomm Company stock.
 
(2) Cash 7,000
      Investment in Lomm Company Stock 7,000
   Record dividends from Lomm Company: $20,000 x 0.35
 
(3) Investment in Lomm Company Stock 28,000
      Income from Lomm Company 28,000
   Record equity-method income: $80,000 x 0.35
 

b.     Journal entries under fair value method:

(1) Investment in Lomm Company Stock 140,000
      Cash 140,000
   Record purchase of Lomm Company stock.
 
(2) Cash 7,000
      Dividend Income 7,000
   Record dividends from Lomm Company: $20,000 x 0.35
 
(3) Investment in Lomm Company Stock 34,000
      Urealized Gain on Increase in Value of Lomm Stock 34,000
   Record increase in value of Lomm stock: $174,000 - $140,000
 


E2-11*  Investee with Preferred Stock Outstanding

Journal entries recorded by Reden Corporation:

(1) Investment in Montgomery Co. Stock 288,000
      Cash 288,000
   Record purchase of Montgomery Co. stock.
 
(2) Cash 6,750
      Investment in Montgomery Co. Stock 6,750
   Record dividend from Montgomery Co.: [$40,000 - ($250,000 x .10)] x 0.45
 
(3) Investment in Montgomery Co. Stock 31,500
      Income from Montgomery Co. 31,500
   Record equity-method income:  [$95,000 - ($250,000 x .10)] x 0.45


E2-12*  Other Comprehensive Income Reported by Investee

    Journal entries recorded by Callas Corp. during 20X9:

(1) Investment in Thinbill Co. Stock 380,000
      Cash 380,000
   Record purchase of Thinbill Company
 
(2) Cash 3,600
      Investment in Thinbill Co. Stock 3,600
   Record dividend from Thinbill: $9,000 x 0.40
 
(3) Investment in Thinbill Co. Stock 22,000
      Income from Thinbill Co. 22,000
   Record equity-method income: $22,000 = ($45,000 + $10,000) x 0.40
 
(4) Investment in Thinbill Co. Stock 8,000
      Unrealized Gain on Investments of Investee (OCI) 8,000
   Record share of OCI reported by Thinbill: $8,000 = $20,000 x 0.40
 
      Closing entries recorded at December 31, 20X9:
 
(5) Income from Thinbill Co. 22,000
      Retained Earnings 22,000
 
(6) Unrealized Gain on Investments of Investee (OCI) 8,000
      Accumulated Other Comprehensive Income from Investee-Unrealized Gain on Investments 8,000


E2-13*  Other Comprehensive Income Reported by Investee

Investment account balance reported by Baldwin Corp. $67,000
 
Add decrease in account recorded in 20X8:
  Equity-method loss ($20,000 x .25) $ (5,000)
  Dividend received ($10,000 x .25)   (2,500) 7,500
 
Deduct increase in account recorded in 20X9:
  Equity-method income ($68,000 x .25) $17,000
  Dividend received ($16,000 x .25) (4,000)
  Other comprehensive income reported by Gwin Company ($12,000 x .25)    3,000 (16,000)
Purchase price $58,500


E2-14  Basic Elimination Entry

  Common Stock – Broadway Corporation 200,000
  Additional Paid-In Capital 300,000
  Retained Earnings 100,000
      Investment in Broadway Common Stock 600,000
 

E2-15  Balance Sheet Worksheet
a.

Equity Method Entries on Blank's Books:
Investment in Faith       150,000
       Cash 150,000
Record the initial investment in Faith


  12/31/X2
  Goodwill = 0 图片
 
 
  Identifiable excess = 0 $150,000
 Initial investment in Faith
 
 
  Book value =
 CS + RE =
150,000
 
 
 
 
 

Book Value Calculations:
  Total
Book Value = Common
Stock + Retained
Earnings
Ending book value 150,000 60,000    90,000
 
 
Basic Elimination Entry
Common stock          60,000
Retained earnings          90,000
       Investment in Faith 150,000
 
Optional accumulated depreciation elimination entry
  Accumulated depreciation   30,000
        Building & equipment 30,000


(Since the buildings and equipment are reported net of accumulated depreciation on the balance sheet, this entry will not affect the worksheet. However, if sufficient information had been given, this entry would have made a difference in the worksheet balances for Buildings and Equipment and Accumulated Depreciation.)
  Blank Faith Elimination Entries
  DR CR Consolidated
  Balance Sheet
  Cash 65,000 18,000 83,000
  Accounts Receivable 87,000 37,000 124,000
  Inventory 110,000 60,000 170,000
  Buildings & Equipment (net) 220,000 150,000 370,000
  Investment in Faith 150,000 150,000 0
  Total Assets 632,000 265,000 0 150,000 747,000
 
  Accounts Payable 92,000 35,000 127,000
  Bonds Payable 150,000 80,000 230,000
  Common Stock 100,000 60,000 60,000 100,000
  Retained Earnings 290,000 90,000 90,000 290,000
  Total Liabilities & Equity 632,000 265,000 150,000 0 747,000
 
E2-15  (continued)
b.
E2-16  Consolidation Entries for Wholly Owned Subsidiary

a.
Equity Method Entries on Trim Corp.'s Books:
Investment in Round Corp.           400,000
       Cash 400,000
Record the initial investment in Round Corp.
 
Investment in Round Corp.            80,000
       Income from Round Corp.  80,000
Record Trim Corp.'s 100% share of Round Corp.'s 20X2 income
 
Cash             25,000
       Investment in Round Corp.  25,000
Record Trim Corp.'s 100% share of Round Corp.'s 20X2 dividend

b.
Book Value Calculations:
  Total
Book Value = Common
Stock + Retained
Earnings
Original book value 400,000   120,000 280,000
+ Net Income 80,000    80,000
- Dividends (25,000) (25,000)
Ending book value 455,000   120,000 335,000
 


1/1/X2
Goodwill = 0 图片
 
 
Identifiable excess = 0 $400,000
 Initial investment in Round Corp.
 
 
Book value =
 CS + RE =
400,000
 
 
 
   
 
12/31/X2
Goodwill = 0 图片
 
 
Excess = 0 $455,000
 Net investment in Round Corp.
 
 
Book value =
CS + RE =
455,000
 
 
 
   
 



E2-16  (continued)

Basic Elimination Entry
Common stock      120,000
Retained earnings   280,000
Income from Round Corp.      80,000
       Dividends declared  25,000
       Investment in Round Corp. 455,000

E2-17  Basic Consolidation Entries for Fully Owned Subsidiary
a.
Equity Method Entries on Purple Co.'s Books:
Investment in Amber Corp.           500,000
       Cash 500,000
Record the initial investment in Amber Corp.
 
Investment in Amber Corp.             50,000
       Income from Amber Corp.  50,000
Record Purple Co.'s 100% share of Amber Corp.'s 20X7 income
 
Cash             20,000
       Investment in Amber Corp.  20,000
Record Purple Co.'s 100% share of Amber Corp.'s 20X7 dividend


b.
Book Value Calculations:
  Total
Book Value = Common
Stock + Retained
Earnings
Original book value 500,000   300,000 200,000
+ Net Income 50,000    50,000
- Dividends (20,000) (20,000)
Ending book value 530,000   300,000 230,000
 





1/1/X7
Goodwill = 0 图片
 
 
Identifiable excess = 0 $500,000
 Initial investment in Amber Corp.
 
 
Book value =
 CS + RE =
500,000
 
 
 
   
 
12/31/X7
Goodwill = 0 图片
 
 
Excess = 0 $530,000
 Net investment in Amber Corp.
 
 
Book value =
CS + RE =
530,000
 
 
 
   
 



E2-17  (continued)
Basic Elimination Entry
Common stock         300,000
Retained earnings         200,000
Income from Amber Corp.           50,000
       Dividends declared  20,000
       Investment in Amber Corp. 530,000


 

Investment in Income from
  Amber Corp. Amber Corp.
Acquisition Price 500,000
Net Income  50,000 50,000 Net Income
  20,000 Dividends
Ending Balance 530,000 50,000 Ending Balance
  530,000 Basic 50,000
  0 0


SOLUTIONS TO PROBLEMS
P2-18  Retroactive Recognition

Journal entries recorded by Idle Corporation:

(1) Investment in Fast Track Enterprises Stock 34,000
      Cash 34,000
   Record purchase of Fast Track stock.
 
 
(2) Investment in Fast Track Enterprises Stock 11,000
      Retained Earnings 11,000
  Record pick-up of difference between
  cost and equity income:
  20X2 .10($40,000 - $20,000) $  2,000
  20X3 .10($60,000 / 2) $3,000
  .15[($60,000 / 2) - $20,000]  1,500 4,500
  20X4 .15($40,000 - $10,000)    4,500
  Amount of increase $11,000
 
(3) Cash 5,000
      Investment in Fast Track Enterprises Stock 5,000
   Record dividend from Fast Track Enterprises: $20,000 x .25
 
(4) Investment in Fast Track Enterprises Stock 12,500
      Income from Fast Track Enterprises 12,500
   Record equity-method income: $50,000 x .25


P2-19  Fair Value Method

  20X6 20X7 20X8
a.    Cost method:
 
  Dividend income $  3,000 $  6,000 $  4,000

  Balance in investment account $70,000 $70,000 $70,000


       b. Equity method:
 
  Investment income:
  $40,000 x .20 $  8,000
  $35,000 x .20 $  7,000
  $60,000 x .20 $12,000

  Balance in investment account:
  Balance at January 1 $70,000 $75,000 $76,000
  Investment income    8,000 7,000 12,000
  Dividends received   (3,000)   (6,000)   (4,000)
  Balance at December 31 $75,000 $76,000 $84,000


     c. Fair value method:
  20X6 20X7 20X8
  Investment income:
  Dividends received $  3,000 $  6,000 $  4,000
  Gain (loss) on fair value  19,000   (3,000)  11,000
  Total income reported $22,000 $  3,000 $15,000
 
  Balance in investment account $89,000 $86,000 $97,000


P2-20  Fair Value Journal Entries

Journal entries under fair value method for 20X8:

(1) Investment in Brown Company Stock 85,000
      Cash 85,000
   Record purchase of Brown Company stock.
 
(2) Cash 4,000
      Dividend Income 4,000
   Record dividends from Brown Company: $10,000 x .40
 
(3) Investment in Brown Company Stock 12,000
      Unrealized Gain on Increase in Value of Brown
       Company Stock 12,000
   Record increase in value of Brown stock: $97,000 - $85,000

Journal entries under fair value method for 20X9:

(1) Cash 6,000
      Dividend Income 6,000
   Record dividends from Brown Company: $15,000 x .40
 
(2) Unrealized Loss on Decrease in Value of Brown                        
   Company Stock 5,000
      Investment in Brown Company Stock 5,000
   Record decrease in value of Brown stock: $97,000 - $92,000

P2-21*  Other Comprehensive Income Reported by Investee

a. Equity-method income reported by Dewey Corporation in 20X5:

  Amounts reported by Jimm Co. for 20X5:
  Operating income $70,000
  Dividend income 7,000
  Gain on investment in trading securities  18,000
  Net income $95,000
  Ownership held by Dewey x      .30
  Investment income reported by Dewey $28,500

b. Computation of amount added to investment account in 20X5:

  Balance in investment account reported by Dewey:
   December 31, 20X5 $276,800
   January 1, 20X5 (245,000)
  Increase in investment account in 20X5 $  31,800
  Dividends received by Dewey during 20X5      6,000
  Amount added to investment account in 20X5 $  37,800


c. Computation of other comprehensive income reported by Jimm Co.:

  Amount added to investment account in 20X5 $ 37,800
  Investment income reported by Dewey in 20X5 (28,500)
  Increase due to other comprehensive income reported by Jimm Co. $   9,300
  Proportion of ownership held by Dewey ÷         0.30
  Other comprehensive income reported by Jimm Co. $ 31,000


d. Computation of market value of securities held by Jimm Co.

  Amount paid by Jimm Co. to purchase securities $130,000
  Increase in market value reported as other comprehensive income in 20X5   31,000
  Market value of available-for-sale securities at December 31, 20X5 $161,000


P2-22*  Equity-Method Income Statement


a.        
Diversified Products Corporation
Income Statement
Year Ended December 31, 20X8

Net Sales $400,000
Cost of Goods Sold (320,000)
Gross Profit $  80,000
Other Expenses $(25,000)
Gain on Sale of Truck   10,000   (15,000)
Income from Continuing Operations $  65,000
Discontinued Operations:
  Operating Loss from Discontinued Division $(15,000)
  Gain on Sale of Division   44,000    29,000
Income before Extraordinary Item $  94,000
Extraordinary Item:
  Loss on Volcanic Activity     (5,000)
Net Income $  89,000



Diversified Products Corporation
Retained Earnings Statement
Year Ended December 31, 20X8

Retained Earnings, January 1, 20X8 $240,000 (1)
20X8 Net Income    89,000  
  $329,000  
Dividends Declared, 20X8   (10,000)  
Retained Earnings, December 31, 20X8 $319,000  
 
(1) The Retained Earnings balance on January 1, 20X8, has been reduced by the $20,000 cumulative adjustment for change in inventory method on January 1, 20X8.

b.          
Wealthy Manufacturing Company
Income Statement
Year Ended December 31, 20X8

Net Sales $850,000
Cost of Goods Sold (670,000)
Gross Profit $180,000
Other Expenses $(90,000)
Income from Continuing Operations of
 Diversified Products Corporation   26,000   (64,000)
Income from Continuing Operations $116,000
Discontinued Operations:
  Share of Operating Loss Reported by
    Diversified Products on Discontinued
    Division $  (6,000)
  Share of Gain on Sale of Division
    Reported by Diversified Products   17,600    11,600
Income before Extraordinary Item $127,600
Extraordinary Item:
  Share of Loss on Volcanic Activity
    Reported by Diversified Products     (2,000)
Net Income $125,600


Wealthy Manufacturing Company
Retained Earnings Statement
Year Ended December 31, 20X8
 
Retained Earnings, January 1, 20X8 $412,000 (1)
20X8 Net Income   125,600
  $537,600
Dividends Declared, 20X8   (30,000)
Retained Earnings, December 31, 20X8 $507,600
 
(1)  The Retained Earnings balance of Wealthy Manufacturing Company on January 1, 20X8, has been reduced by $8,000 to reflect its proportionate share of the $20,000 cumulative adjustment for the change in inventory method recorded by Diversified Products Corporation on January 1, 20X8 ($20,000 x 0.40 = $8,000).
P2-23 Consolidated Worksheet at End of the First Year of Ownership (Equity Method)
a.
Equity Method Entries on Peanut Co.'s Books:
Investment in Snoopy Co.         300,000
       Cash 300,000
Record the initial investment in Snoopy Co.
 
Investment in Snoopy Co.           75,000
       Income from Snoopy Co.  75,000
Record Peanut Co.'s 100% share of Snoopy Co.'s 20X8 income
 
Cash           20,000
       Investment in Snoopy Co.  20,000
Record Peanut Co.'s 100% share of Snoopy Co.'s 20X8 dividend

b.
Book Value Calculations:
  Total
Book Value = Common
Stock + Retained
Earnings
Original book value 300,000   200,000 100,000
+ Net Income 75,000    75,000
- Dividends (20,000) (20,000)
Ending book value 355,000   200,000 155,000
 


1/1/X8
Goodwill = 0 图片
 
 
Identifiable excess = 0 $300,000
 Initial investment in Snoopy Co.
 
 
Book value =
 CS + RE =
300,000
 
 
 
   
 
12/31/X8
Goodwill = 0 图片
 
 
Excess = 0 $355,000
 Net investment in Snoopy Co.
 
 
Book value =
CS + RE =
355,000
 
 
 
   
 



P2-23 (continued)
Basic Elimination Entry
Common stock         200,000
Retained earnings         100,000
Income from Snoopy Co.           75,000
       Dividends declared  20,000
       Investment in Snoopy Co. 355,000
 
Optional accumulated depreciation elimination entry
Accumulated depreciation           10,000
       Building & equipment  10,000

 
Investment in Income from
  Snoopy Co. Snoopy Co.
Acquisition Price 300,000
Net Income  75,000 75,000 Net Income
   20,000 Dividends
Ending Balance 355,000 75,000 Ending Balance
  355,000 Basic 75,000
  0 0


P2-23 (continued)
  Peanut Co. Snoopy Co. Elimination Entries
  DR CR Consolidated
  Income Statement
  Sales 800,000 250,000 1,050,000
  Less: COGS (200,000) (125,000) (325,000)
  Less: Depreciation Expense (50,000) (10,000) (60,000)
  Less: Other Expenses (225,000) (40,000) (265,000)
  Income from Snoopy Co. 75,000 75,000 0
  Net Income 400,000 75,000 75,000 0 400,000
 
  Statement of Retained Earnings
  Beginning Balance 225,000 100,000 100,000 225,000
  Net Income 400,000 75,000 75,000 0 400,000
  Less: Dividends Declared (100,000) (20,000) 20,000 (100,000)
  Ending Balance 525,000 155,000 175,000 20,000 525,000
 
  Balance Sheet
  Cash 130,000 80,000 210,000
  Accounts Receivable 165,000 65,000 230,000
  Inventory 200,000 75,000 275,000
  Investment in Snoopy Co. 355,000 355,000 0
  Land 200,000 100,000 300,000
  Buildings & Equipment 700,000 200,000 10,000 890,000
  Less: Accumulated Depreciation (450,000) (20,000) 10,000 (460,000)
  Total Assets 1,300,000 500,000 10,000 365,000 1,445,000
 
  Accounts Payable 75,000 60,000 135,000
  Bonds Payable 200,000 85,000 285,000
  Common Stock 500,000 200,000 200,000 500,000
  Retained Earnings 525,000 155,000 175,000 20,000 525,000
  Total Liabilities & Equity 1,300,000 500,000 375,000 20,000 1,445,000
 


P2-24 Consolidated Worksheet at End of the Second Year of Ownership (Equity Method)
a.
Equity Method Entries on Peanut Co.'s Books:
Investment in Snoopy Co.           80,000
       Income from Snoopy Co.  80,000
Record Peanut Co.'s 100% share of Snoopy Co.'s 20X9 income
 
Cash           30,000
       Investment in Snoopy Co.  30,000
Record Peanut Co.'s 100% share of Snoopy Co.'s 20X9 dividend

b.
1/1/X9
Goodwill = 0 图片
 
 
Excess = 0 $355,000
 Net investment in Snoopy Co.
 
 
Book value =
 CS + RE =
355,000
 
 
 
   
 
12/31/X9
Goodwill = 0 图片
 
 
Excess = 0 $405,000
 Net investment in Snoopy Co.
 
 
Book value =
CS + RE =
405,000
 
 
 
   
 


Book Value Calculations:
  Total
Book Value = Common
Stock + Retained
Earnings
Beg. book value 355,000   200,000 155,000
+ Net Income 80,000    80,000
- Dividends (30,000) (30,000)
Ending book value 405,000   200,000 205,000
 


P2-24 (continued)
Basic Elimination Entry
Common stock         200,000
Retained earnings         155,000
Income from Snoopy Co.           80,000
       Dividends declared  30,000
       Investment in Snoopy Co. 405,000
 
Optional accumulated depreciation elimination entry
Accumulated depreciation           10,000
       Building & equipment  10,000

 
Investment in Income from
  Snoopy Co. Snoopy Co.
Beginning Balance 355,000
Net Income  80,000 80,000 Net Income
  30,000 Dividends
Ending Balance 405,000 80,000 Ending Balance
  405,000 Basic 80,000
  0 0


P2-24 (continued)
  Peanut Co. Snoopy Co. Elimination Entries
  DR CR Consolidated
  Income Statement
  Sales 850,000 300,000 1,150,000
  Less: COGS (270,000) (150,000) (420,000)
  Less: Depreciation Expense (50,000) (10,000) (60,000)
  Less: Other Expenses (230,000) (60,000) (290,000)
  Income from Snoopy Co. 80,000 80,000 0
  Net Income 380,000 80,000 80,000 0 380,000
 
  Statement of Retained Earnings
  Beginning Balance 525,000 155,000 155,000 525,000
  Net Income 380,000 80,000 80,000 0 380,000
  Less: Dividends Declared (225,000) (30,000) 30,000 (225,000)
  Ending Balance 680,000 205,000 235,000 30,000 680,000
 
  Balance Sheet
  Cash 230,000 75,000 305,000
  Accounts Receivable 190,000 80,000 270,000
  Inventory 180,000 100,000 280,000
  Investment in Snoopy Co. 405,000 405,000 0
  Land 200,000 100,000 300,000
  Buildings & Equipment 700,000 200,000 10,000 890,000
  Less: Accumulated Depreciation (500,000) (30,000) 10,000 (520,000)
  Total Assets 1,405,000 525,000 10,000 415,000 1,525,000
 
  Accounts Payable 75,000 35,000 110,000
  Bonds Payable 150,000 85,000 235,000
  Common Stock 500,000 200,000 200,000 500,000
  Retained Earnings 680,000 205,000 235,000 30,000 680,000
  Total Liabilities & Equity 1,405,000 525,000 435,000 30,000 1,525,000
 


P2-25 Consolidated Worksheet at End of the First Year of Ownership (Equity Method)
a.
Equity Method Entries on Paper Co.'s Books:
Investment in Scissor Co.         370,000
       Cash 370,000
Record the initial investment in Scissor Co.
 
Investment in Scissor Co.          93,000
       Income from Scissor Co.  93,000
Record Paper Co.'s 100% share of Scissor Co.'s 20X8 income
 
Cash           25,000
       Investment in Scissor Co.  25,000
Record Paper Co.'s 100% share of Scissor Co.'s 20X8 dividend

b.
Book Value Calculations:
  Total
Book Value = Common
Stock + Retained
Earnings
Original book value 370,000   250,000 120,000
+ Net Income 93,000    93,000
- Dividends (25,000) (25,000)
Ending book value 438,000   250,000 188,000
 


1/1/X8
Goodwill = 0 图片
 
 
Identifiable excess = 0 $370,000
 Initial investment in Scissor Co.
 
 
Book value =
 CS + RE =
370,000
 
 
 
   
 
12/31/X8
Goodwill = 0 图片
 
 
Excess = 0 $438,000
 Net investment in Scissor Co.
 
 
Book value =
CS + RE =
438,000
 
 
 
   
 



P2-25 (continued)
Basic Elimination Entry
Common stock         250,000
Retained earnings         120,000
Income from Scissor Co.           93,000
       Dividends declared  25,000
       Investment in Scissor Co. 438,000
 
Optional accumulated depreciation elimination entry
Accumulated depreciation           24,000
       Building & equipment  24,000

 
Investment in Income from
  Scissor Co. Scissor Co.
Acquisition Price 370,000
Net Income  93,000 93,000 Net Income
   25,000 Dividends
Ending Balance 438,000 93,000 Ending Balance
  438,000 Basic 93,000
  0 0


P2-25 (continued)
  Paper Co. Scissor Co. Elimination Entries
  DR CR Consolidated
  Income Statement
  Sales 800,000 310,000 1,110,000
  Less: COGS (250,000) (155,000) (405,000)
  Less: Depreciation Expense (65,000) (12,000) (77,000)
  Less: Other Expenses (280,000) (50,000) (330,000)
  Income from Scissor Co. 93,000 93,000 0
  Net Income 298,000 93,000 93,000 0 298,000
 
  Statement of Retained Earnings
  Beginning Balance 280,000 120,000 120,000 280,000
  Net Income 298,000 93,000 93,000 0 298,000
  Less: Dividends Declared (80,000) (25,000) 25,000 (80,000)
  Ending Balance 498,000 188,000 213,000 25,000 498,000
 
  Balance Sheet
  Cash 122,000 46,000 168,000
  Accounts Receivable 140,000 60,000 200,000
  Inventory 190,000 120,000 310,000
  Investment in Scissor Co. 438,000 438,000 0
  Land 250,000 125,000 375,000
  Buildings & Equipment 875,000 250,000 24,000 1,101,000
  Less: Accumulated Depreciation (565,000) (36,000) 24,000 (577,000)
  Total Assets 1,450,000 565,000 24,000 462,000 1,577,000
 
  Accounts Payable 77,000 27,000 104,000
  Bonds Payable 250,000 100,000 350,000
  Common Stock 625,000 250,000 250,000 625,000
  Retained Earnings 498,000 188,000 213,000 25,000 498,000
  Total Liabilities & Equity 1,450,000 565,000 463,000 25,000 1,577,000
 


P2-26 Consolidated Worksheet at End of the Second Year of Ownership (Equity Method)
a.
Equity Method Entries on Paper Co.'s Books:
Investment in Scissor Co.           107,000
       Income from Scissor Co. 107,000
Record Paper Co.'s 100% share of Scissor Co.'s 20X9 income
 
Cash             30,000
       Investment in Scissor Co.  30,000
Record Paper Co.'s 100% share of Scissor Co.'s 20X9 dividend

b.
Book Value Calculations:
  Total
Book Value = Common
Stock + Retained
Earnings
Beg. book value      438,000   250,000 188,000
+ Net Income 107,000 107,000
- Dividends (30,000) (30,000)
Ending book value 515,000  250,000 265,000
 

1/1/X9
Goodwill = 0 图片
 
 
Excess = 0 $438,000
 Net investment in Scissor Co.
 
 
Book value =
 CS + RE =
438,000
 
 
 
   
 
12/31/X9
Goodwill = 0 图片
 
 
Excess = 0 $515,000
 Net investment in Scissor Co.
 
 
Book value =
CS + RE =
515,000
 
 
 
   
 



P2-26 (continued)
Basic Elimination Entry
Common stock         250,000
Retained earnings         188,000
Income from Scissor Co.         107,000
       Dividends declared  30,000
       Investment in Scissor Co. 515,000
 
Optional accumulated depreciation elimination entry
Accumulated depreciation           24,000
       Building & equipment  24,000

 
Investment in Income from
  Scissor Co. Scissor Co.
Beginning Balance 438,000
Net Income 107,000 107,000 Net Income
   30,000 Dividends
Ending Balance 515,000 107,000 Ending Balance
  515,000 Basic 107,000
  0 0


P2-26 (continued)
  Paper Co. Scissor Co. Elimination Entries
  DR CR Consolidated
  Income Statement
  Sales 880,000 355,000 1,235,000
  Less: COGS (278,000) (178,000) (456,000)
  Less: Depreciation Expense (65,000) (12,000) (77,000)
  Less: Other Expenses (312,000) (58,000) (370,000)
  Income from Scissor Co. 107,000 107,000 0
  Net Income 332,000 107,000 107,000 0 332,000
 
  Statement of Retained Earnings
  Beginning Balance 498,000 188,000 188,000 498,000
  Net Income 332,000 107,000 107,000 0 332,000
  Less: Dividends Declared (90,000) (30,000) 30,000 (90,000)
  Ending Balance 740,000 265,000 295,000 30,000 740,000
 
  Balance Sheet
  Cash 232,000 116,000 348,000
  Accounts Receivable 165,000 97,000 262,000
  Inventory 193,000 115,000 308,000
  Investment in Scissor Co. 515,000 515,000 0
  Land 250,000 125,000 375,000
  Buildings & Equipment 875,000 250,000 24,000 1,101,000
  Less: Accumulated Depreciation (630,000) (48,000) 24,000 (654,000)
  Total Assets 1,600,000 655,000 24,000 539,000 1,740,000
 
  Accounts Payable 85,000 40,000 125,000
  Bonds Payable 150,000 100,000 250,000
  Common Stock 625,000 250,000 250,000 625,000
  Retained Earnings 740,000 265,000 295,000 30,000 740,000
  Total Liabilities & Equity 1,600,000 655,000 545,000 30,000 1,740,000
 


P2-27 * Consolidated Worksheet at End of the First Year of Ownership (Cost Method)
a.
Cost Method Entries on Peanut Co.'s Books:
Investment in Snoopy Co.           300,000
       Cash 300,000
Record the initial investment in Snoopy Co.
 
Cash             20,000
       Dividend Income  20,000
Record Peanut Co.'s 100% share of Snoopy Co.'s 20X8 dividend

b.
Book Value Calculations:
  Total
Book Value = Common
Stock + Retained
Earnings
Original book value 300,000   200,000 100,000
 

1/1/X8
Goodwill = 0 图片
 
 
Identifiable excess = 0 $300,000
 Initial investment in Snoopy Co.
 
 
Book value =
 CS + RE =
300,000
 
 
 
   
 
12/31/X8
Goodwill = 0 图片
 
 
Excess = 0 $300,000
 Net investment in Snoopy Co.
 
 
Book value =
CS + RE =
300,000
 
 
 
   
 



P2-27 (continued)
Investment elimination entry
Common stock         200,000
Retained earnings         100,000
       Investment in Snoopy Co. 300,000
 
Dividend elimination
Dividend income           20,000
       Dividends declared  20,000
 
Optional accumulated depreciation elimination entry
Accumulated depreciation           10,000
       Building & equipment  10,000

 
  Investment in Snoopy Co. Dividend Income
Acquisition Price 300,000
  20,000 Dividends
Ending Balance 300,000 20,000 Ending Balance
  300,000 Basic 20,000
  0 0
                                                                                                                   

P2-27 (continued)
  Peanut Co. Snoopy Co. Elimination Entries
  DR CR Consolidated
  Income Statement
  Sales 800,000 250,000 1,050,000
  Less: COGS (200,000) (125,000) (325,000)
  Less: Depreciation Expense (50,000) (10,000) (60,000)
  Less: Other Expenses (225,000) (40,000) (265,000)
  Dividend Income 20,000 20,000 0
  Net Income 345,000 75,000 20,000 0 400,000
 
  Statement of Retained Earnings
  Beginning Balance 225,000 100,000 100,000 225,000
  Net Income 345,000 75,000 20,000 0 400,000
  Less: Dividends Declared (100,000) (20,000) 20,000 (100,000)
  Ending Balance 470,000 155,000 120,000 20,000 525,000
 
  Balance Sheet
  Cash 130,000 80,000 210,000
  Accounts Receivable 165,000 65,000 230,000
  Inventory 200,000 75,000 275,000
  Investment in Snoopy Co. 300,000 300,000 0
  Land 200,000 100,000 300,000
  Buildings & Equipment 700,000 200,000 10,000 890,000
  Less: Accumulated Depreciation (450,000) (20,000) 10,000 (460,000)
  Total Assets 1,245,000 500,000 10,000 310,000 1,445,000
 
  Accounts Payable 75,000 60,000 135,000
  Bonds Payable 200,000 85,000 285,000
  Common Stock 500,000 200,000 200,000 500,000
  Retained Earnings 470,000 155,000 120,000 20,000 525,000
  Total Liabilities & Equity 1,245,000 500,000 320,000 20,000 1,445,000
 


P2-28 * Consolidated Worksheet at End of the Second Year of Ownership (Cost Method)
a.
Cost Method Entries on Peanut Co.'s Books:
Cash             30,000
       Dividend Income  30,000
Record Peanut Co.'s 100% share of Snoopy Co.'s 20X9 dividend

b.
Book Value Calculations:
  Total
Book Value = Common
Stock + Retained
Earnings
Original book value 300,000   200,000 100,000
 

1/1/X9
Goodwill = 0 图片
 
 
Excess = 0 $300,000
 Net investment in Snoopy Co.
 
 
Book value =
 CS + RE =
300,000
 
 
 
   
 
12/31/X9
Goodwill = 0 图片
 
 
Excess = 0 $300,000
 Net investment in Snoopy Co.
 
 
Book value =
CS + RE =
300,000
 
 
 
   
 



P2-28 (continued)
Investment elimination entry
Common stock         200,000
Retained earnings         100,000
       Investment in Snoopy Co. 300,000
 
Dividend elimination
Dividend income           30,000
       Dividends declared  30,000
 
Optional accumulated depreciation elimination entry
Accumulated depreciation           10,000
       Building & equipment  10,000

 
  Investment in Snoopy Co. Dividend Income
Acquisition Price 300,000
  20,000 Dividends
Ending Balance 300,000 20,000 Ending Balance
  300,000 Basic 20,000
  0 0


P2-28 (continued)

  Peanut Co. Snoopy Co. Elimination Entries
  DR CR Consolidated
  Income Statement
  Sales 850,000 300,000 1,150,000
  Less: COGS (270,000) (150,000) (420,000)
  Less: Depreciation Expense (50,000) (10,000) (60,000)
  Less: Other Expenses (230,000) (60,000) (290,000)
  Divident Income 30,000 30,000 0
  Net Income 330,000 80,000 30,000 0 380,000
 
  Statement of Retained Earnings
  Beginning Balance 470,000 155,000 100,000 525,000
  Net Income 330,000 80,000 30,000 0 380,000
  Less: Dividends Declared (225,000) (30,000) 30,000 (225,000)
  Ending Balance 575,000 205,000 130,000 30,000 680,000
 
  Balance Sheet
  Cash 230,000 75,000 305,000
  Accounts Receivable 190,000 80,000 270,000
  Inventory 180,000 100,000 280,000
  Investment in Snoopy Co. 300,000 300,000 0
  Land 200,000 100,000 300,000
  Buildings & Equipment 700,000 200,000 10,000 890,000
  Less: Accumulated Depreciation (500,000) (30,000) 10,000 (520,000)
  Total Assets 1,300,000 525,000 10,000 310,000 1,525,000
 
  Accounts Payable 75,000 35,000 110,000
  Bonds Payable 150,000 85,000 235,000
  Common Stock 500,000 200,000 200,000 500,000
  Retained Earnings 575,000 205,000 130,000 30,000 680,000
  Total Liabilities & Equity 1,300,000 525,000 330,000 30,000 1,525,000