Chapter 2 STOCK INVESTMENTS - INVESTOR ACCOUNTING AND REPORTING Ans w e r s to Que s ti o n s 1 Only !")#ire% its "ost, !

""o#nt s the investor s !""o#nts !re !$$e"te % &hen o#tst ! n %in ' sto"( is $ro* e+istin' sto"(hol%ers, The investor re"or%s the invest * e n t !t Sin"e the invest e e "o*- ! n y is not ! -!rty to the tr!ns !" tion. its !re not !$$e"te %,

/oth investor !n% invest e e !""o#nt s !re !$$e"te % &hen #niss# e % sto"( is !")#ire% %ire"tly $ro* the invest e e , The investor re"or%s the invest * e n t !t its "ost !n% the invest e e !%0#sts its !ss et !n% o&ners e)#ity !""o#nt s to re$le"t the iss#!n" e o$ -revio#sly #niss# e % sto"(, 2 Goo%&ill !risin' $ro* !n e)#ity invest * e n t o$ 21 -er"en t or *ore is not re"or%e % se-!r ! t ely $ro* the invest * e n t !""o#nt, Un%er the e)#ity *etho %. the invest * e n t is -res e n t e % on one line o$ the 2!l!n" e shee t in !""or% ! n " e &ith the one- line "onsoli%!tion "on"e-t, 3 Divi%en%s re"eive% $ro* e!rnin's !""# *#l ! t e % 2e$ore !n invest * e n t is !")#ire% !re tre!t e % !s %e"re ! s e s in the invest * e n t !""o#nt 2!l!n" e #n%er the $!ir v!l#e3"os t *etho %, S#"h %ivi%en%s !re "onsi%er e % ! ret#rn o$ ! -!rt o$ the ori'in!l invest * e n t , 4 The e)#ity *etho % o$ !""o#ntin' $or invest * e n t s in"re!s e s the invest * e n t !""o#nt $or the investor s sh!re o$ the invest e e s in"o*e !n% %e"re ! s e s it $or the investor s sh!re o$ the invest e e s losses !n% $or %ivi%en%s re"eive% $ro* the invest e e , In !%%ition. the invest * e n t !n% invest * e n t in"o* e !""o#nts !re !%0#ste % $or !*orti4!tion o$ !ny invest * e n t "ost- 2oo( v!l#e %i$$erenti!ls rel!te % to the interes t !")#ire%, A%0#st* e n t s to the invest * e n t !n% invest * e n t in"o* e !""o#nts !re !lso nee% e % $or #nre !li4e% -ro$its !n% losses $ro* tr!ns ! " tions 2et& e e n the investor !n% invest e e "o*- ! ni e s, 5 The e)#ity *etho % is re$erre % to !s ! one- line "onsoli%!tion 2e"!# s e the invest * e n t !""o#nt is re-ort e % on one line o$ the investor s 2!l!n" e sheet !n% invest * e n t in"o*e is re-ort e % on one line o$ the investor s in"o* e st!t e * e n t

26

Stock Invest m e n t s - Inves tor Accounting and Reporting 25 6e+"e- t &hen the invest e e h!s e+tr!or%in !ry or "#*#l!tive- e$$e"t ty-e !%0#st * e n t s 7, In !%%ition. the invest * e n t in"o* e is "o*-# t e % s#"h th!t the -!ren t "o*- ! n y s in"o*e !n% sto"(hol% ers e)#ity !re e)#!l to the "onsoli%!t e % net in"o*e !n% "onsoli%!t e % sto"(hol%ers e)#ity th!t &o#l% res#lt i$ the st!t e * e n t s o$ the investor !n% invest e e &ere "onsoli%!t e %,

6 I$ the e)#ity *etho % o$ !""o#ntin' is !--lie% "orre"tly. the in"o*e o$ the -!ren t "o*- ! n y &ill 'ener !lly e)#!l "onsoli%!t e % net in"o*e, 7 The %i$$eren" e in the e)#ity *etho % !n% "onsoli%!tion lies in the %et!il re-ort e %. 2#t not in the !*o#n t o$ in"o*e re-ort e %, The e)#ity *etho % re-orts invest * e n t in"o*e on one line o$ the in"o*e st!t e * e n t &here ! s the %et!ils o$ reven # e s !n% e+-e n s e s !re re-ort e % in the "onsoli%!t e % in"o*e st!t e * e n t , 8 The invest * e n t !""o#nt 2!l!n" e o$ the investor &ill e)#!l #n%erlyin' 2oo( v!l#e o$ the invest e e i$ 6!7 the e)#ity *eth o % is "orre"tly !--lie%. 627 the invest * e n t &!s !")#ire% !t 2oo( v!l#e &hi"h &!s e)#!l to $!ir v!l#e. the -oolin' *etho % &!s #se%. or the "ost- 2oo( v!l#e %i$$erenti!ls h!ve !ll 2een !*orti4e%. !n% 6"7 there h!ve 2een no inter"o * - ! n y tr!ns !" tions 2et& e e n the !$$ili!te% "o*- ! nie s th!t h!ve "re!t e % invest * e n t !""o#nt- 2oo( v!l#e %i$$eren" e s , 9 The invest * e n t !""o#nt 2!l!n" e *#st 2e "onvert e % $ro* the "ost to the e)#ity *etho % &hen !")#isitions in"re! s e the interes t hel% to 21 -er"e nt or *ore, The !*o# n t o$ the !%0#st * e n t is the %i$$eren" e 2et& e e n the invest * e n t in"o* e re-ort e % #n%er the "ost *etho % in -rior ye!rs !n% the in"o*e th!t &o#l% h!ve 2een re-ort e % i$ the e)#ity *etho % o$ !""o#ntin' h!% 2een #se%, Ch!n' e s $ro* the "ost to the e)#ity *etho % o$ !""o#ntin' $or e)#ity invest * e n t s !re "h!n' e s in the re-ortin' entity th!t re)#ire rest! t e * e n t o$ -rior ye!rs $in!n"i!l st!te * e n t s &hen the e$$e"t is *!t eri!l, 10 The one- line "onsoli%!tion is !%0#st e % &hen the invest e e s in"o* e in"l#%es e+tr!or%in !ry ite*s. '!ins or losses $ro* %is"ontin# e % o-er! tions. or "#*#l!tive- e$$e"t ty-e !%0#st * e n t s , In this "!se. the investor s sh!re o$ the invest e e s or%in!ry in"o* e is re-ort e % !s invest * e n t in"o* e #n%er ! one- line "onsoli%!tion. 2#t the investor s sh!re o$ e+tr!or%in !ry ite*s. "#*#l!tivee$$e"t ty-e !%0#st * e n t s . !n% '!ins !n% losses $ro* %is"ontin# e % o-er!tions is "o*2ine % &ith si*il!r ite*s o$ the investor, 11 The re*!inin' 9: -er"en t intere s t in the invest e e is !""o#nt e % $or #n%er the $!ir v!l#e3"os t *etho %. !n% the invest * e n t !""o#nt 2!l!n" e i**e %i!t ely !$ter the s!le 2e"o * e s the ne& "ost 2!sis, 12 ;es, <hen !n invest e e h!s -re$erre % sto"( in its "!-it!l str#"t#r e. the investor h!s to !llo"!t e the invest e e s in"o* e to -re$erre % !n% "o**o n

28 sto"(hol%ers, Then. the investor t!(es #- its sh!re o$ the invest e e s in"o* e !llo"!t e % to "o**o n sto"(hol% ers in !--lyin' the e)#ity *etho %, The !llo"!tion is not ne"es s ! r y &hen the invest e e h!s only "o**o n sto"( o#tst ! n %in ',
Chapt er 2

2=
SOLUTIONS TO EXERCISES Solution E2-1 1 2 3 4 5 d c c d b

Stock Invest m e n t s - Inves tor Accounting and Reporting

Solution E2-2 1 2 3 4 d b d b

[AICPA adapted]

Grade's investment is reported at its $300,000 cost because the equity method is not appropriate and because Grade's share o !edium's income e"ceeds dividends received since acquisition [#$$%0,000 " &'() * $$0,000]+ 5 c

,ividends received rom -a acon or the t.o years .ere $&0,'00 #$/0,000 " &'(), but on0y $1,000 #&'( o -a acon's income o $%0,000 or the t.o years) is sho.n on 2orque0's income statement as dividend income rom the -a acon investment+ 2he remainin3 $&,'00 reduces the investment account ba0ance+ 6 7 8 c a d $$'0,000 30,000 $$70,000 [$'0,000 4 $&'0,000 4 #$300,000 " &0()]

Investment ba0ance 5anuary $ Add6 Income rom Pod #$&00,000 " 30() Investment in Pod ,ecember 3&, $003

Chapt er 2

>1

Solution E2-3 1 8o.man's percenta3e o.nership in 2revor

8o.man's $0,000 shares9#%0,000 4 $0,000) shares : $'( 2 Good.i00 $'00,000 3/',000 $&$',000

Investment cost 8oo; va0ue acquired #$&,000,000 4 $'00,000) " $'( Good.i00

Solution E2-4 Income =hare o rom !ed0ey or $00< $ 30,000

!ed0ey's income #$$00,000 " &9$ year " 30()

>9
Solution E2-5 1 Income rom >a;ey

Stock Invest m e n t s - Inves tor Accounting and Reporting

=hare o >a;ey's reported income #$700,000 " 30() ?ess6 @"cess a00ocated to inventory ?ess6 ,epreciation o e"cess a00ocated to bui0din3 #$$00,0009< years) Income 2 rom >a;ey Investment account ba0ance at ,ecember 3&, $003

$$<0,000 #&00,000) #'0,000) $ 10,000

Cost o investment in >a;ey Add6 Income rom >a;ey ?ess6 ,ividends Investment in >a;ey ,ecember 3&, $003 A0ternative so0ution6 Ander0yin3 equity in >a;ey at 5anuary & #$&,'00,0009+3) $',000,000 Income 0ess dividends Ander0yin3 equity ,ecember 3&, $003 Interest o.ned 8oo; va0ue o interest o.ned ,ecember 3&, $003 Add6 AnamortiBed e"cess Investment in >a;ey ,ecember 3&, $003

$$,000,000 10,000 #%0,000) $$,030,000

%00,000 ',%00,000 30( &,%70,000 3'0,000 $$,030,000

Chapt er 2

>2

Solution E2-6 5ourna0 entry on !artin's boo;s6 Investment in Cei3hbors ?oss rom discontinued operations Income rom De00y 2o reco3niBe income $&$0,000 $0,000 $&<0,000

rom <0( investment in Cei3hbors+

Solution E2-7 1 a $ &7,000 #3,000) #&$,000) $ 3,000 $ '0,000 #3,000) $ </,000

,ividends received rom 8ennett #$&$0,000 " &'() =hare o income since acquisition o interest $003 #$$0,000 " &'() $00< #$70,000 " &'() @"cess dividends received over share o income Investment in 8ennett 5anuary 3, $003 ?ess6 @"cess dividends received over share o Investment in 8ennett ,ecember 3&, $00< 2 b income

Cost o &0,000 o <0,000 shares outstandin3 8oo; va0ue o $'( interest acquired #$<,000,000 stoc;ho0ders' equity at ,ecember 3&, $003 4 $&,<00,000 rom additiona0 stoc; issuance) " $'( @"cess cost over boo; va0ue acquired #3ood.i00) 3 d

$&,<00,000 &,3'0,000 $ '0,000

2he investment in !onroe ba0ance remains at the ori3ina0 cost+ 4 c $$00,000 <0( $ 70,000

Income be ore e"traordinary item Percent o.ned Income rom DraBy Products

>>
Solution E2-8

Stock Invest m e n t s - Inves tor Accounting and Reporting

Preliminary computations Cost o <0( interest 5anuary &, $003 8oo; va0ue acquired #$<,000,000 " <0() @"cess cost over boo; va0ue acquired @"cess a00ocated to6 Inventories $&00,000 " <0( @quipment $$00,000 " <0( Good.i00 or the remainder @"cess cost over boo; va0ue acquired Eaython's under0yin3 equity in 2reaton #$','00,000 " <0() Add6 Good.i00 Investment ba0ance ,ecember 3&, $00/

$$,<00,000 #&,%00,000) $ 700,000 $ $ <0,000 70,000 %70,000 700,000

$$,$00,000 %70,000 $$,770,000

A0ternative computation6 Eaython's share o the chan3e in 2reaton's stoc;ho0ders' equity #$&,'00,000 " <0() $ %00,000 ?ess6 @"cess a00ocated to inventories #$<0,000 " &00() #<0,000) ?ess6 @"cess a00ocated to equipment #$70,0009< years " < years) #70,000) Increase in investment account <70,000 >ri3ina0 investment $,<00,000 Investment ba0ance ,ecember 3&, $00/ $$,770,000

Chapt er 2

>?

Solution E2-9 1 Income rom Eunner $&&&,000

=hare o income to common #$<00,000 F $30,000 pre erred dividends) " 30( 2 Investment in Eunner ,ecember 3&, $00<

Investment cost Add6 Income rom Eunner ?ess6 ,ividends rom Eunner #$$00,000 dividends F $30,000 dividends to pre erred) " 30( Investment in Eunner ,ecember 3&, $00<

$&,$'0,000 &&&,000 #'&,000) $&,3&0,000

Solution E2-10 1 Income rom 2ree #$300,000 G &00,000) " $'( $$',000

Investment income >ctober & to ,ecember 3&, $003 2 Investment ba0ance ,ecember 3&, $003 $%00,000 $',000 FFF $%$',000

Investment cost >ctober &, $003 Add6 Income rom 2ree ?ess6 ,ividends Investment in 2ree ,ecember 3&, $003

>:
Solution E2-11

Stock Invest m e n t s - Inves tor Accounting and Reporting

Preliminary computations Good.i00 rom irst &0( interest6 Cost o investment 8oo; va0ue acquired #$<$0,000 " &0() @"cess cost over boo; va0ue acquired Good.i00 rom second &0( interest6 Cost o investment 8oo; va0ue acquired #$'00,000 " &0() @"cess cost over boo; va0ue acquired 1 Correctin3 entry as o equity basis

$ '0,000 #<$,000) $ 7,000 $&00,000 #'0,000) $ '0,000

5anuary $, $00' to convert investment to the

Accumu0ated 3ain90oss on stoc; avai0ab0e

or sa0e

$'0,000 air va0ue $'0,000

Ha0uation a00o.ance to record =A= at

2o remove the va0uation a00o.ance entered on ,ecember 3&, $00< under the air va0ue method or an avai0ab0e or sa0e security+ Investment in 2.iBB0e Eetained earnin3s 2o adIust investment account to o00o.s6 =hare o 2.iBB0e's income or $00< ?ess6 =hare o dividends or $00< 2 Income Income Income Income rom 2.iBB0e or $00' $ &0,000 &0,000 $ $0,000 an $7,000 $7,000 equity basis computed $$0,000 #&$,000) $ 7,000 as

rom 2.iBB0e on ori3ina0 &0( investment rom 2.iBB0e on second &0( investment rom 2.iBB0e

Chapt er 2

>6

Solution E2-12 Preliminary computations =toc;ho0ders' equity o 2a00 on ,ecember 3&, $003 =a0e o &$,000 previous0y unissued shares on 5anuary &, $00< =toc;ho0ders' equity a ter issuance on 5anuary &, $00< Cost o &$,000 shares to Eiver 8oo; va0ue o &$,000 shares acquired $%30,000 " &$,00093%,000 shares @"cess cost over boo; va0ue acquired @"cess is a00ocated as o00o.s6 8ui0din3s $%0,000 " &$,00093%,000 shares Good.i00 @"cess cost over boo; va0ue acquired $370,000 $'0,000 $%30,000 $$'0,000 $&0,000 $ <0,000 $ $0,000 $0,000 $ <0,000

5ourna0 entries on Eiver's boo;s durin3 $00< January 1, 2004 Investment in 2a00 Cash 2o record acquisition o During 2004 Cash Investment in 2a00 2o record dividends received December 31, 2004 Investment in 2a00 Income $$'0,000 $$'0,000 a &93 interest in 2a00+

$ 30,000 $ 30,000 rom 2a00 #$10,000 " &93)+

$ 37,000 rom 2a00 $ 37,000 o00o.s6 $ <0,000 #$,000) $ 37,000

2o record investment income rom 2a00 computed as =hare o 2a00's income #$&$0,000 " &93) ,epreciation on bui0din3 #$$0,0009&0 years) Income rom 2a00 F $00<

>5
Solution E2-13 1

Stock Invest m e n t s - Inves tor Accounting and Reporting

5ourna0 entries on 8IP's boo;s Cash

or $00< $30,000 $30,000

Investment in Cro.n #30() 2o record dividends received Investment in Cro.n #30() @"traordinary 0oss # rom Cro.n) Income rom Cro.n 2o record investment income

rom Cro.n #$&00,000 " 30()+ $%0,000 %,000 $%%,000 rom Cro.n computed as o00o.s6 $ '&,000 &',000 $ %%,000

=hare o income be ore e"traordinary item $&/0,000 " 30( Add6 @"cess air va0ue over cost rea0iBed in $00< $'0,000 " 30( Income rom Cro.n be ore e"traordinary 0oss

Investment in Cro.n ba0ance ,ecember 3&, $00< $&1',000 %0,000 #30,000) $$$',000

Investment cost Add6 Income rom Cro.n a ter e"traordinary 0oss ?ess6 ,ividends received rom Cro.n Investment in Cro.n ,ecember 3&, $00< Chec;6 Investment ba0ance is equa0 to under0yin3 boo; va0ue #$/00,000 4 $&'0,000 F $&00,000) " 30( : $$$',000

BIP Co !o "tion Income =tatement or the year ended ,ecember 3&, $00< =a0es @"penses >peratin3 income Income rom Cro.n #be ore e"traordinary item) Income be ore e"traordinary item @"traordinary 0oss #net o ta" e ect) Cet income $&,000,000 /00,000 300,000 %%,000 3%%,000 %,000 $ 3%0,000

Chapt er 2

>8

Solution E2-14 1 Income rom Jater or $003 $ <0,000

@quity in income #$&07,000 F $7,000 pre erred) " <0( 2 Investment in Jater ,ecember 3&, $003

Cost o investment in Jater common Add6 Income rom Jater F $003 ?ess6 ,ividends Investment in Jater ,ecember 3&, $003

$$10,000 <0,000 #&%,000) $3&<,000

>=
SOLUTIONS TO PROBLE#S Solution P2-1 1 Good.i00

Stock Invest m e n t s - Inves tor Accounting and Reporting

Cost o investment in 2e00y on Apri0 & 8oo; va0ue acquired6 Cet assets at ,ecember 3& Add6 Income or &9< year #$&$0,000 " $'() ?ess6 ,ividends paid !arch &' 8oo; va0ue at Apri0 & Interest acquired Good.i00 rom investment in 2e00y 2 Income rom 2e00y or $00<

$ $&,000,000 30,000 #$0,000) &,0&0,000 30( $

3<3,000

303,000 <0,000

@quity in income be ore e"traordinary item #$&$0,000 " 39< year " 30() @"traordinary 3ain rom 2e00y #$<0,000 " 30() Income rom 2e00y 3 Investment in 2e00y at ,ecember 3&, $00<

$ $

$/,000 &$,000 31,000

Investment cost Apri0 & Add6 Income rom 2e00y p0us e"traordinary 3ain ?ess6 ,ividends #$$0,000 " 3 quarters) " 30( Investment in =he00y ,ecember 3&, $00< 4 @quity in 2e00y's net assets at ,ecember 3&, $00<

$ $

3<3,000 31,000 #&7,000) 3%<,000

2e00y's stoc;ho0ders' equity 5anuary & Add6 Cet income ?ess6 ,ividends 2e00y's stoc;ho0ders' equity ,ecember 3& Investment interest @quity in 2e00y's net assets 5 @"traordinary 3ain or $00< to be reported by Eitter

$&,000,000 &%0,000 #70,000) &,070,000 30( $ 3$<,000

2e00y's e"traordinary 3ain " 30(

&$,000

Chapt er 2

?1

Solution P2-2 1 Cost method $&&0,000 #$,<00) $&0/,%00

Investment in =ie3e0 5u0y &, $003 #at cost) ,ividends char3ed to investment Investment in =ie3e0 ba0ance at ,ecember 3&, $003 July 1, 2003 Investment in =ie3e0 Cash 2o record initia0 investment November 1, 2003 Cash ,ividend income 2o record receipt o dividends #$7,000 " 70()+ $&&0,000 $&&0,000 or 70( interest+

%,<00 $ %,<00

December 31, 2003 ,ividend income Investment in =ie3e0

$,<00 $ $,<00 earnin3s #$7,000

2o reduce investment or dividends in e"cess o dividends F $',000 earnin3s) " 70(+ 2 @quity method

Investment in =ie3e0 5u0y &, $003 Add6 =hare o reported income ,educt6 ,ividends char3ed to investment ,educt6 @"cess ,epreciation Investment in =ie3e0 ba0ance at ,ecember 3&, $003 July 1, 2003 Investment in =ie3e0 Cash 2o record initia0 investment November 1, 2003 Cash Investment in =ie3e0 2o record receipt o dividends #$7,000 " 70()+ $&&0,000

$&&0,000 <,000 #%,<00) #&,&00) $&0%,'00

$&&0,000 or 70( interest o $ %,<00 $ %,<00 =ie3e0+

December 31, 2003 Investment in =ie3e0 Income rom =ie3e0

$,100 $ $,100

2o record income rom =ie3e0 computed as o00o.s6 =hare o =ie3e0's income #$&0,000 " &9$ year " 70() 0ess e"cess depreciation #$$$,0009&0 years " &9$ year)+

?9
Solution P2-3

Stock Invest m e n t s - Inves tor Accounting and Reporting

Preliminary computations Cost o investment in -e0da 8oo; va0ue acquired #$&,000,000 " 30() @"cess cost over boo; va0ue acquired @"cess a00ocated6 Anderva0ued inventories #$30,000 " 30() >verva0ued bui0din3 #F$%0,000 " 30() Good.i00 or the remainder @"cess cost over boo; va0ue acquired 1 Income rom -e0da

$33&,000 300,000 $ 3&,000 $ 1,000 #&7,000) <0,000 $ 3&,000

=hare o -e0da's reported income #$&00,000 " 30() ?ess6 @"cess a00ocated to inventories so0d in $003 Add6 AmortiBation o e"cess a00ocated to overva0ued bui0din3 $&7,0009&0 years Income 2 rom -e0da F $003 Investment ba0ance ,ecember 3&, $003

$ 30,000 #1,000) &,700 $ $$,700

Cost o investment Add6 Income rom -e0da ?ess6 =hare o -e0da's dividends #$'0,000 " 30() Investment in -e0da ba0ance ,ecember 3&, $003 3 HatterKs share o -e0da's net assets

$33&,000 $$,700 #&',000) $337,700

=hare o stoc;ho0ders' equity #$&,000,000 4 $&00,000 income F $'0,000 dividends) " 30(

$3&',000

Chapt er 2

?2

Solution P2-4 Preliminary computations Investment cost o <0( interest 8oo; va0ue acquired [$'00,000 4 #$&00,000 " &9$ year)] " <0( @"cess cost over boo; va0ue acquired @"cess a00ocated6 ?and $30,000 " <0( @quipment $'0,000 " <0( Eemainder to 3ood.i00 @"cess cost over boo; va0ue acquired July 1, 2003 Investment in ,ormer Cash 2o record initia0 investment $370,000 $$0,000 $&%0,000 $ &$,000 $0,000 &$7,000 $&%0,000

$370,000 $370,000 or <0( interest in ,ormer+

November 2003 Cash #other receivab0es) Investment in ,ormer 2o record receipt o

$ $0,000 $ $0,000

dividends #$'0,000 " <0()+

December 31, 2003 Investment in ,ormer Income rom ,ormer 2o record share o

$ $0,000 $ $0,000

,ormer's income #$&00,000 " &9$ year " <0()+

December 31, 2003 Income rom ,ormer Investment in ,ormer

$,000 $ $,000

2o record depreciation on e"cess a00ocated to underva0ued equipment #$$0,0009' years " &9$ year)+

?>
Solution P2-5 1

Stock Invest m e n t s - Inves tor Accounting and Reporting

=chedu0e to a00ocate costFboo; va0ue di

erentia0s $&,%70,000 &,&/0,000 $ '&0,000

Investment cost 5anuary & 8oo; va0ue acquired #$3,100,000 net assets " 30() @"cess cost over boo; va0ue acquired A00ocation o e"cess6 Lair Ha0ue F Percent 8oo; Ha0ue Acquired Inventories $$00,000 30( ?and 700,000 30( 8ui0din3sFnet '00,000 30( @quipmentFnet #/00,000) 30( 8onds payab0e #&00,000) 30( Assi3ned to identi iab0e net assets Eemainder to 3ood.i00 @"cess cost over boo; va0ue acquired 2 Income rom 2remor or $003

A00ocation $ %0,000 $<0,000 &'0,000 #$&0,000) #30,000) $&0,000 300,000 $'&0,000

@quity in income #$&,$00,000 " 30() ?ess6 AmortiBation o di erentia0s Inventories #so0d in $003) 8ui0din3sFnet #$&'0,0009&0 years) @quipmentFnet #$$&0,0009/ years) 8onds payab0e #$30,0009' years) Income rom 2remor 3 Investment in 2remor ba0ance ,ecember 3&, $003

$3%0,000 #%0,000) #&',000) 30,000 %,000 $3$&,000

Investment cost Add6 Income rom 2remor ?ess6 ,ividends #$%00,000 " 30() Investment in 2remor ,ecember 3& Chec;6 Ander0yin3 equity #$<,'00,000 " 30() AnamortiBed e"cess6 ?and 8ui0din3sFnet #$&'0,000 F $&',000) @quipmentFnet #$$&0,000 F $30,000) 8onds payab0e #$30,000 F $%,000) Good.i00 Investment in 2remor account

$&,%70,000 3$&,000 #&70,000) $&,7$&,000 $&,3'0,000 $<0,000 &3',000 #&70,000) #$<,000) 300,000 $&,7$&,000

Chapt er 2

??

Solution P2-6 1 Income rom =tap0eton $1%,000 /7,000 $&7,000 $ %,000 100 $ ',&00

Investment in =tap0eton 5u0y &, $003 at cost 8oo; va0ue acquired #$&30,000 " %0() @"cess cost over boo; va0ue acquired Pau0y's share o =tap0eton's income or $003 #$$0,000 " &9$ year " %0() ?ess6 @"cess ,epreciation #$&7,0009&0 years " &9$ year) Income rom =tap0eton or $003 2 Investment ba0ance ,ecember 3&, $003

Investment cost 5u0y &, $003 Add6 Income rom =tap0eton or $003 ?ess6 ,ividends #$&$,000 " %0() Investment in =tap0eton ,ecember 3&, $003

$1%,000 ',&00 #/,$00) $13,100

?:

Stock Invest m e n t s - Inves tor Accounting and Reporting

Solution P2-7 $ill Co !o "tion Partia0 Income =tatement or the year ended ,ecember 3&, $00' Investment income Income rom ?ar;spur #equity basis) Income be ore e"traordinary item Extraor inary gain =hare o ?ar;spur's operatin3 0oss carry or.ard Cet income $<',000 <',000 30,000 $/',000

Chapt er 2

?6

Solution P2-8 1 Investment income F $00' Income rom &0( investment6 =hare o income #$/0,000 " &0() " & year ?ess6 @"cess depreciation #$$0,000 F $&',000) " &0( " & year Income rom $0( investment6 =hare o income #$/0,000 " $0() " &9$ year ?ess6 @"cess depreciation #$'0,000 F $</,000) " &0( " &9$ year Investment income or $00'

$/,000 #'00) $/,000 #&'0) %,7'0 $&3,3'0 $ %,'00

Prior period adIustment and other Iourna0 entries to record additiona0 purchase o 8rady stoc; 5anuary &, $00' .ith $<,000 $<,000

2he &0( interest is converted to the equity method as o the o00o.in3 entry6 Investment in 8rady Eetained earnin3s

2he adIustment is equa0 to $'0,000 retained earnin3s increase or $003 and $00< times &0( interest, 0ess e"cess depreciation o $&,000 or $003 and $00<+ Anrea0iBed 3ains on avai0ab0e or sa0e securities $',000 Ha0uation a00o.ance or avai0ab0e or sa0e sec+ $',000

2his entry reverses the cumu0ative air va0ue adIustment made in prior periods+ =ince the security .as avai0ab0e or sa0e rather than a tradin3 security, the adIustment has had no impact on prior income statements+ Investment in 8rady Cash Eecord the purchase o 3 $'0,000 $'0,000 the additiona0 $0( interest in 8rady+

Investment in 8rady at ,ecember 3&, $00% $7/,000 3,000 $,''0 $1$,''0

=hare o 8rady's under0yin3 equity at ,ecember 3&, $00% #$$10,000 stoc;ho0ders' equity " 30() Add6 AnamortiBed equipment e"cess on &0( interest Add6 AnamortiBed equipment e"cess on $0( interest Investment account ba0ance ,ecember 3&, $00%

AdIustment

or MaBe0's purchase o

additiona0 stoc;

rom 8rady

?5

Stock Invest m e n t s - Inves tor Accounting and Reporting

MaBe0 increases its investment in 8rady account by $/0,000, the amount o the additiona0 investment+ 2he ne. ba0ance o the investment in 8rady account .i00 be $&%$,''0+

Solution P2-9 Preliminary computations Investment cost o 10( interest in =i3ma 8oo; va0ue acquired #$$,'$',000 4 $&$',000) " 10( @"cess boo; va0ue over cost @"cess a00ocated6 >verva0ued p0ant assets #$'00,000 " 10() Anderva0ued inventories #$'0,000 " 10() @"cess boo; va0ue over cost 1 Investment income or $003 $ &&$,'00 $',000 #<',000) $ 1$,'00 $&,170,000 #$,37',000) $ #<0',000) $ #<'0,000) <',000 $ #<0',000)

=hare o reported income #$$'0,000 " &9$ year " 10() Add6 ,epreciation on overva0ued p0ant assets #$<'0,00091 years) " &9$ year ?ess6 Anderva0uation a00ocated to inventories Income 2 rom =i3ma F $003 Investment ba0ance at ,ecember 3&, $00<

Ander0yin3 boo; va0ue o 10( interest in =i3ma #=i3ma's ,ecember 3&, $00< equity o $$,/00,000 " 10() ?ess6 AnamortiBed overva0uation o p0ant assets #$'0,000 per year " / &9$ years) Investment ba0ance ,ecember 3&, $00< 3 5ourna0 entries to account or investment in $00' $&3',000

$$,<30,000 #3/',000) $$,0'',000

Cash #or ,ividends receivab0e) Investment in =i3ma 2o record receipt o

$&3',000

dividends #$&'0,000 " 10()+ $$30,000 $$30,000

Investment in =i3ma Income rom =i3ma

2o record income rom =i3ma computed as o00o.s6 Provo's share o =i3ma's reported net income #$$00,000 " 10() p0us $'0,000 amortiBation o overva0ued p0ant assets+ Chec;6 Investment ba0ance ,ecember 3&, $00< o $$,0'',000 4 $$30,000 income rom =i3ma F $&3',000 dividends : $$,&'0,000 ba0ance ,ecember 3&, $00'

Chapt er 2

?8

A0ternative0y, =i3ma's under0yin3 equity #$$,000,000 paidFin capita0 4 $/'0,000 retained earnin3s) " 10( interest F $3$',000 unamortiBed e"cess a00ocated to p0ant assets : $$,&'0,000 ba0ance ,ecember 3&, $00'+

?=
Solution P2-10 1 !ar;et price o $&$

Stock Invest m e n t s - Inves tor Accounting and Reporting

or Creape's shares $ '$0,000 <00,000 $ &$0,000 A00ocation $ <0,000 70,000 #70,000) <0,000 70,000 <0,000 $ &$0,000

Cost o investment in 2antani #<0,000 shares " $&$) 4 $<0,000 direct costs 8oo; va0ue acquired #$&,000,000 net assets " <0() @"cess cost over boo; va0ue acquired A00ocation o e"cess6 Lair Ha0ue F Percent 8oo; Ha0ue Acquired Inventories $&00,000 <0( ?and $00,000 <0( 8ui0din3sFnet #$00,000) <0( @quipmentFnet &00,000 <0( Assi3ned to identi iab0e net assets Eemainder assi3ned to 3ood.i00 2ota0 a00ocated 2 !ar;et price o $/ or Creape's shares

Cost o investment in 2antani #<0,000 shares " $/) 4 $<0,000 direct costs 8oo; va0ue acquired #$&,000,000 net assets " <0() @"cess boo; va0ue over cost @"cess a00ocated to6

$3$0,000 <00,000 $#70,000)

Lair Ha0ue F Percent Initia0 Eea00oF Lina0 8oo; Ha0ue Acquired A00ocation cation A00ocation Inventories $&00,000 <0( $<0,000 FFF $ <0,000 ?and $00,000 <0( 70,000 $#<0,000) <0,000 8ui0din3sFnet #$00,000) <0( #70,000) #'3,333) #&33,333) @quipmentFnet &00,000 <0( <0,000 #%%,%%/) #$%,%%/) Ce3ative 3ood.i00 #&%0,000) &%0,000 0 $#70,000) $#70,000)

?and 8ui0din3s @quipment

$300,0009$&,$00,000 " $&%0,000 : $<0,000 $<00,0009$&,$00,000 " $&%0,000 : $'3,333 $'00,0009$&,$00,000 " $&%0,000 : $%%,%%/

Chapt er 2

:1
rom =pandi" F $003 or $003 $ 3,000

Solution P2-11 1 Income

Prudy's share o =pandi"'s income $<0,000 " &9$ year " &'( 2

Investment in =pandi" ba0ance ,ecember 3&, $003 $ <7,/'0 3,000 #$,$'0) $ <1,'00

Investment in =pandi" at cost Add6 Income rom =pandi" or $003 ?ess6 ,ividends rom =pandi" Covember &, $003 #$&',000 " &'() Investment in =pandi" ba0ance ,ecember 3&, $003 3 Income rom =pandi" F $00<

Prudy's shares o =pandi"'s income or $00<6 $%0,000 income " &'( interest " & year $%0,000 income " 30( interest " & year $%0,000 income " <'( interest " &9< year Prudy's share o =pandi"'s income or $00<

1,000 &7,000

%,/'0 $ 33,/'0

:9
Solution P2-11 4 #continued)

Stock Invest m e n t s - Inves tor Accounting and Reporting

Investment in =pandi" ,ecember 3&, $00< $ <1,'00 $%&,000 33,/'0 #$0,$'0) $3$<,000

Investment ba0ance ,ecember 3&, $003 # rom $) Add6 Additiona0 investments #$11,000 4 $&%$,000) Add6 Income or $00< # rom 3) ?ess6 ,ividends or $00< #$&',000 " <'() 4 #$&',000 " 10() Investment in =pandi" ba0ance at ,ecember 3&, $00< A0ternative so0ution Investment cost #$<7,/'0 4 $11,000 4 $&%$,000) Add6 =hare o reported income $003 F $<0,000 " &9$ year " &'( $00< F $%0,000 " & year " <'( $00< F $%0,000 " &9< year " <'( ?ess6 ,ividends $003 F $&',000 " &'( $00< F $&',000 " <'( $00< F $&',000 " 10( Investment in =pandi"

$301,/'0 $ 3,000 $/,000 %,/'0 $ $,$'0 %,/'0 &3,'00

3%,/'0

#$$,'00) $3$<,000

Cote6 =ince Prudy's investment in =pandi" consisted o 1,000 shares #a <'( interest) on 5anuary &, $00<, Prudy correct0y used the equity method o accountin3 or the &'( investment interest he0d durin3 $003+ 2he a0ternative o reportin3 income or $003 on a air va0ue9cost basis and recordin3 a prior period adIustment or $00< is not appropriate in vie. o the over.he0min3 evidence o an abi0ity to e"ercise si3ni icant in 0uence by the time $003 income is recorded+

Chapt er 2

:2

Solution P2-12 Income rom =assy $003 As reported Correct amounts >verstatement
a

$00< $3$,000 3$,000b $ F0F

$00' $'$,000 '$,000c $ F0F

$00% $<7,000 <7,000d $ F0F

2ota0 $&/$,000 &'$,000 $ $0,000

$<0,000 $0,000a $$0,000

#$&00,000 " &9$ year " <0() #$70,000 " <0() #$&30,000 " <0() #$&$0,000 " <0()

Investment in =assy ba0ance ,ecember 3&, $00% $<00,000 $0,000 $370,000

Investment in =assy per boo;s ,ecember 3&, $00% ?ess6 >verstatement Correct investment in =assy ba0ance ,ecember 3&, $00% Chec;6 Ander0yin3 equity in =assy #$100,000 " <0() Add6 Good.i00 #$300,000F#/00,000 " <0()) Investment ba0ance

$3%0,000 $0,000 $370,000

Correctin3 entry #be ore c0osin3 Eetained earnin3s Investment in =assy

or $00%) $$0,000 $$0,000 or prior

2o record investment and retained earnin3s accounts errors+

:>
Solution P2-13 1

Stock Invest m e n t s - Inves tor Accounting and Reporting

=chedu0e to a00ocate cost over boo; va0ue $&1$,000 &33,000 $ '1,000

Investment cost #&<,000 shares " $&3) 4 $&0,000 8oo; va0ue acquired $&10,000 " /0( @"cess cost over boo; va0ue acquired @"cess a00ocated6 Inventories ?and @quipmentFnet Eemainder to 3ood.i00 @"cess cost over boo; va0ue acquired Interest Lair Ha0ue F 8oo; Ha0ue " Acquired : $ '0,000 $ %0,000 /0( '0,000 30,000 /0( &3',000 1',000 /0(

A00ocation $#/,000) &<,000 $7,000 $<,000 $'1,000

Investment income

rom =amaritan $ <$,000 /,000 #',$'0) $ <3,/'0

=hare o =amaritan's reported income $%0,000 " /0( Add6 >verva0ued inventory items ?ess6 ,epreciation on underva0ued equipment #$$7,0009< years) " 39< year Investment income rom =amaritan

Investment in =amaritan account at ,ecember 3&, $003 $&1$,000 <3,/'0 #$7,000) $$0/,/'0 $&</,000 &<,000 $$,/'0 $<,000 $$0/,/'0

Investment cost Add6 Income rom =amaritan ?ess6 ,ividends received #&<,000 shares " $$) Investment in =amaritan ba0ance ,ecember 3&, $003 Chec;6 Ander0yin3 equity at ,ecember 3&, $003 #$$&0,000 " /0() Add6 AnamortiBed e"cess o cost over boo; va0ue ?and @quipment Good.i00 Investment ba0ance

Chapt er 2

:?

Solution P2-14 1 S%&'(ul' to "llo%"t' %o)t-*oo+ ,"lu' (i--' 'nti"l Investment cost Apri0 &, $003 &<,000 shares " $/ per share 4 $&0,000 other costs 8oo; va0ue acquired $&10,000 boo; va0ue " /0( @"cess boo; va0ue over cost @"cess a00ocated6
Lair 8oo; Interest Eea00oF Lina0 Ha0ue F Ha0ue " Acquired : A00ocation F cation : A00ocation Inventories $ '0,000 $%0,000 /0( $ #/,000) $ #/,000) ?and '0,000 30,000 /0( &<,000 $#&%,$&%) b #$,$&%) @quipmentFnet &3',000 1',000 /0( $7,000 #<3,/7<) b #&',/7<) Ce3ative 3ood.i00 a #%0,000) %0,000 FFF @"cess boo; va0ue over cost $#$',000) 0 $ #$',000)
a

$&07,000 &33,000 $#$',000)

Proo o ne3ative 3ood.i006 Cost $&07,000 F air va0ue acquired #$$<0,000 " /0() : $%0,000 Eea00ocation6 $%0,000 " $'0,0009$&7',000 : $&%,$&% based on air va0ue o 0and $%0,000 " $&3',0009$&7',000 : $<3,/7< based on air va0ue o equipment

Pub0ican's income

rom =amaritan $ <$,000 /,000 $,1%0 $ '&,1%0

@quity in =amaritan's income #$%0,000 " /0() Add6 >verva0ued inventory items Add6 AmortiBation o equipment #$&',/7<9< years " 39< year) Income 3 rom =amaritan F $003

Investment in =amaritan account at ,ecember 3&, $003 $&07,000 '&,1%0 #$7,000) $&3&,1%0

Investment cost Apri0 &, $003 Add6 Income rom =amaritan ,educt6 ,ividends received #&<,000 shares " $$) Investment in =amaritan ,ecember 3&, $003

Chec;6 =hare o under0yin3 stoc;ho0ders' equity at ,ecember 3&, $003 $$&0,000 " /0( $&</,000 AnamortiBed e"cess o boo; va0ue over cost6 ?and $ #$,$&%) @quipmentFnet #F$&',/7< 4 $$,1%0) #&$,7$<) #&',0<0) Investment ba0ance ,ecember 3&, $003 $&3&,1%0