ADMS 3585 - Worksheet 7 answers

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Chapter 9: Part 2 Use the following information for questions 1-4. The summarized balance sheets of Janice Corp. and Marshall Corp. at December 31, 2020, are as follows: JANICE CORP. Balance Sheet December 31, 2020 Assets $ 780,000 Liabilities $ 155,000 Common shares 275,000 Retained earnings 350,000 Total equities $ 780,000 MARSHALL CORP. Balance Sheet December 31, 2020 Assets $ 490,000 Liabilities $ 76,000 Common shares 185,000 Retained earnings 229,000 Total equities $ 490,000 1. Janice acquired a 20% interest in Marshall on December 31, 2020, for $79,000. The equity method was used to account for this investment. What is the balance of Investment in Marshall Corp. right after the purchase? a) 79,000 b) 15,800 c) 65,000 d) 97,000 e) 63,200 Dr. Investment in Marshall 79,000 Cr. Cash 79,000 2. Janice acquired a 30% interest in Marshall on December 31, 2020 for $ 82,000. The equity method was used to account for this investment. What is the balance of Investment in Marshall Corp. right after the purchase? a) 24,600 b) 57,400 c) 82,000 d) 78,000

e) 92,000 Dr. Investment in Marshall 82,000 Cr. Cash 82,000 3. Janice acquired a 20% interest in Marshall on December 31, 2020, for $ 37,500. During 2021 Marshall reported a net income of $ 18,300 and paid a total cash dividend of $ 7,900. If Janice uses the equity method to account for this investment, what could be the balance of the Investment in Marshall Corp. account on December 31 2021? a) 47,900 b) 39,580 c) 27,100 d) 41,160 e) 55,800 Balance at Dec 31 2021 = 37,500 + (18,300 x 20%) – (7,900 x 20%) = 39,580 Note: Opening Balance + Net income – Dividends Received = Ending Balance 4. Please record all the journal entries related to question #3. Dec 31 2020 Dr. Investment in Marshall 37,500 Cr. Cash 37,500 To record the purchase of 20% interest in Marshall Dec 31 2021 Dr. Investment in Marshall 3,660 Cr. Investment Income/Equity Method Income 3,660 To record received 20% of Marshall’s net income for the year. Dr. Cash 1,580 Cr. Investment in Marshall 1,580 To record receiving 20% of dividends declared by Marshall.

5. On January 2, 2020, Mercedes Corp. purchased 365 of the 1,000 outstanding common shares of Werner Ltd. for $ 85,000. During 2020, Werner declared total cash dividends of $ 12,800 and reported net income for the year of $ 63,000. If Mercedes uses the equity method of accounting for its investment in Werner, Mercedes’s Investment in Werner Ltd. account at December 31, 2020 should be, a) 135,200 b) 34,800 c) 66,677 d) 103,323 e) 107,995 Percentage of ownership = 365/1000 = 36.5% Dec 31 2020 Balance = 85,000 + (63,000 x 36.5%) – (12,800 x 36.5%) = 103,323 Use the following information for questions 6-8. On January 1, 2020, Anderson Ltd. acquired 45% of Valdez Corp.'s common shares for $ 560,000. During 2020, Valdez reported net income of $ 235,000 and paid total dividends of $ 89,000. Anderson's 45% interest in Valdez gives Anderson the ability to exercise significant influence over their operating and financial policies. During 2021, Valdez reported net income of $ 190,000 and paid total dividends of $ 30,000 on April 1 and $ 36,000 on October 1. On July 1, 2021, Anderson sold half of its shares in Valdez for $ 490,000 cash. 6. Before income taxes, what income should Anderson include in its 2020 income statement as a result of this investment? a) 235,000 b) 89,000 c) 560,000 d) 105,750 e) 40,050 When you have significant influence – use equity method. Dr. Investment in Valdez (balance sheet) Cr. Investment Income/Equity method income (income statement) For record net income Dr. Cash (balance sheet) Cr. Investment in Valdez (balance sheet) To record dividends. 235,000 x 45% = 105,750

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7. The carrying amount of this investment in Anderson's December 31, 2020, statement of financial position should be a) 625,700 b) 665,750 c) 519,950 d) 499,300 e) 626,900 Balance at Dec 31 2020 = 560,000 + (235,000 x 45%) – (89,000 x 45%) = 625,700 8. The gain on disposal of this investment in Anderson's 2021, income statement should be a) 159,290 b) 327,475 c) 162,525 d) 159,778 e) 218,150 Carrying Amount 2020 625,700 Add: Net Income [190,000 x (6/12) x 45%] 42,750 Less: Dividends (30,000 x 45%) (13,500) Balance at July 1 st 654,950 490,000 – (654,950/2) = 162,525

Long Problem 9.12 Brooks Corp. is a medium-sized corporation that specializes in quarrying stone for building construction. The company has long dominated the market, and at one time had 70% market penetration. During prosperous years, the company's profits and conservative dividend policy resulted in funds becoming available for outside investment. Over the years, Brooks has had a policy of investing idle cash in equity instruments of other companies. In particular, Brooks has made periodic investments in the company's main supplier, Norton Industries Limited. Although Brooks currently owns 18% of the outstanding common shares of Norton, it does not yet have significant influence over the operations of this investee company. Brooks accounts for its investment in Norton using FV-OCI without recycling through net income. Yasmina Olynyk has recently joined Brooks as assistant controller, and her first assignment is to prepare the 2020 year-end adjusting entries. Olynyk has gathered the following information about Brooks's relevant investment accounts: 1. In 2020, Brooks acquired shares of Delaney Motors Corp. and Isha Electric Ltd. for short-term trading purposes. Brooks purchased 100,000 shares of Delaney Motors for $1.4 million, and the shares currently have a fair value of $1.6 million. Brooks's investment in Isha Electric has not been profitable: the company acquired 50,000 shares of Isha at $20 per share and they currently have a fair value of $720,000. 2. Before 2020, Brooks had invested $22.5 million in Norton Industries and, at December 31, 2019, the investment had a fair value of $21.5 million. While Brooks did not sell or purchase any Norton shares this year, Norton declared and paid a dividend totalling $2.4 million on all of its common shares, and reported 2020 net income of $13.8 million. Brooks's 18% ownership of Norton Industries has a December 31, 2020 fair value of $22,225,000. Instructions a. Prepare the appropriate adjusting entries for Brooks as at December 31, 2020. Type of investment Investment Cost/Carrying Amount Fair value Unrealized gain/loss FVNI/FVTPL Delaney Motors 1.4 million 1.6 million 200,000 gain FVNI/FVTPL Isha Electric (50,000 shares x $20 per share) = 1 million 720,000 280,000 loss Total 80,000 loss FV-OCI Norton 21.5 million $22,225,000 725,000 gain Dr. Loss on Investment 80,000 Cr. FV-NI Investment 80,000 To adjust to fair value. Dr. FV-OCI Investment (Norton) 725,000 Cr. Unrealized gain 725,000 To adjust to fair value.

b. Prepare the dividend and adjusting entries for the Norton investment, assuming that Brooks's 18% interest results in significant influence over Norton's activities. Significant influence – equity method. Dr. Cash (2,400,000 x 18%) 432,000 Cr. Investment in Norton 432,000 To record dividends received. Dr. Investment in Norton 2,484,000 Cr. Investment Income 2,484,000 (13,800,000 x 18%) To record investment income. c. Could an 18% ownership interest actually result in Brooks having significant influence? Yes. Could Brooks have a 45% ownership interest and yet not have significant influence? Yes. Because one other owner could have 55% of the shares. Explain your answers. Qualitative test: Look at the representation of the board. Participation in policy making. If the other shares are widely held, for example, even with 18% interest, Brooks could still result in significant influence. Please the feedback form: https://forms.office.com/r/SnqF46Dmbj

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