Ch 1 TRMC REVIEW
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TOPIC REVIEW 1.1 Determining Significant Influence Assume your company holds a 22% interest in the voting common stock of an investee company. Two other companies own 51 % and 27% of the investee company's voting common stock, respectively. Your company does not control any seats on the board of directors. All board members are appointed by the other two companies, and those companies also actively run the investee company, regardless of your company's preferences. In past years, your company has tried and failed to obtain board representation on the investee company's board. Your company also is unable to obtain quarterly financial information that the other investor companies regularly receive. The stock of the investee company has a readily determinable fair value. How should your company report its 22% investment in the investee in your company's financial statements? Specifically, should you report the investee as a controlled consolidated subsidiary, an equity method investment, or a passive investment reported at fair value? Explain your answer. They would report at fair value as insignificant influence because they attempted but failed to get on board of director representation
TOPIC REVIEW 1.2 Accounting for Equity Investments (Basic) Assume an investor purchases all of the stock of the investee (and, thus, its business) in a stock purchase for $750. The reported book values of the investee's net assets equal their fair values. The investee's balance sheet on the date of purchase is as follows: Accounts receivable $ 75 Mortgage payable $ 75 Inventories 150 Stockholders' equity 750 Building 600 Total assets $ 825 Total liabilities and equity $ 825 Now, assume, subsequent to the purchase, the investee reports net income of $150 and pays $45 in dividends to the investor. a. At what amount will the investee's Stockholders' Equity be reported after income and dividends have been closed to Retained Earnings (assume no other changes to Stockholders' Equity)? b. Provide the following journal entries: 1. Record the recognition of Equity Income by the investor 2. Record the receipt of the $45 dividend c. At what amount is the Equity Investment reported on the investor's balance sheet? How does this compare to the investee's Stockholders' Equity? 855
TOPIC REVIEW 1.3 Accounting for the Equity Investment When Price Exceeds Book Value Assume an investor purchases all of the stock of the investee in a stock purchase for $900. The investee's balance sheet on the date of purchase is as follows: Accounts receivable $ 75 Mortgage payable $ 75 Inventories 150 Stockholders' equity 750 Building 600 Total assets $ 825 Total liabilities and equity $ 825 In this example, the amount paid (i.e., $900) is $150 greater than the book value of the net assets of the investee (i.e., $750). Assume the additional $150 of purchase price relates to an unrecognized patent held by the investee that has a remaining useful life of 10 years on the acquisition date. We also assume, subsequent to the purchase, the investee reports net income of $150 and pays $45 in dividends to the investor. a. Provide the journal entry to recognize the Equity Income by the investor. b. Provide the journal entry to record the receipt of the $45 dividend. c. Provide the journal entry to record the amortization of the patent asset. Equity Investment 150 Equity income 150 Cash 45 Equity Investment 45 Equity Income 15 Equity Investment 15
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TOPIC REVIEW 1.4 Accounting for the Effects on Equity Investments of lntercompany Sales of Inventory Assume an investor sells parts inventories, which originally cost the investor $100, to a 100% owned investee for a sale price of $150. Also assume 70% of the parts inventories remain on the investee's balance sheet at the end of the period. Provide the journal entry to defer the recognition of gross profit on the inventories that remain on the investee's balance sheet. Equity Income 35 Equity Investment 35
TOPIC REVIEW 1.5 Accounting for the Effects on Equity Investments of lntercompany Sales of Inventory When Less Than 100% of the Investee Is Owned Assume an investor sells parts, which originally cost $120, to an investee for $160. Also assume 70% of the parts inventories remain on the investee's balance sheet at the end of the period, and that the investor has significant influence over the investee based on its 25% ownership interest. Provide the journal entry to defer the recognition of gross profit on the inventories that remain on the investee's balance sheet. equity income 7 equity investment 7
TOPIC REVIEW 1.6 Reporting a Change to the Equity Method Assume an investor company acquires for $2,400 a 5% investment in the common stock of an investee company on February 15, 2021. The investor determined the common stock of the investee has a readily determinable fair value. On December 31, 2021, the fair value of the 5% common stock investment is $2,940, and the investor company made all of the appropriate adjustments in preparation of the annual financial statements. On March 1, 2022, the investor company acquires an additional 20% of common stock of the investee for $12,160, thereby increasing the investor's overall ownership interest to 25%. a. Prepare the journal entries the investor company should record on March 1, 2022. b. For this question only, assume instead that the investor determined, on February 15, 2021, that the common stock of the investee does not have a readily determinable fair value. In addition, the investor company determined that the additional 20% common stock purchase on March 1, 2022 does qualify as an observable price change in orderly transaction. Prepare the journal entries the investor company should record on March 1, 2022. c. For this question only, assume instead that the investor determined, on February 15, 2021, that the common stock of the investee does not have a readily determinable fair value. In addition, the investor company determined that the additional 20% common stock purchase on March 1, 2022 does not qualify as an observable price change in orderly transaction. Prepare the journal entries the investor company should record on March 1, 2022. a total imp 60,800 5% 3,040 100 Equity Investment 100 UHG - Income 100 Equity Investment 12,160 cash 12,160 b. Equity Investment 640 UHG - Income 640 Equity Investment 12,160 cash 12,160 c. Equity Investment 12,160 cash 12,160 no holding gain
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TOPIC REVIEW 1.7 Reporting a Change from the Equity Method to Insignificant Influence Assume on August 1, 2022, an investor company owns 32% of the common stock of an investee and can exercise significant influence over the investee. On this same date, the investor sold, for $30,000, 24% of the outstanding common stock of the equity investment to an unaffiliated party. Immediately 96,000 preceding this sale, the investor's balance of the 32% Equity Investment account was $24,000. As a result of this sale, the investor sold 75% of its previously held investment (i.e., 24% / 32%) and now retains 25% of the previous investment. 125,000 10,000 a. Assume the investor determined the investee's stock does have a readily determinable fair value. a Prepare the journal entry (or entries) the investor company should record on August 1, 2022. Also, Cash 30,000 describe how the retained portion of the equity investment be reported in the periods after the loss Equity Investment 18,000 of significant influence. Gain on Sale 12,000 b. Assume the investor determined the investee's stock does not have a readily determinable fair value, and the transaction resulting in the loss of significant influence does provide an observable Implied FV 125,000 price change in orderly transactions for the identical or a similar investment of the same issuer. 8% 10,000 Prepare the journal entry (or entries) the investor company should record on August 1, 2022. Also, BV 6,000 describe how the retained portion of the equity investment be reported in the periods after the loss UHG - Inc 4,000 of significant influence. c. Assume the investor determined the investee's stock does not have a readily determinable fair Equity investment 4,000 value, and the transaction resulting in the loss of significant influence does not provide an observable UHG - Inc 4,000 price change in orderly transactions for the identical or a similar investment of the same issuer. Prepare the journal entry ( or entries) the investor company should record on August 1, 2022. Also, describe how the retained portion of the equity investment be reported in the periods after the loss of significant influence if the investor does not wish to apply the Level 2 and Level 3 measurement techniques described in FASB ASC 820: Fair Value Measurement.
TOPIC REVIEW 1.8 Comprehensive Review Assume in 2019 an investor company purchases a 15% investment in an investee company for $75,000 and accounts for that investment using the fair value method. On December 31, 2021 (the most recent financial statement date), the reported fair value of the 15% investment was $135,000. On February 15, 2022, the investor acquires an additional 20% of the outstanding common stock of the investee for $375,000. After acquiring the additional 20% of the investee, the investor has significant influence over the investee. On February 15, 2022, the book value of the net assets of the investee is $750,000. The investor is willing to pay $375,000 for 20% of the stock of the investee (implying a fair value of the investee of $375,000/20% = $1,875,000) because the investee has a patent that is worth $1,125,000. That patent will expire in 10 years. Subsequent to the purchase, the investee reports net income of $300,000 and pays $135,000 in dividends through the end of the year. In addition, during the year, the investor sells inventories to the investee that cost $75,000 for a sale price of $120,000. At the end of the year, 30% of the parts inventories remain on the investee's balance sheet. Record each of the following adjustments related to the purchase of the additional 20% interest and the subsequent 35% investment holding. a. Provide the journal entries necessary for the acquisition of significant influence on February 15, 2022. b. Provide the journal entry to recognize the Equity Income by the investor. c. Provide the journal entry to record the receipt of the dividend. d. Provide the journal entry to record the amortization of the Patent asset. e. Provide the journal entry to record the deferral of gross profit on the intercompany inventory sale.
TOPIC REVIEW 1.9 Exercise 1.39 Changes in Equity Method Accounts As described in the opening vignette in this chapter, through December 31, 2019, Hulu LLC is 2/3 owned by The Walt Disney Company and 1/3 owned by Comcast Corporation (via Comcast’s 100% ownership of NBC Universal). According to Comcast’s December 31, 2019 SEC Form 10-K, Comcast accounts for its “investment [in Hulu] using the equity method. In 2019, 2018 and 2017, we recognized losses of $473 million, $454 million and $276 million, respectively, in equity in net income (losses) of investees, net. In 2019, 2018 and 2017, we made cash capital contributions totaling $903 million, $454 million and $300 million, respectively, to Hulu.” a. According to its 10-K, Comcast’s Investment in Hulu balance was $694 million on December 31, 2019. Based on the account activity during the year ended December 31, 2019, what was Comcast’s Investment in Hulu balance on December 31, 2018? b. For this question, assume Comcast, in determining its equity losses from Hulu for the year ended December 31, 2019, deducted $100 million in additional amortization expense for the excess of the acquisition date fair value of Hulu’s net assets over Comcast’s proportionate share of Hulu’s net assets book values. Also, assume Comcast owned 1/3 of Hulu for the entire year ended December 31, 2019. What amount of net income (loss) did Hulu report for the year ended December 31, 2019?
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CHAPTER 1 MULTIPLE CHOICE 1.1 An investor company acquired 20% of an investee company’s voting common stock. The investee’s common stock has a readily determinable fair value. The investor has representation on the investee’s board of directors, participates in the investee’s policy making process and has material business transactions with the investee. Which of the following alternatives best describes the investor’s required accounting for its interest in the investee? a. Because the investee’s stock has a readily determinable fair value, the investor must use fair value method to account for its interest in the investee’s common stock. b. The investor should recognize as income the dividends it receives from the investee. c. The investor should recognize as income a proportionate share of the net income recognized by the investee. d. The investor must use the cost-based approach to account for its interest in the investee’s common stock. 1.2 Which of the following factors is an indicator that an investor company has significant influence over an investee company? a. The investor tries and fails to obtain representation on the investee’s board of directors. b. Majority ownership of the investee is concentrated among a small group of shareholders who operate the investee without regard to the views of the investor. c. The investee has technological dependency on the investor. d. The investor and investee sign an agreement under which the investor surrenders significant rights. 1.3 An investor company uses the equity method to account for its investment in 25% of the outstanding common stock of an investee company. How should cash dividends received from the investee affect the financial statements of the investor? a. A decrease in retained earnings b. A decrease in the Equity Investment account c. Dividend income d. An increase in the Equity Investment account 1.4 On January 1, 2021, an investor company acquired 25% of an investee company’s common stock for $720,000. As a result of this transaction, the investor can exert significant influence over the investee. During each year ended December 31, 2021 and 2022 the investee reported $144,000 of net income and $60,000 of dividends. On January 1, 2021, the book value of the investee’s net assets was $2,400,000 and all individual net assets had appraised fair values that equaled their reported book values. On December 31, 2022, what is the balance of the Equity Investment account on the Investor’s balance sheet? a. $741,000 b. $888,000 c. $762,000 d. $720,000
Use the information below for 1.5 and 1.6 On January 1, 2022, an investor purchases 26,000 common shares of an investee at $12 (cash) per share. The shares represent 20% ownership in the investee. The investee’s common stock has a readily determinable fair value. On January 1, 2022, the book value of the investee’s assets and liabilities equals $1,235,000 and $195,000, respectively. On that date, the appraised fair values of the investee’s identifiable net assets approximated the recorded book values. During the year ended December 31, 2022, the investee company reported net income equal to $65,000 and dividends equal to $19,500. On December 31, 2022, the fair value of the investee’s stock is $16 per share. 1.5 Assume the investor cannot exert significant influence over the investee. Determine the balance in the “Investment in Investee” account at December 31, 2022. a. $425,100 b. $312,000 c. $321,100 d. $416,000 1.6 Assume the investor can exert significant influence over the investee. Determine the balance in the “Investment in Investee” account at December 31, 2022. a. $425,100 b. $321,100 c. $312,000 d. $416,000 Use the information below for 1.7 and 1.8 On January 1, 2022, an investor purchases for $300,000 a 20% ownership in an investee. On January 1, 2022, the book value of the investee’s assets and liabilities equals $1,850,000 and $350,000 respectively. On that date, the appraised fair values of the investee’s identifiable net assets approximated the recorded book values. During the year ended December 31, 2022, the investee company reported net income equal to $100,000 and dividends equal to $30,000. On December 31, 2022, the fair value of the investor’s share of the the investee is $400,000. Assume the investor cannot exert significant influence over the investee. 1.7 Determine the balance in the “Investment in Investee” account at December 31, 2022. a. $400,000 b. $314,000 c. $414,000 d. $300,000 1.8 Assume the investor can exert significant influence over the investee. Determine the balance in the “Investment in Investee” account at December 31, 2022. a. $300,000 b. $414,000 c. $314,000 d. $400,000
Use the information below for 1.9 and 1.10 On January 1, 20122, an investor purchases 20,000 common shares of an investee at $12 (cash) per share. The shares represent 25% ownership in the investee. The investee’s common stock does not have a readily determinable fair value. On January 1, 2022, the book value of the investee’s assets and liabilities equals $850,000 and $300,000, respectively. On that date, the appraised fair values of the investee’s identifiable net assets approximated the recorded book values, except for a customer list. On January 1, 2022, the customer list had a recorded book value of $0, an estimated fair value equal to $50,000 and a 5 year remaining useful life. During the year ended December 31, 2022, the investee company reported net income equal to $80,000 and dividends equal to $24,000. 1.9 Assume the investor cannot exert significant influence over the investee. Determine the balance in the “Investment in Investee” account at December 31, 2022. a. $320,000 b. $240,000 c. $251,500 d. $296,000 1.10 Assume the investor can exert significant influence over the investee. Determine the balance in the “Investment in Investee” account at December 31, 2022. a. $320,000 b. $296,000 c. $251,500 d. $240,000 Use the information below for 1.11 through 1.14 On January 1, 2022, an investor purchases for $400,000 a 15% ownership in an investee. The investee’s common stock has a readily determinable fair value. On January 1, 2022, the book value of the investee’s assets and liabilities equals $900,000 and $250,000 respectively. On that date, the appraised fair values of the investee’s identifiable net assets approximated the recorded book values, except for a patent. On January 1, 2022, the patent had a recorded book value of $0 an estimated fair value equal to $80,000 and a 10 year remaining useful life. During the year ended December 31, 2022, the investee company reported net income equal to $60,000 and dividends equal to $40,000. On December 31, 2022, the fair value of the investor’s share of the investee is $450,000. 1.11 Assume the investor cannot exert significant influence over the investee. Determine the balance in the “Investment in Investee” account at December 31, 2022. a. $400,000 b. $450,000 c. $470,000 d. $401,800
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1.12 Assume the investor cannot exert significant influence over the investee. Determine the amount of "Investment Income from the Investee” recognized by the investor during the year ended December 31, 2022. a. $9,000 b. $1,800 c. $7,800 d. $6,000 1.13 Assume the investor can exert significant influence over the investee. Determine the balance in the “Investment in Investee” account at December 31, 2022. a. $450,000 b. $470,000 c. $400,000 d. $401,800 1.14 Assume the investor can exert significant influence over the investee. Determine the amount of “Investment Income from the Investee” recognized by the investor during the year ended December 31, 2022. a. $6,000 b. $7,800 c. $9,000 d. $1,800 1.15 An investor company owns 20% of the common stock of an investee company. The investor has significant influence over the investee. During the year ended December 31, 2022, the investee bought $50,000 of inventory from the investor. The investor includes gross profit of 30% on all inventory sales transactions. At December 31, 2022, the investee held $75,000 of total inventory, with $15,000 of this inventory purchased from the investor during 2022. For the year ended December 31, 2022, the investor and investee reported $100,000 and $20,000 respectively, of net income. What amount of investment income from the investee did the investor recognize during the year ended December 31, 2022? a. $3,100 b. $4,500 c. $900 d. $4,000
Use the information below for 1.16 and 1.17 An investor company owns 25% of the common stock of an investee company. The investor has significant influence over the investee, and acquired its equity interest in the investee on January 1, 2021 for $735,000. On the date of acquisition, the investee’s stockholders’ equity was $2,940,000 and the fair values of the investee’s individual net assets were equal to their reported book values. During the year ended December 31, 2021, the investee reported net income of $70,000 and dividends of $14,000. During the year ended December 31, 2022, the investee reported net income of $84,000 and dividends of $21,000 The investor routinely sells inventory to the investee at a 30% profit margin. At December 31, 2021 and 2022, the investee held inventories purchased from the investor for $42,000 and $56,000 respectively. (All of these inventories on hand at the end of the year are sold by the investee to unaffiliated companies in the next period.) 1.16 What amount of investment income from the investee did the investor recognize during the year ended December 31, 2022? a. $19,950 b. $22,050 c. $21,000 d. $24,150 1.17 What is the balance in the Equity Investment account on December 31, 2022? a. $760,550 b. $764,750 c. $735,000 d. $798,000 Use the information below for 1.18 and 1.19 An investor company owns 20% of the common stock of an investee company. The investor has significant influence over the investee, and acquired its equity interest in the investee on January 1, 2021 for $600,000. On the date of acquisition, the investee’s stockholders’ equity was $2,500,000 and the fair values of the investee’s individual net assets were equal to their reported book values. During the year ended December 31, 2021, the investee reported net income of $60,000 and dividends of $15,000. During the year ended December 31, 2022, the investee reported net income of $90,000 and dividends of $25,000. The investor routinely sells inventory to the investee at a 40% profit margin. At December 31, 2021 and 2022, the investee held inventories purchased from the investor for $40,000 and $30,000 respectively. (All of these inventories on hand at the end of the year are sold by the investee to unaffiliated companies in the next period.) 1.18 What amount of investment income from the investee did the investor recognize during the year ended December 31, 2022? a. $18,000 b. $18,800 c. $21,200 d. $17,200
1.19 What is the balance in the Equity Investment account on December 31, 2022? a. $622,000 b. $665,000 c. $600,000 d. $619,600 1.20 On July 1, 2022, an investor company owns 30% of the common stock of an investee and can exercise significant influence over the investee. On July 1, 2022, immediately before the sale of 10% of the investee to an unaffiliated party, the balance of the Equity Investment account was $48,000. The investor company sold the 10% interest in the investee for $30,000. The investor company determined that after the sale of 10% it could no longer exert significant influence and that the remaining 20% investment has a readily determinable fair value. Immediately after the sale of the 10% interest, what is the carrying amount (i.e., balance) of the Equity Investment (after all required adjustments) and what method of accounting must the investor use for the Equity Investment? Balance Method a. $32,000 Equity b. $60,000 Fair value c. $32,000 Fair value d. $60,000 Cost based 1.21 On March 15, 2022, an investor company owns 35% of the outstanding common stock of an investee and can exercise significant influence over the investee. On March 15, 2022, immediately preceding the sale of 20% of the investee’s outstanding common stock to an unaffiliated party, the balance of the Equity Investment account was $35,000. The investor company sold the 20%. interest in the investee for $30,000 The investor company determined that after the sale of its 20% interest it could no longer exert significant influence over the investee, that the remaining 15% investment does not have a readily determinable fair value and that the transaction resulting in the loss of significant influence constitutes an orderly exchange. Immediately after the sale of the 20% interest, what is the carrying amount (i.e., balance) of the Equity Investment (i.e., after all required adjustments) and what method of accounting will the investor use for the Equity Investment if the investor does not wish to apply the Level 2 and Level 3 measurement techniques described in FASB ASC 820: Fair Value Measurement? Balance Method a. $15,000 Cost based b. $15,000 Equity c. $22,500 Fair value d. $22,500 Cost based
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1.22 On October 20, 2022, an investor company owns 20% of the outstanding common stock of an investee and can exercise significant influence over the investee. On October 20, 2022, immediately preceding the sale of 5% of the investee’s outstanding common stock to an unaffiliated party, the balance of the Equity Investment account was $50,000. The investor company sold the 5% interest in the investee for $18,000. The investor company determined that after the sale of its 5% interest it could no longer exert significant influence over the investee, that the remaining 15% investment does not have a readily determinable fair value and that the transaction resulting in the loss of significant influence does not constitute an orderly exchange. Immediately after the sale of the 5% interest, what is the carrying amount (i.e., balance) of the Equity Investment (i.e., after all required adjustments) and what method of accounting will the investor use for the Equity Investment if the investor does not wish to apply the Level 2 and Level 3 measurement techniques described in FASB ASC 820: Fair Value Measurement? Balance Method a. $37,500 Cost based b. $54,000 Fair value c. $54,000 Cost based d. $37,500 Fair value
TOPIC REVIEW 1.1 Determining Significant Influence Assume your company holds a 22% interest in the voting common stock of an investee company. Two other companies own 51 % and 27% of the investee company's voting common stock, respectively. Your company does not control any seats on the board of directors. All board members are appointed by the other two companies, and those companies also actively run the investee company, regardless of your company's preferences. In past years, your company has tried and failed to obtain board representation on the investee company's board. Your company also is unable to obtain quarterly financial information that the other investor companies regularly receive. The stock of the investee company has a readily determinable fair value. How should your company report its 22% investment in the investee in your company's financial statements? Specifically, should you report the investee as a controlled consolidated subsidiary, an equity method investment, or a passive investment reported at fair value? Explain your answer. Passive investment reported at fair value. The company does not appear to have significant influence based on: - Unsuccessful attempt to obtain board representation on the investee company's board. - Unsuccessul attempt to obtain quarterly financial information.
TOPIC REVIEW 1.2 Accounting for Equity Investments (Basic) Assume an investor purchases all of the stock of the investee (and, thus, its business) in a stock purchase for $750. The reported book values of the investee's net assets equal their fair values. The investee's balance sheet on the date of purchase is as follows: Accounts receivable $ 75 Mortgage payable $ 75 Inventories 150 Stockholders' equity 750 Building 600 Total assets $ 825 Total liabilities and equity $ 825 Now, assume, subsequent to the purchase, the investee reports net income of $150 and pays $45 in dividends to the investor. a. At what amount will the investee's Stockholders' Equity be reported after income and dividends have been closed to Retained Earnings (assume no other changes to Stockholders' Equity)? b. Provide the following journal entries: 1. Record the recognition of Equity Income by the investor 2. Record the receipt of the $45 dividend c. At what amount is the Equity Investment reported on the investor's balance sheet? How does this compare to the investee's Stockholders' Equity? a. Investee stockholders equity after close= 855 b. 1. Equity investment 150 Equity income 150 2. Cash 45 Equity investments 45 c. Investor equity investment at B/S date= 855 ties to investee SHE
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TOPIC REVIEW 1.3 Accounting for the Equity Investment When Price Exceeds Book Value Assume an investor purchases all of the stock of the investee in a stock purchase for $900. The investee's balance sheet on the date of purchase is as follows: Accounts receivable $ 75 Mortgage payable $ 75 Inventories 150 Stockholders' equity 750 Building 600 Total assets $ 825 Total liabilities and equity $ 825 In this example, the amount paid (i.e., $900) is $150 greater than the book value of the net assets of the investee (i.e., $750). Assume the additional $150 of purchase price relates to an unrecognized patent held by the investee that has a remaining useful life of 10 years on the acquisition date. We also assume, subsequent to the purchase, the investee reports net income of $150 and pays $45 in dividends to the investor. a. Provide the journal entry to recognize the Equity Income by the investor. b. Provide the journal entry to record the receipt of the $45 dividend. c. Provide the journal entry to record the amortization of the patent asset. a. Equity investment 150 Equity income 150 b. Cash 45 Equity investment 45 c. Equity investment 15 Equity income 15
TOPIC REVIEW 1.4 Accounting for the Effects on Equity Investments of lntercompany Sales of Inventory Assume an investor sells parts inventories, which originally cost the investor $100, to a 100% owned investee for a sale price of $150. Also assume 70% of the parts inventories remain on the investee's balance sheet at the end of the period. Provide the journal entry to defer the recognition of gross profit on the inventories that remain on the investee's balance sheet. Equity income 35 Equity investment 35
TOPIC REVIEW 1.5 Accounting for the Effects on Equity Investments of lntercompany Sales of Inventory When Less Than 100% of the Investee Is Owned Assume an investor sells parts, which originally cost $120, to an investee for $160. Also assume 70% of the parts inventories remain on the investee's balance sheet at the end of the period, and that the investor has significant influence over the investee based on its 25% ownership interest. Provide the journal entry to defer the recognition of gross profit on the inventories that remain on the investee's balance sheet. Equity income 7 Equity investment 7
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TOPIC REVIEW 1.6 Reporting a Change to the Equity Method Assume an investor company acquires for $2,400 a 5% investment in the common stock of an investee company on February 15, 2021. The investor determined the common stock of the investee has a readily determinable fair value. On December 31, 2021, the fair value of the 5% common stock investment is $2,940, and the investor company made all of the appropriate adjustments in preparation of the annual financial statements. On March 1, 2022, the investor company acquires an additional 20% of common stock of the investee for $12,160, thereby increasing the investor's overall ownership interest to 25%. a. Prepare the journal entries the investor company should record on March 1, 2022. b. For this question only, assume instead that the investor determined, on February 15, 2021, that the common stock of the investee does not have a readily determinable fair value. In addition, the investor company determined that the additional 20% common stock purchase on March 1, 2022 does qualify as an observable price change in orderly transaction. Prepare the journal entries the investor company should record on March 1, 2022. c. For this question only, assume instead that the investor determined, on February 15, 2021, that the common stock of the investee does not have a readily determinable fair value. In addition, the investor company determined that the additional 20% common stock purchase on March 1, 2022 does not qualify as an observable price change in orderly transaction. Prepare the journal entries the investor company should record on March 1, 2022. a. Equity investment 12,160 Cash 12,160 Equity investment 100 * * Implied fair value of investee= 60,800 Unrealized holding gain 100 Implied fair value of 5% holding= 3,040 Fair value adjustment= 100 b. Equity investment 12,160 Cash 12,160 Equity investment 640 * * Implied fair value of investee= 60,800 Unrealized holding gain 640 Implied fair value of 5% holding= 3,040 Fair value adjustment= 640 c. Equity investment 12,160 Cash 12,160
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TOPIC REVIEW 1.7 Reporting a Change from the Equity Method to Insignificant Influence Assume on August 1, 2022, an investor company owns 32% of the common stock of an investee and can exercise significant influence over the investee. On this same date, the investor sold, for $30,000, 24% of the outstanding common stock of the equity investment to an unaffiliated party. Immediately preceding this sale, the investor's balance of the 32% Equity Investment account was $24,000. As a result of this sale, the investor sold 75% of its previously held investment (i.e., 24% / 32%) and now retains 25% of the previous investment. a. Assume the investor determined the investee's stock does have a readily determinable fair value. Prepare the journal entry (or entries) the investor company should record on August 1, 2022. Also, describe how the retained portion of the equity investment be reported in the periods after the loss of significant influence. b. Assume the investor determined the investee's stock does not have a readily determinable fair value, and the transaction resulting in the loss of significant influence does provide an observable price change in orderly transactions for the identical or a similar investment of the same issuer. Prepare the journal entry (or entries) the investor company should record on August 1, 2022. Also, describe how the retained portion of the equity investment be reported in the periods after the loss of significant influence. c. Assume the investor determined the investee's stock does not have a readily determinable fair value, and the transaction resulting in the loss of significant influence does not provide an observable 760 400 20 price change in orderly transactions for the identical or a similar investment of the same issuer. Prepare the journal entry ( or entries) the investor company should record on August 1, 2022. Also, PE 300 0.25 describe how the retained portion of the equity investment be reported in the periods after the loss Land 420 0.35 of significant influence if the investor does not wish to apply the Level 2 and Level 3 measurement Patent 480 0.40 techniques described in FASB ASC 820: Fair Value Measurement. 1,200 a. Cash 30,000 Equity investment 18,000 Gain on sale 12,000 Equity investment 4,000 * * Implied value of investee= 125,000 Unrealized holding gain 4,000 Implied value of 8% holding= 10,000 Fair value adjustment= 4,000 Use fair value method going forward. b. Same entries as a, cost method going forward. c. Cash 30,000 Equity investment 18,000 Gain on sale 12,000 Cost method going forward.
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CHAPTER 1 COMPREHENSIVE REVIEW Assume in 2019 an investor company purchases a 15% investment in an investee company for $75,000 and accounts for that investment using the fair value method. On December 31, 2021 (the most recent financial statement date), the reported fair value of the 15% investment was $135,000. On February 15, 2022, the investor acquires an additional 20% of the outstanding common stock of the investee for $375,000. After acquiring the additional 20% of the investee, the investor has significant influence over the investee. On February 15, 2022, the book value of the net assets of the investee is $750,000. The investor is willing to pay $375,000 for 20% of the stock of the investee (implying a fair value of the investee of $375,000/20% = $1,875,000) because the investee has a patent that is worth $1,125,000. That patent will expire in 10 years. Subsequent to the purchase, the investee reports net income of $300,000 and pays $135,000 in dividends through the end of the year. In addition, during the year, the investor sells inventories to the investee that cost $75,000 for a sale price of $120,000. At the end of the year, 30% of the parts inventories remain on the investee's balance sheet. Record each of the following adjustments related to the purchase of the additional 20% interest and the subsequent 35% investment holding. a. Provide the journal entries necessary for the acquisition of significant influence on February 15, 2022. b. Provide the journal entry to recognize the Equity Income by the investor. c. Provide the journal entry to record the receipt of the dividend. d. Provide the journal entry to record the amortization of the Patent asset. e. Provide the journal entry to record the deferral of gross profit on the intercompany inventory sale. a. Equity investment 375,000 Cash 375,000 Equity investment 146,250 * * Implied value of investee 1,875,000 Unrealized holding gain 146,250 Implied value of 15% holding 281,250 Fair value adjustment 146,250 b. Equity investment 105,000 Equity income 105,000 c. Cash 47,250 Equity investment 47,250 d. Equity income 39,375 Equity investment 39,375 e. Equity income 4,725 Equity investment 4,725
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TOPIC REVIEW 1.9 Exercise 1.39 Changes in Equity Method Accounts As described in the opening vignette in this chapter, through December 31, 2019, Hulu LLC is 2/3 owned by The Walt Disney Company and 1/3 owned by Comcast Corporation (via Comcast’s 100% ownership of NBC Universal). According to Comcast’s December 31, 2019 SEC Form 10-K, Comcast accounts for its “investment [in Hulu] using the equity method. In 2019, 2018 and 2017, we recognized losses of $473 million, $454 million and $276 million, respectively, in equity in net income (losses) of investees, net. In 2019, 2018 and 2017, we made cash capital contributions totaling $903 million, $454 million and $300 million, respectively, to Hulu.” a. According to its 10-K, Comcast’s Investment in Hulu balance was $694 million on December 31, 2019. Based on the account activity during the year ended December 31, 2019, what was Comcast’s Investment in Hulu balance on December 31, 2018? b. For this question, assume Comcast, in determining its equity losses from Hulu for the year ended December 31, 2019, deducted $100 million in additional amortization expense for the excess of the acquisition date fair value of Hulu’s net assets over Comcast’s proportionate share of Hulu’s net assets book values. Also, assume Comcast owned 1/3 of Hulu for the entire year ended December 31, 2019. What amount of net income (loss) did Hulu report for the year ended December 31, 2019? a. Comcast Corp. B/S at 12/31/2018 - $ in millions Equity investment in Hulu LLC 264 b. Hulu LLC P&L for year ended 12/31/2019 - $ in millions Net income/ (loss) (1,119)
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1.1 c 1.2 c 1.3 b 1.4 762,000 c 1.5 416,000 d 1.6 321,100 b 1.7 400,000 a 1.8 314,000 c 1.9 240,000 b 1.10 251,500 c 1.11 450,000 b 1.12 6,000 d 1.13 401,800 d 1.14 7,800 b 1.15 3,100 a 1.16 19,950 a 1.17 760,550 a 1.18 18,800 b 1.19 619,600 d 1.20 60,000 Fair value b 1.21 22,500 Cost based
d 1.22 37,500 Cost based
a
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Provide correct answer this financial accounting question
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TCO A) You are auditing a company that owns 22% of the voting common stock of another corporation and uses the equity method to account for the investment. How would you verify that the equity method is appropriate in this case?
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please answer within the format by providing formula the detailed workingPlease provide answer in text (Without image)Please provide answer in text (Without image)Please provide answer in text (Without image)
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Types of common stock
In some cases, individuals who start a business have special voting rights that help them exercise more control over the firm. They own a special class of stock called (dual, founder) shares.
Consider this case:
The CEO of EchoStar Communications, Charlie Ergen, owned around 5% of the company’s stock, but his multiple votes per share gave him around 90% of the vote.
Source: “Dish Network 2010 Annual Report,” on Dish Network Investor Relations, http://files.shareholder.com/downloads/DISH/1330128565x0x480914/DC45515A-D65F-475D-B6C2-CF83AE7A10D6/DISH_-_Web_Posting_-_3.30.11.pdf.
Based on this example, which of the following statements is true?
A. Classified shares are not issued with the purpose of providing super voting rights to a certain class of investors.
B. Classified shares have super voting rights, which give more control to a certain class of investors.
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None
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Mastery Problem: Corporations: Organization, Stock Transactions, and Dividends
Pranks, Inc.
Pranks, Inc. is a manufacturer of joke and novelty products for perpetrators of practical jokes. The corporation has paid several cash dividends throughout Year 6, the current year. It is also declaring a stock dividend to its stockholders as the calendar year-end approaches. You’ve been brought in as a consultant to assist with this process, and also to help determine whether some missing information can be determined before the distribution of the stock dividend is made. The company has two classes of stock: common stock and cumulative preferred stock.
Number of common shares authorized
800,000
Number of common shares issued
650,000
Par value of common shares
$20
Par value of cumulative preferred shares
$30
Paid-in capital in excess of par-common stock
$7,000,000
Paid-in capital in excess of par-preferred stock
$0
Total retained earnings before the stock dividend is declared…
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Mastery Problem: Corporations: Organization, Stock Transactions, and Dividends
Pranks, Inc.
Pranks, Inc. is a manufacturer of joke and novelty products for perpetrators of practical jokes. The corporation has paid several cash dividends throughout Year 6, the current year. It is also declaring a stock dividend to its stockholders as the calendar year-end approaches. You’ve been brought in as a consultant to assist with this process, and also to help determine whether some missing information can be determined before the distribution of the stock dividend is made. The company has two classes of stock: common stock and cumulative preferred stock.
Number of common shares authorized
900,000
Number of common shares issued
750,000
Par value of common shares
$20
Par value of cumulative preferred shares
$30
Paid-in capital in excess of par-common stock
$7,000,000
Paid-in capital in excess of par-preferred stock
$0
Total retained earnings before the stock dividend is declared…
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Mastery Problem: Corporations: Organization, Stock Transactions, and Dividends
Pranks, Inc.
Pranks, Inc. is a manufacturer of joke and novelty products for perpetrators of practical jokes. The corporation has paid several cash dividends throughout Year 6, the current year. It is also declaring a stock dividend to its stockholders as the calendar year-end approaches. You’ve been brought in as a consultant to assist with this process, and also to help determine whether some missing information can be determined before the distribution of the stock dividend is made. The company has two classes of stock: common stockand cumulative preferred stock.
Number of common shares authorized
900,000
Number of common shares issued
750,000
Par value of common shares
$20
Par value of cumulative preferred shares
$30
Paid-in capital in excess of par-common stock
$7,000,000
Paid-in capital in excess of par-preferred stock
$0
Total retained earnings before the stock dividend is declared…
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