Fundamentals of Advanced Accounting
7th Edition
ISBN: 9781259722639
Author: Joe Ben Hoyle, Thomas Schaefer, Timothy Doupnik
Publisher: McGraw-Hill Education
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Chapter 1, Problem 1DYS
1.
To determine
Using an Excel spreadsheet, set the following values in cells:
- Acme’s cost of investment in PHC.
- Percentage acquired.
- First-year PHC reported income.
- Projected growth rate in income.
- PHC annual dividends.
- Annual excess patent amortization.
1.
Expert Solution
Explanation of Solution
The required values are presented in excel sheet as follows:
| Growth rate in income | 10% | ||||
| Dividends | 30000 | ||||
| Cost | 700000 | ||||
| Annual amortization | $ 15,000 | ||||
| 1st year PHC income | $ 185,000 | ||||
| Percentage owned | 40% | ||||
| 2018 | 2019 | 2020 | 2021 | 2022 | |
| PHC reported income | $ 74,000 | $ 81,400 | $ 89,540 | $ 98,494 | $ 108,343 |
| Amortization | $ 15,000 | $ 15,000 | $ 15,000 | $ 15,000 | $ 15,000 |
| Equity earnings | $ 59,000 | $ 66,400 | $ 74,540 | $ 83,494 | $ 93,343 |
| Beginning balance | $ 700,000 | $ 747,000 | $ 801,400 | $ 863,940 | $ 935,434 |
| Equity earnings | $ 59,000 | $ 66,400 | $ 74,540 | $ 83,494 | $ 93,343 |
| Dividends | $ (12,000) | $ (12,000) | $ (12,000) | $ (12,000) | $ (12,000) |
| Ending balance | $ 747,000 | $ 801,400 | $ 863,940 | $ 935,434 | $ 1,016,777 |
| ROI | 8.43% | 8.89% | 9.30% | 9.66% | 9.98% |
| Average | 9.25% |
2.
To determine
Referring to the values in (1), prepare the following schedules using columns for the years 2018 through 2022.
Acme’s equity in PHC earnings with rows showing these:
- Acme’s share of PHC reported income.
- Amortization expense.
- Acme’s equity in PHC earnings.
Acme’s Investment in PHC balance with rows showing the following:
- Beginning balance.
- Equity earnings.
- Dividends.
- Ending balance.
2.
Expert Solution
Explanation of Solution
| Growth rate in income | 10% | ||||
| Dividends | 30000 | ||||
| Cost | 700000 | ||||
| Annual amortization | $ 15,000 | ||||
| 1st year PHC income | $ 185,000 | ||||
| Percentage owned | 40% | ||||
| 2018 | 2019 | 2020 | 2021 | 2022 | |
| PHC reported income | $ 74,000 | $ 81,400 | $ 89,540 | $ 98,494 | $ 108,343 |
| Amortization | $ 15,000 | $ 15,000 | $ 15,000 | $ 15,000 | $ 15,000 |
| Equity earnings | $ 59,000 | $ 66,400 | $ 74,540 | $ 83,494 | $ 93,343 |
| Beginning balance | $ 700,000 | $ 747,000 | $ 801,400 | $ 863,940 | $ 935,434 |
| Equity earnings | $ 59,000 | $ 66,400 | $ 74,540 | $ 83,494 | $ 93,343 |
| Dividends | $ (12,000) | $ (12,000) | $ (12,000) | $ (12,000) | $ (12,000) |
| Ending balance | $ 747,000 | $ 801,400 | $ 863,940 | $ 935,434 | $ 1,016,777 |
| ROI | 8.43% | 8.89% | 9.30% | 9.66% | 9.98% |
| Average | 9.25% |
3.
To determine
Compute the average of the projected returns on beginning investment balances for the first five years of Acme’s investment in PHC. Find the maximum amount which Acme can pay for PHC if it wishes to earn at least a 10 percent average
3.
Expert Solution
Explanation of Solution
The average of the projected returns on beginning investment balances for the first five years of Acme’s investment in PHC is as follows:
| Growth rate in income | 10% | ||||
| Dividends | 30000 | ||||
| Cost | 639794 | ||||
| Annual amortization | $ 15,000 | ||||
| 1st year PHC income | $ 185,000 | ||||
| Percentage owned | 40% | ||||
| 2018 | 2019 | 2020 | 2021 | 2022 | |
| PHC reported income | $ 74,000 | $ 81,400 | $ 89,540 | $ 98,494 | $ 108,343 |
| Amortization | $ 15,000 | $ 15,000 | $ 15,000 | $ 15,000 | $ 15,000 |
| Equity earnings | $ 59,000 | $ 66,400 | $ 74,540 | $ 83,494 | $ 93,343 |
| Beginning balance | $ 639,794 | $ 686,794 | $ 741,194 | $ 803,734 | $ 875,228 |
| Equity earnings | $ 59,000 | $ 66,400 | $ 74,540 | $ 83,494 | $ 93,343 |
| Dividends | $ (12,000) | $ (12,000) | $ (12,000) | $ (12,000) | $ (12,000) |
| Ending balance | $ 686,794 | $ 741,194 | $ 803,734 | $ 875,228 | $ 956,571 |
| ROI | 9.22% | 9.67% | 10.06% | 10.39% | 10.67% |
| Average | 10.00% |
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