Chapter 3, Problem 23P

a.

To determine

Find the December 31, 2015, Investment Income and Investment in Company C account balances assuming Company A uses the:

• Equity method.
• Initial value method

Explanation of Solution

Computation of Investment Income and Investment in Company C account balances assuming that Company A uses the Equity method:

Particulars	Amount
Investment income of 2015
Equity accrual	$     60,000
Amortization	$   (10,000)
Investment income for year 2015	$     50,000
Investment in company C: December 31, 2015
Consideration for Company C	$   510,000
Equity accrual	$     55,000
Excess amortization	$   (10,000)
Dividends paid	$     (5,000)
Year 2015
Equity accrual	$     60,000
Excess amortization	$   (10,000)
Dividends	$     (8,000)
Total	$   592,000

Table: (1)

Computation of Investment Income and Investment in Company C account balances assuming that Company A uses the initial value method:

Particulars	Amount
Investment income of 2015
Dividend income	$     8,000
Investment in Company C: December 31, 2015
Consideration transferred for Company C	$  510,000

Table: (2)

Working note:

Particulars	Amount
Fair value on date of acquisition	$   510,000
Book value of assets and liabilities	$   450,000
Excess fair value over book value	$     60,000
		Remaining life	Annual amortization
Allocation to equipment	$     50,000	5 years	$     10,000
Goodwill	$     10,000	Indefinite	-
Total			$     10,000

Table: (3)

b.

To determine

Explain the manner in which the parent’s internal investment accounting method choice affect the amount reported for expenses in its December 31, 2015, consolidated income statement.

Explanation of Solution

The parent’s internal investment accounting method choice does not affect the amount reported for expenses in its December 31, 2015, consolidated income statement as the internal reporting method have no impact on the balance of expenses.

c.

To determine

Explain the manner in which the parent’s internal investment accounting method choice affect the amount reported for equipment in its December 31, 2015, consolidated balance sheet

Explanation of Solution

The parent’s internal investment accounting method choice does not affect the amount reported for equipment in its December 31, 2015, consolidated income statement as the internal reporting method have no impact on the balance of equipment.

d.

To determine

Find Company A’s January 1, 2015, Retained Earnings account balance assuming Company A’s accounts for its investment in Company C using the:

• Equity value method.
• Initial value method

Explanation of Solution

Company A’s January 1, 2015, Retained Earnings account balance assuming Company A’s accounts for its investment in Company C using the equity method:

Particulars	Amount
Retained earnings of Company A	$        860,000
Income of Company A in 2014	$        125,000
Equity accrual for Company C	$          55,000
Amortization expenses	$        (10,000)
Retained earnings of Company A on 1st January 2015	$     1,030,000

Table: (4)

Company A’s January 1, 2015, Retained Earnings account balance assuming Company A’s accounts for its investment in Company C using the initial value method:

Particulars	Amount
Retained earnings of Company A	$        860,000
Income of Company A in 2014	$        125,000
Dividend income from Company C	$             5000
Retained earnings of Company A on 1st January 2015	$        990,000

Table: (5)

e.

To determine

Identify the worksheet adjustment to Company A’s January 1, 2015, Retained Earnings account balance is required if Company A accounts for its investment in Company C using the initial value method.

Explanation of Solution

Worksheet adjustment to Company A’s January 1, 2015, Retained Earnings account balance:

Date	Account Title and Explanation	Post Ref.	Debit	Credit
	Investment in Company C		$40,000
	Retained Earnings on 1st January, 2015			$40,000
	(entry C will be passed if the initial value method is used)

Table: (6)

f.

To determine

Prepare the worksheet entry to eliminate Company C’s stockholders’ equity.

Explanation of Solution

Worksheet entry to eliminate Company C’s stockholders’ equity:

Date	Account Title and Explanation	Post Ref.	Debit	Credit
	Common stock of Company C		$ 150,000
	Retained earnings on January 1 , 2015		$ 350,000
	Investment in Company C			$ 500,000
	(entry S will be recorded when the initial value method is being used)

Table: (7)

g.

To determine

Find the consolidated net income for 2015.

Explanation of Solution

Computation of consolidated net income for 2015:

Particulars	Amount
Consolidated revenues	$        640,000
Consolidated expenses	$      (480,000)
Consolidated net income	$        160,000

Table: (8)