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Solution Manual For Advanced Accounting, 11th Edition

  • Accounting
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    Chapter 1 BUSINESS COMBINATIONS Answers to Questions 1 A business combination is a union of business entities in which two or more previously separate and independent companies are brought under the control of a single management team. T hree situations establish the control necessary for a business combination, namely, when one or more corporations become subsidiaries, when one company transfers its net assets to another, and when each combining company transfers its net assets to a newly formed corporation. 2 The dissolution of all but one of the separate legal entities is not necessary for a business combination. An example of one form of business combination in which the separate legal entities are not dissolved is when one corporation becomes a subsidiary of another. In the case of a parent - subsidiary relationship, each combining company continues to exist as a separate legal entity even though both companies are under the control of a single management team. 3 A business combination occurs when two or more previously separate and independent companies are brought under the control of a single management team. Merger and consolidation in a generic sense are frequently used as synonyms for the term business combination . In a technical sense, however, a merger is a type of business combination in which all but one of the combining entities are dissolved and a consolidation is a type of business combination in which a new corporation is formed to take over the assets of two or more previously separate companies and all of the combining companies are dissolved. 4 Goodwill arises in a business combination accounted for under the acquisition method when the cost of the investment ( fair value of the consideration transferred ) exceeds the fair value of identifiable net assets acquired. Under GAAP , goodwill is no t amortized for financial reporting purposes and will have no effect on net income , unless the goodwill is deemed to be impaired. If goodwill is impaired, a loss will be re cog nized. 5 A bargain purchase occurs when the acquisition price is less than the fair value of the identifiable net assets acquired. The acquirer records the gain from a bargain purchase as an ordinary gain during the period of the acquisition . The gain equals the difference between the investment cost and the fair value of the identifiable net assets acquired.

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    1 - 2 Business Combinations SOLUTIONS TO EXERCISES Solution E1 - 1 1 a 2 b 3 a 4 d Solution E1 - 2 [AICPA adapted] 1 a Plant and equipment should be recorded at the $ 22 0 ,000 fair value. 2 c Investment cost $ 1,6 00,000 Less: Fair value of net assets Cash $ 16 0,000 Inventory 38 0,000 Property and equipment — net 1,12 0,000 Liabilities ( 36 0,000 ) 1,30 0,000 Goodwill $ 30 0,000 Solution E1 - 3 Stockholders’ equity — P a l Corporation on January 2 Capital stock, $10 par, 6 00,000 shares outstanding $ 6 ,000,000 Other paid - in capital [$ 4 00,000 + $ 3,0 00,000 – $ 10 ,000] 3,390 ,000 Retained earnings [$1,200,000 - $20,000] 1, 18 0,000 Total stockholders’ equity $ 10 , 5 7 0 ,000 Entry to record combination Investment in S i p 6, 000,000 Capital stock, $10 par 3,0 00,000 Other paid - in capital 3,0 00,000 Investment expense 2 0,000 Other paid - in capital 10 ,000 Cash 30 ,000 Check: Net assets per books (book value) $ 7,6 00,000 Goodwill and write - up assets 3,0 0 0 ,000 Less: Expense of direct costs ( 2 0,000) Less: Issuance of stock ( 10 ,000 ) $ 10 , 5 7 0 ,000

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    Chapter 1 1 - 3

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    1 - 4 Business Combinations Solution E1 - 4 Journal entries on Pan ’s books to record the acquisition Investment in Set 10 , 2 00 ,000 Common stock, $10 par 4,8 00,000 Additional paid - in capital 5,4 0 0,000 To record issuance of 4 8 0,000 shares of $10 par common stock with a fair value of $ 10 , 2 00 ,000 for the common stock of Set in a business combination. Additional paid - in capital 6 0 ,000 Investment e xpenses 1 0 0 ,000 Salary and overhead expenses 80,000 Other assets or cash 24 0,000 To record costs of registering and issuing securities as a reduction of paid - in capital, and record direct and indirect costs of combination as expenses. Current assets 4,4 00,000 Plant assets 8,8 00 ,000 Liabilities 1,2 00,000 Investment in Set Gain from bargain purchase 10,2 00 ,000 1,800,000 To record allocation of the $ 10,2 00 ,000 cost of Se t Company to identifiable assets and liabilities according to their fair values and the gain from the bargain purchase. The gain from bargain purchase is c omputed as follows: Cost $ 10,2 00 ,000 Fair value of net assets acquired 12 ,000,000 Bargain purchase amount $ 1,8 0 0 ,000

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    Chapter 1 1 - 5 Solution E1 - 5 Journal entries on the books of P an Corporation to record merger with S is Corporation Investment in S is 1,06 0,000 Common stock, $10 par 36 0,000 Additional paid - in capital 30 0,000 Cash 4 00,000 To record issuance of 36 ,000 common shares and payment of cash in the acquisition of S is Corporation in a merger. Investment expenses 14 0,000 Additional paid - in capital 6 0,000 Cash 2 00,000 To record costs of registering and issuing securities and additional direct costs of combination. Cash 8 0,000 Inventories 2 00,000 Other current assets 4 0,000 Plant assets — net 56 0,000 Goodwill 32 0,000 Current liabilities 6 0,000 Other liabilities 8 0,000 Investment in S is 1,06 0,000 To record allocation of cost to assets received and liabilities assumed on the basis of their fair values and to goodwill computed as follows: Cost of investment $ 1,06 0,000 Fair value of net assets acquired 74 0,000 Goodwill $ 32 0,000

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    1 - 6 Business Combinations SOLUTIONS TO PROBLEMS Solution P1 - 1 Preliminary computations Fair Value: Cost of investment in San at January 2 ( 6 0,000 shares  $ 4 0) $ 2,4 00 ,000 Book value of net assets ($2,000,000 - $240,000) ( 1,76 0,000 ) Excess fair value over book value $ 64 0 ,000 Excess a ssigned to: Current assets $ 16 0,000 Remainder to goodwill 48 0 ,000 Excess fair value over book value $ 64 0 ,000 Note: $ 10 0 ,000 direct costs of combination are expensed. The excess fair value of Pin’s buildings is not considered. Pin Corporation Balance Sheet at January 2, 20 11 Assets Current assets ($ 5 2 0,000 + $ 2 4 0,000 + $ 16 0,000 excess - $ 16 0,000 direct costs) $ 76 0,000 Land ($ 2 0 0,000 + $ 4 00,000) 6 0 0,000 Buildings — net ($ 1,2 00,000 + $ 4 00,000) 1,6 00,000 Equipment — net ($ 88 0,000 + $ 96 0,000) 1,84 0,000 Goodwill 48 0 ,000 Total assets $ 5,28 0 ,000 Liabilities and Stockholders’ Equity Current liabilities ($ 2 0 0,000 + $ 2 4 0,000) $ 44 0,000 C apital stock, $10 par ($ 2 , 0 00,000 + $ 6 00,000 new issue ) 2 , 6 00,000 Additional paid - in capital [$ 2 0 0,000 + ($ 3 0  6 0,000 shares) — $ 6 0 ,000 costs of issuing and registering securities] 1, 9 4 0 ,000 Retained earnings (subtract $ 10 0 ,000 expensed direct cost) 3 0 0 ,000 Total liabilities and stockholders’ equity $ 5,28 0 ,000

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    Chapter 1 1 - 7

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    1 - 8 Business Combinations Solution P1 - 2 Preliminary computations Fair Value: Cost of acquiring Sea $ 1,650 ,000 Fair value of assets acquired and liabilities assumed 1,34 0,000 Goodwill from acquisition of Sea $ 310 ,000 Pe t Corporation Balance Sheet at January 2, 20 11 Assets Current assets Cash [$ 300 ,000 + $ 6 0,000 - $ 28 0,000 expenses paid] $ 8 0,000 Accounts receivable — net [$ 46 0,000 + $ 8 0,000 fair value] 54 0,000 Inventories [$ 1,04 0,000 + $ 24 0,000 fair value] 1,28 0,000 Plant assets Land [$ 8 00,000 + $ 30 0,000 fair value] 1,10 0,000 Buildings — net [$ 2 ,000,000 + $ 6 00,000 fair value] 2 , 6 00,000 Equipment — net [$ 1,0 00,000 + $5 0 0,000 fair value] 1, 5 0 0,000 Goodwill 310 ,000 Total assets $ 7 , 410 ,000 Liabilities and Stockholders’ Equity Liabilities Accounts payable [$ 6 00,000 + $ 8 0,000] $ 68 0,000 Note payable [$ 1,2 00,000 + $ 36 0,000 fair value] 1,56 0,000 Stockholders’ equity Capital stock, $10 par [$ 1,6 00,000 + ( 66 ,000 shares  $10)] 2,26 0,000 Other paid - in capital [$ 1,2 00,000 - $ 8 0,000 + ($ 1,650 ,000 - $ 66 0,000)] 2,110 ,000 Retained earnings (subtract $ 2 00,000 expensed direct costs) 8 00,000 Total liabilities and stockholders’ equity $ 7,41 0,000

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    Chapter 1 1 - 9 Solution P1 - 3 P a r issues 25,000 shares of stock for Sin’s outstanding shares 1a Investment in Sin 1,50 0,000 Capital stock, $10 par 250,000 Additional paid - in capital 1,25 0,000 To record issuance of 25,000, $10 par shares with a market price of $ 6 0 per share in a business combination with Sin. Investment expenses 6 0,000 Additional paid - in capital 4 0,000 Cash 10 0,000 To record costs of combination in a business combination with Sin. Cash 2 0,000 Inventories 12 0,000 Other current assets 2 00,000 Land 2 00,000 Plant and equipment — net 70 0,000 Goodwill 36 0,000 Liabilities 10 0,000 Investment in Sin 1,500 ,000 To assign investment cost to identifiable assets and liabilities according to their fair values and the remainder to goodwill. Goodwill is computed: $ 1,50 0,000 cost - $ 1,140 ,000 fair value of net assets acquired. 1b P a r Corporation Balance Sheet January 2, 20 11 (after business combination) Assets Cash [$ 2 4 0,000 + $ 2 0,000 - $100,000 ] $ 16 0,000 Inventories [$ 10 0,000 + $ 120 ,000] 22 0,000 Other current assets [$ 2 00,000 + $ 2 00,000] 4 00,000 Land [$ 16 0,000 + $ 2 00,000] 36 0,000 Plant and equipment — net [$ 1,30 0,000 + $ 70 0,000] 2 ,000,000 Goodwill 3 6 0,000 Total assets $ 3,500 ,000 Liabilities and Stockholders’ Equity Liabilities [$ 4 00,000 + $ 10 0,000] $ 5 0 0,000 Capital stock, $10 par [$ 1,0 00,000 + $250,000] 1,25 0,000 Additional paid - in capital [$ 4 00,000 + $ 1,25 0,000 - $ 4 0,000] 1,61 0,000 Retained earnings (subtract $ 6 0,000 direct costs) 14 0,000 Total liabilities and stockholders’ equity $ 3,500 ,000

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    1 - 10 Business Combinations Solution P1 - 3 (continued) P a r issues 15,000 shares of stock for Sin’s outstanding shares 2a Investment in Sin (15,000 shares  $ 6 0) 90 0,000 Capital stock, $10 par 150,000 Additional paid - in capital 75 0,000 To record issuance of 15,000, $10 par common shares with a market price of $ 6 0 per share. Investment expense 6 0,000 Additional paid - in capital 4 0,000 Cash 10 0,000 To record costs of combination in the acquisition of Sin. Cash 2 0,000 Inventories 12 0,000 Other current assets 2 00,000 Land 2 0 0,000 Plant and equipment — net 70 0,000 Liabilities 10 0,000 Investment in Sin Gain on bargain purchase 90 0,000 240,000 To record Sin’s net assets at fair values and gain on bargain purchase . Fair value of net assets acquired $ 1,14 0,000 Investment cost (Fair value of consideration) 90 0,000 Gain on Bargain Purchase $ 2 4 0,000 2b P a r Corporation Balance Sheet January 2, 20 11 (after business combination) Assets Cash [$ 2 4 0,000 + $ 2 0,000 - $100,000 ] $ 16 0,000 Inventories [$ 10 0,000 + $ 12 0,000] 22 0,000 Other current assets [$ 2 00,000 + $ 2 00,000] 4 00,000 Land [$ 16 0,000 + $ 2 0 0,000] 36 0,000 Plant and equipment — net [$ 1,30 0,000 + $ 70 0,000] 2 ,000 ,000 Total assets $ 3,14 0,000 Liabilities and stockholders’ equity Liabilities [$ 4 00,000 + $ 10 0,000] $ 50 0,000 Capital stock, $10 par [$ 1,0 00,000 + $150,000] 1,150 ,000 Additional paid - in capital [$ 4 00,000 + $ 75 0,000 - $ 4 0,000] 1, 11 0 ,000 Retained earnings (subtract $ 6 0,000 direct costs and add $ 24 0,000 Gain from bargain purchase) 38 0,000 Total liabilities and stockholders’ equity $ 3,140 ,000

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    Chapter 1 1 - 11 Solution P1 - 4 1 Schedule to allocate investment cost to assets and liabilities Investment cost (fair value) , January 1 $300,000 Fair value acquired from S u n ($360,000  100%) 360,000 Excess fair value over cost (bargain purchase gain) $ 60,000 Allocation: Allocation Cash $ 10,000 Receivables — net 20,000 Inventories 30,000 Land 100,000 Buildings — net 150,000 Equipment — net 150,000 Accounts payable (30,000) Other liabilities (70,000) Gain on bargain purchase (60,000 ) Totals $ 300,000 2 P ub Corporation Balance Sheet at January 1, 20 11 (after combination) Assets Liabilities Cash $ 25,000 Accounts payable $ 120,000 Receivables — net 60,000 Note payable (5 years) 200,000 Inventories 150,000 Other liabilities 170,000 Land 1 45 ,000 Liabilities 490,000 Buildings — net 3 50 , 0 00 Equipment — net 3 3 0, 0 00 Stockholders’ Equity Capital stock, $10 par 300,000 Other paid - in capital 100,000 Retained earnings * 1 7 0,000 Stockholders’ equity 5 7 0,000 Total assets $1,0 6 0,000 Total equities $1,0 6 0,000 * Retained earnings reflects the $60,000 gain on the bargain purchase.

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    1 - 12 Business Combinations Solution P1 - 5 1 Journal entries to record the acquisition of Saw Corporation Investment in S aw 5,0 00,000 Capital stock, $10 par 1,000,000 Other paid - in capital 3 ,000,000 Cash 1,0 00,000 To record acquisition of S aw for 100,000 shares of common stock and $ 1,0 00,000 cash. Investment expense 2 00,000 Other paid - in capital 10 0,000 Cash 30 0,000 To record payment of costs to register and issue the shares of stock ($ 10 0,000) and other costs of combination ($ 2 00,000). Cash 48 0,000 Accounts receivable 72 0,000 Notes receivable 6 00,000 Inventories 1,0 00,000 Other current assets 4 00,000 Land 4 0 0,000 Buildings 2 , 4 0 0,000 Equipment 1,2 0 0,000 Accounts payable 6 00,000 Mortgage payable, 10% 1,20 0,000 Investment in S aw Gain on bargain purchase 5,0 00,000 200,000 To record the net assets of S aw at fair value and gain on bargain purchase . Gain on Bargain Purchase Calculation Acquisition price $ 5,0 00,000 Fair value of net assets acquired 5 , 4 00,000 Gain on bargain purchase $ 4 00,000

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    Chapter 1 1 - 13 Solution P1 - 5 (continued) 2 Pat Corporation Balance Sheet at January 2, 20 11 ( after business combination) Assets Current Assets Cash $ 5 , 18 0,000 Accounts receivable — net 3 , 32 0,000 Notes receivable — net 3 , 6 00,000 Inventories 6 ,000,000 Other current assets 1,8 00,000 $ 19 ,9 0 0,000 Plant Assets Land $ 4 , 4 0 0,000 Buildings — net 2 0, 4 0 0,000 Equipment — net 21 , 2 0 0,000 46 , 0 00,000 Total assets $ 65 , 9 0 0,000 Liabilities and Stockholders’ Equity Liabilities Accounts payable $ 2 , 6 00,000 Mortgage payable, 10% 11 , 2 00,000 $ 13 , 8 00,000 Stockholders’ Equity Capital stock, $10 par $ 2 1,000,000 Other paid - in capital 1 8,9 0 0,000 Retained earnings * 12 , 2 00,000 52 , 10 0,000 Total liabilities and stockholders’ equity $ 65 , 9 0 0,000 * Subtract $ 2 00,000 direct combination costs and add $ 4 00,000 gain on bargain purchase.

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    1 - 14 Business Combinations RESEARCH CASE Research Case Requirement 1 (Amounts in millions) Investment in Target (1 Billion x $50) 50,000 Common Stock (1 Billion x $0.10) 100 Capital in Excess of Par Value 49,900 Cash and Cash Equivalents 2,200 Credit Card Receivables 6,966 Inventory 7,897 Other Current Assets 2,079 Land 6,952 Buildings and Improvements 26,582 Fixtures and Equipment 5,692 Computer Hardware and Software 3,090 Construction in Progress 502 Other Noncurrent Assets 829 Accumulated Other Comprehensive Loss 581 Goodwill 26,301 Accumulated Depreciation 10,485 Accounts Payable 6,511 Accrued and Other Current Liabilities 3,120 Unsecured Debt and Other Borrowings(short - term) 796 Nonrecourse Debt Collaterized by Credit Card Receivables(short - term) 900 Unsecured Debt and Other Borrowings(long - term) 10,643 Nonrecourse Debt Collaterized by Credit Card Receivables(long - term) 4,475 Deferred Income Taxes 835 Other Noncurrent Liabilities 1,906 Investment in Target 50,000

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    Chapter 1 1 - 15 Requirement 2 (Amounts in millions) Wal - Mart Target Total Assets Current Assets : Cash and Cash Equivalents $7,907 $2,200 $10,107 Receivables, net 4,144 6,966 11,110 Inventories 33,160 7,897 41,057 Prepaid Expenses and Other 2,980 2,079 5,059 Current Assets of Discontinued Operations 140 140 Total Current Assets $ 48,331 $19,142 $ 67,473 Property and Equipment : Land $22,591 $6,952 $29,543 Buildings and Improvements 77,452 26,582 104,034 Fixtures and Equipment 35,450 5,692 41,142 Transportation Equipment 2,355 2,355 Computer Hardware and Software 3,090 3,090 Construction in Progress 502 502 Total Property and Equipment 137,848 42,818 180,666 Less Accumulated Depreciation - 38,304 - 10,485 - 48,789 Property and Equipment, Net $99,544 $32,333 $131,877 Property Under Capital Leases : Property Under Capital Leases $5,669 $5,669 Less Accumulated Amortization - 2,906 - 2,906 Property Under Capital Leases, Net $2,763 $2,763 Goodwill(16,126 + 26,301) $16,126 $42,427 Other Assets and Deferred Charges 3,942 829 4,771 Total Assets $ 170,706 $ 249,311

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    1 - 16 Business Combinations Liabilities and Stockholders’ Equity Current Liabilities : Short - term Borrowings $523 $523 Accounts Payable 30,451 $6,511 36,962 Accrued Liabilities 18,734 3,120 21,854 Accured Income Taxes 1,365 1,365 Long - term Debt Due Within One Year 4,050 4,050 Obligations Under Capital Leases Due Within One Year 346 346 Current Liabilities of Discontinued Operations 92 92 Unsecured debt and Other Borrowings 796 796 Nonrecourse Debt Collaterized by Credit Card Receivables 900 900 Total Current Liabilities $55,561 $11,327 $66,888 Long - term Liabilities : Long - Term Debt $33,231 $33,231 Long - Term Obligations Under Capital Leases 3,170 3,170 Deferred Income Taxes and other 5,508 $835 6,343 Unsecured Debt and Other Borrowings 10,643 10,643 Nonrecourse Debt Collaterized by Credit Card Receivables 4,475 4,475 Other Noncurrent Liabilities 1,906 1,906 Redeemable Noncontrolling Interest 307 307 Total Long - Term Liabilities $42,216 $17,859 $60,075 Stockholders' Equity Preferred Stock Common Stock(100 + 378) $478 Capital in Excess of Par Value(3,803+49,900) 53,703 Retained Earnings 66,638 Accumulated Other Comprehensive Loss (70 + 581) - 651 Total Stockholders' Equity 120,168 Noncontrolling Interest 2,180 Total Stockholders' Equity 122,348 Total Liabilities and Stockholders' Equity $ 249,311

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    Chapter 2 STOCK INVESTMENTS — INVESTOR ACCOUNTING AND REPORTING Answers to Questions 1 Only the investor’s accounts are affected when outstanding stock is acquired from existing stockholders. The investor records the investment at its cost. Since the investee company is not a party to the transaction, its accounts are not affected. Both investor and investee accounts are affected when unissued stock is acquired directly from the investee. The investor records the investment at its cost and the investee adjusts its asset and owners’ equity accounts to reflect the issuance of previously unissued stock. 2 Goodwill arising from an equity investment of 20 percent or more is not recorded separately from the investment account. Under the equity method, the investment is presented on one line of the balance sheet in accordance with the one - line consolidation concept. 3 Dividends received from earnings accumulated before an investment is acquired are treated as decreases in the investment account balance under the fair value/cost method. Such dividends are considered a return of a part of the original investment. 4 The equity method of accounting for investments increases the investment account for the investor’s share of the investee’s income and decreases it for the investor’s share of the investee’s losses and for dividends received from the investee. In addition, the investment and investment income accounts are adjusted for amortization of any investment cost - book value differentials related to the interest acquired. Adjustments to the investment and investment income accounts are also needed for unrealized profits and losses from transactions between the investor and investee companies. A fair value adjustment is optional under SFAS No. 159. 5 The equity method is referred to as a one - line consolidation because the investment account is reported on one line of the investor’s balance sheet and investment income is reported on one line of the investor’s income statement (except when the investee has extraordinary gains/losses or gains/losses from discontinued operations ). In addition, the investment income is computed such that the parent company’s income and stockholders’ equity are equal to the consolidated net income and consolidated stockholders’ equity that would result if the statements of the investor and investee were consolidated. 6 If the equity method of accounting is applied correctly, the income of the parent company will generally equal the controlling interest share of consolidated net income. If the subsidiary is 100% owned by the parent, the parent’s net income under the equity method will equal the consolidated net income of the parent and it’s subsidiary. 7 The difference in the equity method and consolidation lies in the detail reported, but not in the amount of income reported. The equity method reports investment income on one line of the income statement whereas the details of revenues and expenses are reported in the consolidated income statement. 8 The investment account balance of the investor will equal underlying book value of the investee if (a) the equity method is correctly applied, (b) the investment was acquired at book value which was equal to fair value, the pooling method was used, or the cost - book value differentials have all been amortized or written off as impairment losses , and (c) there have been no intercompany transactions between the affiliated companies that have created investment account - book value differences. 9 The investment account balance must be converted from the cost to the equity method when acquisitions increase the interest held to 20 percent or more. The amount of the adjustment is the difference between the investment income reported under the cost method in prior years and the income that would have been reported if the equity method of accounting had been used. The offsetting account in the journal entry is Retained Earnings. Changes from the cost to the equity method of accounting for equity investments are

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    2 - 2 Stock Investments — Investor Accounting and Reporting changes in the reporting entity that require restatement of prior years’ financial statements when the effect is material. 10 The one - line consolidation is adjusted when the investee’s income includes extraordinary items or gains or losses from discontinued operations. In this case, the investor’s share of the investee’s ordinary income is reported as investment income under a one - line consolidation, but the investor’s share of extraordinary items, and gains and losses from discontinued operations is combined with similar items of the investor. 11 The remaining 15 percent interest in the investee is accounted for under the fair value/cost method, and the investment account balance immediately after the sale becomes the new cost basis. 12 Yes. When an investee has preferred stock in its capital structure, the investor has to allocate the investee’s income to preferred and common stockholders. Then, the investor takes up its share of the investee’s income allocated to common stockholders in applying the equity method. The allocation is not necessary when the investee has only common stock outstanding. 13 Goodwill impairment losses are calculated by business reporting units. For each reporting unit, the company must first determine the fair values of net assets. The fair value of the reporting unit is the amount at which it could be purchased in a current market transaction. This may be based on market prices, discounted cash flow analyses, or similar current transactions. This is done in the same manner as is done to originally record a combination. Any excess measured fair value over identifiable assets and liabilities is the implied fair value of goodwill. The company then compares the implied goodwill fair value to the carrying value of goodwill to determine if there has been an impairment loss during the period. If the carrying value exceeds the implied fair value, an impairment loss equal to the difference is recognized. 14 Yes. Goodwill i mpairment losses for subsidiaries are computed as outlined in the solution to question 13. Companies compare fair values to book values for equity method investments as a whole. Firms may recognize impairment losses for equity method investments as a whole, but perform no separate impairment tests for goodwill associated with an equity method investment . SOLUTIONS TO EXERCISES Solution E2 - 1 1 d 2 c 3 c 4 d 5 b Solution E2 - 2 [AICPA adapted] 1 d 2 b 3 d 4 b G a r’s investment is reported at its $ 6 00,000 cost because the equity method is not appropriate and because G a r’s share of Med’s income exceeds dividends received since acquisition [($ 5 20,000  15%) > $ 4 0,000].

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    Chapter 2 2 - 3 5 c Dividends received from Z e f for the two years were $10,500 ( $70,000  15% - all in 20 12 ), but only $9,000 (15% of Z e f’s income of $60,000 for the two years) can be shown on T w o’s income statement as dividend income from the Z e f investment. The remaining $1,500 reduces the investment account balance. 6 c [$ 10 0,000 + $ 30 0,000 + ($ 6 00,000  10%)] 7 a 8 d Investment balance January 2 $250,000 Add: Income from Pod ($100,000  30%) 30,000 Investment in Pod December 31 $280,000 Solution E2 - 3 1 Bow’s percentage ownership in Tre Bow’s 20,000 shares/(60,000 + 20,000) shares = 25% 2 Goodwill Investment cost $500,000 Book value ( $1,000,000 + $500,000)  25% ( 375,000 ) Goodwill $125,000 Solution E2 - 4 Income from Med for 20 11 Share of Med’s income ($200,000  1/2 year  30%) $ 30,000

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    2 - 4 Stock Investments — Investor Accounting and Reporting Solution E2 - 5 1 Income from Oak Share of Oak’s reported income ($800,000  30%) $ 240,000 Less: Excess allocated to inventory (100,000) Less: Depreciation of excess allocated to building ($200,000/4 years) (50,000 ) Income from Oak $ 90,000 2 Investment account balance at December 31 Cost of investment in Oak $2,000,000 Add: Income from Oak 90,000 Less: Dividends ($200,000 x 30%) (60,000 ) Investment in Oak December 31 $2,030,000 Alternative solution Underlying equity in Oak at January 1 ($1,500,000/.3) $5,000,000 Income less dividends 600,000 Underlying equity December 31 5,600,000 Interest owned 30 % Book value of interest owned December 31 1,680,000 Add: Unamortized excess 350,000 Investment in Oak December 31 $2,030,000 Solution E2 - 6 Journal entry on Ma n ’s books Investment in Nib ($ 6 00,000 x 40%) 24 0,000 Loss from discontinued operations 4 0,000 Income from Nib 28 0,000 To recognize income from 40% investment in N i b.

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    Chapter 2 2 - 5 Solution E2 - 7 1 a Dividends received from Ben ($120,000  15%) $ 18,000 Share of income since acquisition of interest 20 11 ($20,000  15%) (3,000) 20 12 ($80,000  15%) (12,000 ) Excess dividends received over share of income $ 3,000 Investment in Ben January 3, 20 11 $ 50,000 Less: Excess dividends received over share of income (3,000 ) Investment in Ben December 31, 20 1 2 $ 47,000 2 b Cost of 10,000 of 40,000 shares outstanding $1,400,000 Book value of 25% interest acquired ($4,000,000 stockholders’ equity at December 31, 20 11 + $1,400,000 from additional stock issuance)  25% 1,350,000 Excess cost over book value(goodwill) $ 50,000 3 d The investment in Mo e balance remains at the original cost. 4 c Income before extraordinary item $ 200,000 Percent owned 40 % Income from Kaz Products $ 80,000 Solution E2 - 8 Preliminary computations Cost of 40% interest January 1, 20 11 $2,400,000 Book value acquired ($4,000,000  40%) (1,600,000 ) Excess cost over book value $ 800,000 Excess allocated to Inventories $100,000  40% $ 40,000 Equipment $200,000  40% 80,000 Goodwill for the remainder 680,000 Excess cost over book value $ 800,000 Ray’s underlying equity in Ton ($5,500,000  40%) $2,200,000 Add: Goodwill 680,000 Investment balance December 31, 201 6 $2,880,000 Alternative computation Ray’s share of the change in Ton’s stockholders’ equity ($1,500,000  40%) $ 600,000 Less: Excess allocated to inventories ($40,000  100%) (40,000) Less: Excess allocated to equipment ($80,000/4 years  4 years) (80,000 ) Increase in investment account 480,000 Original investment 2,400,000 Investment balance December 31, 201 6 $2,880,000

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    2 - 6 Stock Investments — Investor Accounting and Reporting Solution E2 - 9 1 Income from Run Share of income to common ($400,000 - $30,000 preferred dividends)  30% $ 111,000 2 Investment in Run December 31, 20 1 2 NOTE: The $50,000 direct costs of acquiring the investment are a part of the cost of the investment. They are charged against additional piad - in capital. Investment cost $1,2 0 0,000 Add: Income from Run 111,000 Less: Dividends from Run ($200,000 dividends - $30,000 dividends to preferred)  30% (51,000 ) Investment in Run December 31, 20 1 2 $1, 26 0,000 Solution E2 - 10 1 Income from Tee ($ 4 00,000 – $ 3 00,000)  25% Investment income October 1 to December 31 $ 25,000 2 Investment balance December 31 Investment cost October 1 $ 600,000 Add: Income from Tee 25,000 Less: Dividends --- Investment in Tee at December 31 $ 625,000

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    Chapter 2 2 - 7 Solution E2 - 11 Preliminary computations Goodwill from first 10% interest: Cost of investment $ 25 ,000 Book value acquired ($ 21 0,000  10%) (2 1 ,000 ) Excess cost over book value $ 4 ,000 Goodwill from second 10% interest: Cost of investment $ 5 0,000 Book value acquired ($ 25 0,000  10%) ( 25 ,000 ) Excess cost over book value $ 25 ,000 1 Correcting entry as of January 2, 20 1 2 to convert investment to the equity basis Unrealized gain/loss on available - for - s ale securities 25 ,000 Allowance to adjust available - for - sale Securities to market value 25 ,000 To remove the valuation allowance entered on December 31, 20 11 under the fair value method for an available for sale security. Investment in Fed 4 ,000 Retained earnings 4 ,000 To adjust investment account to an equity basis computed as follows: Share of Fed ’s income for 20 11 $ 1 0,000 Less: Share of dividends for 20 11 ( 6 ,000 ) $ 4 ,000 2 Income from Fed for 20 1 2 Income from Fed on original 10% investment $ 5 ,000 Income from Fed on second 10% investment 5 ,000 Income from Fed $ 1 0,000

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    2 - 8 Stock Investments — Investor Accounting and Reporting Solution E2 - 12 Preliminary computations Stockholders’ equity of Tal on December 31, 20 1 1 $380,000 Sale of 12,000 previously unissued shares on January 1 , 20 1 2 250,000 Stockholders’ equity after issuance on January 1 , 20 1 2 $630,000 Cost of 12,000 shares to Riv $250,000 Book value of 12,000 shares acquired $630,000  12,000/36,000 shares 210,000 Excess cost over book value $ 40,000 Excess is allocated as follows Buildings $60,000  12,000/36,000 shares $ 20,000 Goodwill 20,000 Excess cost over book value $ 40,000 Journal entries on Riv’s books during 20 12 January 1 Investment in Tal 250,000 Cash 250,000 To record acquisition of a 1/3 interest in Tal. During 20 12 Cash 30,000 Investment in Tal 30,000 To record dividends received from Tal ($90,000  1/3). December 31 Investment in Tal 38,000 Income from Tal 38,000 To record investment income from Tal computed as follows: Share of Tal’s income ($120,000  1/3) $ 40,000 Depreciation on building ($20,000/10 years) (2,000 ) Income from Tal $ 38,000

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    Chapter 2 2 - 9 Solution E2 - 13 1 Journal entries on BIP’s books for 20 12 Cash 6 0,000 Investment in Cow (30%) 6 0,000 To record dividends received from Cow ( $ 2 00,000  30%). Investment in Cow (30%) 120 ,000 Extraordinary loss (from Cow) 12 ,000 Income from Cow 132 ,000 To record investment income from Cow computed as follows: Share of income before extraordinary item $ 340, 000  30% $ 102 ,000 Add: Excess fair value over cost realized in 20 12 $ 100 ,000  30% 30 ,000 Income from Cow before extraordinary loss $ 132 ,000 2 Investment in Cow balance December 31, 20 12 Investment cost $ 390 ,000 Add: Income from C o w after extraordinary loss 120 ,000 Less: Dividends received from Cow ( 6 0,000 ) Investment in Cow December 31 $ 450 ,000 Check: Investment balance is equal to underlying book value ($ 1,4 00,000 + $ 30 0,000 - $ 2 00,000)  30% = $ 450 ,000 3 BIP Corporation Income Statement for the year ended December 31, 20 12 Sales $ 2 ,000,000 Expenses 1,4 00,000 Operating income 6 00,000 Income from Cow (before extraordinary item) 132 ,000 Income before extraordinary item 732 ,000 Extraordinary loss (net of tax effect) 12 ,000 Net income $ 720 ,000 Solution E2 - 14 1 Income from Wat for 20 12 Equity in income ($108,000 - $8,000 preferred)  40% $ 40,000 2 Investment in Wat December 31, 20 12 Cost of investment in Wat common $ 290,000 Add: Income from Wat 40,000

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    2 - 10 Stock Investments — Investor Accounting and Reporting Less: Dividends * ($40,000 x 40%) (16,000 ) Investment in Wat December 31 $ 314,000 * $48,000 to t al dividends less $8,000 preferred dividend

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    Chapter 2 2 - 11 Solution E2 - 15 December 31, 2012: Total fair value of Sel $320,000 Fair value of identifiable assets(net) $250,000 Implied fair value of goodwill $70,000 Goodwill carrying value $100,000 Goodwill implied fair value $ 70,000 Impairment loss $30,000 T he $ 3 0,000 impairment loss is deducted in calculating Par’s income from continuing operations. Solution E2 - 16 Goodwill impairments are calculated at the business reporting unit level. Increases and decreases in fair values across business units are not offsetting. Flash must report an impairment loss of $5,000 in calculating 20 12 income from continuing operations. The calculation follows: Carrying value of goodwill $35,000 Estimated value of goodwill 30,000 Impairment loss $5,000 SOLUTIONS TO PROBLEMS Solution P2 - 1 1 Goodwill Cost of investment in Tel on April 1 $ 1,372 ,000 Book value acquired: Net assets at December 31 $ 4 ,000,000 Add: Income for 1/4 year ($ 48 0,000  25%) 12 0,000 Less: Dividends paid March 15 ( 8 0,000 ) Book value at April 1 4 ,0 4 0,000 Interest acquired 30 % 1,212 ,000 Goodwill from investment in Tel $ 16 0,000 2 Income from Tel for 20 11 Equity in income before extraordinary item ($ 48 0,000  3/4 year  30%) $ 108 ,000 Extraordinary gain from Tel ($ 16 0,000  30%) 48 ,000 3 Investment in Tel at December 31, 20 11 Investment cost April 1 $ 1,372 ,000 Add: Income from Tel plus extraordinary gain 156 ,000 Less: Dividends ($ 8 0,000  3 quarters)  30% ( 72 ,000 ) Investment in Tel December 31 $ 1,456 ,000 4 Equity in Tel’s net assets at December 31, 20 11 Tel’s stockholders’ equity January 1 $ 4 ,000,000 Add: Net income 64 0,000 Less: Dividends ( 32 0,000 ) Tel’s stockholders’ equity December 31 4 , 32 0,000 Investment interest 30 % Equity in Tel’s net assets $ 1,296 ,000

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    2 - 12 Stock Investments — Investor Accounting and Reporting 5 Extraordinary gain for 20 11 to be reported by Rit Tel’s extraordinary gain  30% $ 48 ,000 Solution P2 - 2 1 Cost method Investment in Sel July 1, 20 11 (at cost) $ 22 0,000 Dividends charged to investment ( 2,4 00 ) Investment in Sel balance at December 31, 20 11 $ 21 7 , 6 00 July 1, 20 11 Investment in Sel 22 0,000 Cash 22 0,000 To record initial investment for 80% interest. November 1, 20 11 Cash 6 , 4 00 Dividend income 6 , 4 00 To record receipt of dividends ( $ 8 ,000  80%). December 31, 20 11 Dividend income 2,40 0 Investment in Sel 2,4 00 To reduce investment for dividends in excess of earnings ( $ 6,400 dividends - $ 4 ,000 earnings) . 2 Equity method Investment in Sel July 1, 20 11 $ 22 0,000 Add: Share of reported income 4 ,000 Deduct: Dividends charged to investment ( 6,4 00) Deduct: Excess Depreciation ( 6 , 6 00 ) Investment in Sel balance at December 31, 20 11 $ 21 1 ,0 00 July 1, 20 11 Investment in Sel 22 0,000 Cash 22 0,000 To record initial investment for 80% interest of Sel. November 1, 20 11 Cash 6,4 00 Investment in Sel 6,4 00 To record receipt of dividends ($ 8 ,000  80%). December 31, 20 11 Loss from Sel (Income from Sel) 2 , 6 00 In vestment in Sel 2,6 00 To record loss from Sel computed as follows: Share of Sel’s income ($ 1 0,000  1/2 year  80%) less excess depreciation ($ 132 ,000/10 years  1/2 year).

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    Chapter 2 2 - 13 Solution P2 - 3 Preliminary computations Cost of investment in Zel $331,000 Book value acquired ($1,000,000  30%) 300,000 Excess cost over book value $ 31,000 Excess allocated Undervalued inventories ($30,000  30%) $ 9,000 Overvalued building ( - $60,000  30%) (18,000) Goodwill for the remainder 40,000 Excess cost over book value $ 31,000 1 Income from Zel Share of Zel’s reported income ($100,000  30%) $ 30,000 Less: Excess allocated to inventories sold in 20 11 (9,000) Add: Amortization of excess allocated to overvalued building $18,000/10 years 1,800 Income from Zel — 20 11 $ 22,800 2 Investment balance December 31, 20 11 Cost of investment $331,000 Add: Income from Zel 22,800 Less: Share of Zel’s dividends ($50,000  30%) (15,000 ) Investment in Zel balance December 31 $338,800 3 Vat’s share of Zel’s net assets Share of stockholders’ equity ($1,000,000 + $100,000 income - $50,000 dividends)  30% $315,000

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    2 - 14 Stock Investments — Investor Accounting and Reporting Solution P2 - 4 Preliminary computations Investment cost of 40% interest $380,000 Book value acquired [$500,000 + ($100,000  1/2 year)]  40% 220,000 Excess cost over book value $160,000 Excess allocated Land $30,000  40% $ 12,000 Equipment $50,000  40% 20,000 Remainder to goodwill 128,000 Excess cost over book value $160,000 July 1, 20 11 Investment in Jill 380,000 Cash 380,000 To record initial investment for 40% interest in Jill . November 20 11 Cash (other receivables) 20,000 Investment in Jill 20,000 To record receipt of dividends ($50,000  40%). December 31, 20 11 Investment in Jill 20,000 Income from Jill 20,000 To record share of Jill ’s income ($100,000  1/2 year  40%). December 31, 20 11 Income from Jill 2,000 Investment in Jill 2,000 To record depreciation on excess allocated to U ndervalued equipment ($20,000/5 years  1/2 year).

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