Solution Manual For Advanced Accounting, 11th Edition

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Chapter 1BUSINESS COMBINATIONSAnswers to Questions1A business combination is a union of business entities in which two or more previously separate andindependent companies are brought under the control of a single management team.Three situationsestablish the control necessary for a business combination, namely, when one or more corporations becomesubsidiaries, when one company transfers its net assets to another, and when each combining companytransfers its net assets to a newly formed corporation.2The dissolution of all but one of the separate legal entities isnotnecessary for a business combination. Anexample of one form of business combination in which the separate legal entities are not dissolved is whenone corporation becomes a subsidiary of another. In the case of a parent-subsidiary relationship, eachcombining company continues to exist as a separate legal entity even though both companies are under thecontrol of a single management team.3A business combination occurs when two or more previously separate and independent companies arebrought under the control of a single management team. Merger and consolidation in a generic sense arefrequently used as synonyms for the termbusiness combination. In a technical sense, however, amergerisa type of business combination in which all but one of the combining entities are dissolved and aconsolidationis a type of business combination in which a new corporation is formed to take over theassets of two or more previously separate companies and all of the combining companies are dissolved.4Goodwill arises in a business combination accounted for under theacquisitionmethod when the cost of theinvestment (fair value of the consideration transferred) exceeds the fair value of identifiable net assetsacquired. UnderGAAP, goodwill is notamortized for financial reporting purposes and will have no effecton net income, unless the goodwill is deemed to be impaired. If goodwill is impaired, a loss will berecognized.5A bargain purchase occurs when the acquisition price is less than the fair value of the identifiable net assetsacquired. The acquirer records the gain from a bargain purchase asan ordinary gainduring the period of theacquisition.The gain equals the difference between the investment cost and the fair value of theidentifiable net assets acquired.

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1-2Business CombinationsSOLUTIONSTOEXERCISESSolutionE1-11a2b3a4dSolutionE1-2[AICPAadapted]1aPlantandequipmentshouldberecordedatthe$220,000fairvalue.2cInvestmentcost$1,600,000Less:FairvalueofnetassetsCash$160,000Inventory380,000Propertyandequipment—net1,120,000Liabilities(360,000)1,300,000Goodwill$300,000SolutionE1-3Stockholders’equity—PalCorporationonJanuary2Capitalstock,$10par,600,000sharesoutstanding$6,000,000Otherpaid-incapital[$400,000+$3,000,000–$10,000]3,390,000Retainedearnings[$1,200,000-$20,000]1,180,000Totalstockholders’equity$10,570,000EntrytorecordcombinationInvestmentinSip6,000,000Capitalstock,$10par3,000,000Otherpaid-incapital3,000,000Investmentexpense20,000Otherpaid-incapital10,000Cash30,000Check:Netassetsperbooks(bookvalue)$7,600,000Goodwillandwrite-upassets3,000,000Less:Expenseofdirectcosts(20,000)Less:Issuanceofstock(10,000)$10,570,000

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Chapter 11-3

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1-4Business CombinationsSolutionE1-4JournalentriesonPan’sbookstorecordtheacquisitionInvestmentinSet10,200,000Commonstock,$10par4,800,000Additionalpaid-incapital5,400,000Torecordissuanceof480,000sharesof$10parcommonstockwithafairvalueof$10,200,000forthecommonstockofSetinabusinesscombination.Additionalpaid-incapital60,000Investmentexpenses100,000Salaryandoverheadexpenses80,000Otherassetsorcash240,000Torecordcostsofregisteringandissuingsecuritiesasareductionofpaid-incapital,andrecorddirectandindirectcostsofcombinationasexpenses.Currentassets4,400,000Plantassets8,800,000Liabilities1,200,000InvestmentinSetGainfrombargainpurchase10,200,0001,800,000Torecordallocationofthe$10,200,000costofSetCompanytoidentifiableassetsandliabilitiesaccordingtotheirfairvaluesandthegainfromthebargainpurchase.Thegainfrombargainpurchaseiscomputedasfollows:Cost$10,200,000Fairvalueofnetassetsacquired12,000,000Bargainpurchaseamount$1,800,000

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Chapter 11-5SolutionE1-5JournalentriesonthebooksofPanCorporationtorecordmergerwithSisCorporationInvestmentinSis1,060,000Commonstock,$10par360,000Additionalpaid-incapital300,000Cash400,000Torecordissuanceof36,000commonsharesandpaymentofcashintheacquisitionofSisCorporationinamerger.Investmentexpenses140,000Additionalpaid-incapital60,000Cash200,000Torecordcostsofregisteringandissuingsecuritiesandadditionaldirectcostsofcombination.Cash80,000Inventories200,000Othercurrentassets40,000Plantassets—net560,000Goodwill320,000Currentliabilities60,000Otherliabilities80,000InvestmentinSis1,060,000Torecordallocationofcosttoassetsreceivedandliabilitiesassumedonthebasisoftheirfairvaluesandtogoodwillcomputedasfollows:Costofinvestment$1,060,000Fairvalueofnetassetsacquired740,000Goodwill$320,000

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1-6Business CombinationsSOLUTIONSTOPROBLEMSSolutionP1-1PreliminarycomputationsFairValue:CostofinvestmentinSanatJanuary2(60,000shares$40)$2,400,000Bookvalueofnetassets($2,000,000-$240,000)(1,760,000)Excessfairvalueoverbookvalue$640,000Excessassignedto:Currentassets$160,000Remaindertogoodwill480,000Excessfairvalueoverbookvalue$640,000Note:$100,000directcostsofcombinationareexpensed.TheexcessfairvalueofPin’sbuildingsisnotconsidered.PinCorporationBalanceSheetatJanuary2,2011AssetsCurrentassets($520,000+$240,000+$160,000excess-$160,000directcosts)$760,000Land($200,000+$400,000)600,000Buildings—net($1,200,000+$400,000)1,600,000Equipment—net($880,000+$960,000)1,840,000Goodwill480,000Totalassets$5,280,000LiabilitiesandStockholders’EquityCurrentliabilities($200,000+$240,000)$440,000Capitalstock,$10par($2,000,000+$600,000newissue)2,600,000Additionalpaid-incapital[$200,000+($3060,000shares)—$60,000costsofissuingandregisteringsecurities]1,940,000Retainedearnings(subtract$100,000expenseddirectcost)300,000Totalliabilitiesandstockholders’equity$5,280,000

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Chapter 11-7

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1-8Business CombinationsSolutionP1-2PreliminarycomputationsFairValue:CostofacquiringSea$1,650,000Fairvalueofassetsacquiredandliabilitiesassumed1,340,000GoodwillfromacquisitionofSea$310,000PetCorporationBalanceSheetatJanuary2,2011AssetsCurrentassetsCash[$300,000+$60,000-$280,000expensespaid]$80,000Accountsreceivable—net[$460,000+$80,000fairvalue]540,000Inventories[$1,040,000+$240,000fairvalue]1,280,000PlantassetsLand[$800,000+$300,000fairvalue]1,100,000Buildings—net[$2,000,000+$600,000fairvalue]2,600,000Equipment—net[$1,000,000+$500,000fairvalue]1,500,000Goodwill310,000Totalassets$7,410,000LiabilitiesandStockholders’EquityLiabilitiesAccountspayable[$600,000+$80,000]$680,000Notepayable[$1,200,000+$360,000fairvalue]1,560,000Stockholders’equityCapitalstock,$10par[$1,600,000+(66,000shares$10)]2,260,000Otherpaid-incapital[$1,200,000-$80,000+($1,650,000-$660,000)]2,110,000Retainedearnings(subtract$200,000expenseddirectcosts)800,000Totalliabilitiesandstockholders’equity$7,410,000

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Chapter 11-9SolutionP1-3Parissues25,000sharesofstockforSin’soutstandingshares1aInvestmentinSin1,500,000Capitalstock,$10par250,000Additionalpaid-incapital1,250,000Torecordissuanceof25,000,$10parshareswithamarketpriceof$60pershareinabusinesscombinationwithSin.Investmentexpenses60,000Additionalpaid-incapital40,000Cash100,000TorecordcostsofcombinationinabusinesscombinationwithSin.Cash20,000Inventories120,000Othercurrentassets200,000Land200,000Plantandequipment—net700,000Goodwill360,000Liabilities100,000InvestmentinSin1,500,000Toassigninvestmentcosttoidentifiableassetsandliabilitiesaccordingtotheirfairvaluesandtheremaindertogoodwill.Goodwilliscomputed:$1,500,000cost-$1,140,000fairvalueofnetassetsacquired.1bParCorporationBalanceSheetJanuary2,2011(afterbusinesscombination)AssetsCash[$240,000+$20,000-$100,000]$160,000Inventories[$100,000+$120,000]220,000Othercurrentassets[$200,000+$200,000]400,000Land[$160,000+$200,000]360,000Plantandequipment—net[$1,300,000+$700,000]2,000,000Goodwill360,000Totalassets$3,500,000LiabilitiesandStockholders’EquityLiabilities[$400,000+$100,000]$500,000Capitalstock,$10par[$1,000,000+$250,000]1,250,000Additionalpaid-incapital[$400,000+$1,250,000-$40,000]1,610,000Retainedearnings(subtract$60,000directcosts)140,000Totalliabilitiesandstockholders’equity$3,500,000

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1-10Business CombinationsSolutionP1-3(continued)Parissues15,000sharesofstockforSin’soutstandingshares2aInvestmentinSin(15,000shares$60)900,000Capitalstock,$10par150,000Additionalpaid-incapital750,000Torecordissuanceof15,000,$10parcommonshareswithamarketpriceof$60pershare.Investmentexpense60,000Additionalpaid-incapital40,000Cash100,000TorecordcostsofcombinationintheacquisitionofSin.Cash20,000Inventories120,000Othercurrentassets200,000Land200,000Plantandequipment—net700,000Liabilities100,000InvestmentinSinGainonbargainpurchase900,000240,000TorecordSin’snetassetsatfairvaluesandgainonbargainpurchase.Fairvalueofnetassetsacquired$1,140,000Investmentcost(Fairvalueofconsideration)900,000GainonBargainPurchase$240,0002bParCorporationBalanceSheetJanuary2,2011(afterbusinesscombination)AssetsCash[$240,000+$20,000-$100,000]$160,000Inventories[$100,000+$120,000]220,000Othercurrentassets[$200,000+$200,000]400,000Land[$160,000+$200,000]360,000Plantandequipment—net[$1,300,000+$700,000]2,000,000Totalassets$3,140,000Liabilitiesandstockholders’equityLiabilities[$400,000+$100,000]$500,000Capitalstock,$10par[$1,000,000+$150,000]1,150,000Additionalpaid-incapital[$400,000+$750,000-$40,000]1,110,000Retainedearnings(subtract$60,000directcostsandadd$240,000Gainfrombargainpurchase)380,000Totalliabilitiesandstockholders’equity$3,140,000

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Chapter 11-11SolutionP1-41ScheduletoallocateinvestmentcosttoassetsandliabilitiesInvestmentcost(fairvalue),January1$300,000FairvalueacquiredfromSun($360,000100%)360,000Excessfairvalueovercost(bargainpurchasegain)$60,000Allocation:AllocationCash$10,000Receivables—net20,000Inventories30,000Land100,000Buildings—net150,000Equipment—net150,000Accountspayable(30,000)Otherliabilities(70,000)Gainonbargainpurchase(60,000)Totals$300,0002PubCorporationBalanceSheetatJanuary1,2011(aftercombination)AssetsLiabilitiesCash$25,000Accountspayable$120,000Receivables—net60,000Notepayable(5years)200,000Inventories150,000Otherliabilities170,000Land145,000Liabilities490,000Buildings—net350,000Equipment—net330,000Stockholders’EquityCapitalstock,$10par300,000Otherpaid-incapital100,000Retainedearnings*170,000Stockholders’equity570,000Totalassets$1,060,000Totalequities$1,060,000*Retainedearningsreflectsthe$60,000gainonthebargainpurchase.

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1-12Business CombinationsSolutionP1-51JournalentriestorecordtheacquisitionofSawCorporationInvestmentinSaw5,000,000Capitalstock,$10par1,000,000Otherpaid-incapital3,000,000Cash1,000,000TorecordacquisitionofSawfor100,000sharesofcommonstockand$1,000,000cash.Investmentexpense200,000Otherpaid-incapital100,000Cash300,000Torecordpaymentofcoststoregisterandissuethesharesofstock($100,000)andothercostsofcombination($200,000).Cash480,000Accountsreceivable720,000Notesreceivable600,000Inventories1,000,000Othercurrentassets400,000Land400,000Buildings2,400,000Equipment1,200,000Accountspayable600,000Mortgagepayable,10%1,200,000InvestmentinSawGainonbargainpurchase5,000,000200,000TorecordthenetassetsofSawatfairvalueandgainonbargainpurchase.GainonBargainPurchaseCalculationAcquisitionprice$5,000,000Fairvalueofnetassetsacquired5,400,000Gainonbargainpurchase$400,000

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Chapter 11-13SolutionP1-5(continued)2PatCorporationBalanceSheetatJanuary2,2011(afterbusinesscombination)AssetsCurrentAssetsCash$5,180,000Accountsreceivable—net3,320,000Notesreceivable—net3,600,000Inventories6,000,000Othercurrentassets1,800,000$19,900,000PlantAssetsLand$4,400,000Buildings—net20,400,000Equipment—net21,200,00046,000,000Totalassets$65,900,000LiabilitiesandStockholders’EquityLiabilitiesAccountspayable$2,600,000Mortgagepayable,10%11,200,000$13,800,000Stockholders’EquityCapitalstock,$10par$21,000,000Otherpaid-incapital18,900,000Retainedearnings*12,200,00052,100,000Totalliabilitiesandstockholders’equity$65,900,000*Subtract$200,000directcombinationcostsandadd$400,000gainonbargainpurchase.

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1-14Business CombinationsRESEARCHCASEResearchCaseRequirement1(Amounts in millions)Investment in Target (1 Billion x $50)50,000Common Stock (1 Billion x $0.10)100Capital in Excess of Par Value49,900Cash and Cash Equivalents2,200Credit Card Receivables6,966Inventory7,897Other Current Assets2,079Land6,952Buildings and Improvements26,582Fixtures and Equipment5,692Computer Hardware and Software3,090Construction in Progress502Other Noncurrent Assets829Accumulated Other ComprehensiveLoss581Goodwill26,301Accumulated Depreciation10,485Accounts Payable6,511Accrued and Other Current Liabilities3,120Unsecured Debt and OtherBorrowings(short-term)796Nonrecourse Debt Collaterized by CreditCard Receivables(short-term)900Unsecured Debt and OtherBorrowings(long-term)10,643Nonrecourse Debt Collaterized by CreditCard Receivables(long-term)4,475Deferred Income Taxes835Other Noncurrent Liabilities1,906Investment in Target50,000

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Chapter 11-15Requirement2(Amounts in millions)Wal-MartTargetTotalAssetsCurrent Assets:Cash and Cash Equivalents$7,907$2,200$10,107Receivables, net4,1446,96611,110Inventories33,1607,89741,057Prepaid Expenses and Other2,9802,0795,059Current Assets of Discontinued Operations140140Total Current Assets$48,331$19,142$67,473Property and Equipment:Land$22,591$6,952$29,543Buildings and Improvements77,45226,582104,034Fixtures and Equipment35,4505,69241,142Transportation Equipment2,3552,355Computer Hardware and Software3,0903,090Construction in Progress502502Total Property and Equipment137,84842,818180,666Less Accumulated Depreciation-38,304-10,485-48,789Property and Equipment, Net$99,544$32,333$131,877Property Under Capital Leases:Property Under Capital Leases$5,669$5,669Less Accumulated Amortization-2,906-2,906Property Under Capital Leases, Net$2,763$2,763Goodwill(16,126 + 26,301)$16,126$42,427Other Assets and Deferred Charges3,9428294,771Total Assets$170,706$249,311

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1-16Business CombinationsLiabilities and Stockholders’ EquityCurrent Liabilities:Short-term Borrowings$523$523Accounts Payable30,451$6,51136,962Accrued Liabilities18,7343,12021,854Accured Income Taxes1,3651,365Long-term Debt Due Within One Year4,0504,050Obligations Under Capital Leases DueWithin One Year346346Current Liabilities of DiscontinuedOperations9292Unsecured debt and Other Borrowings796796Nonrecourse Debt Collaterized by CreditCard Receivables900900Total Current Liabilities$55,561$11,327$66,888Long-term Liabilities:Long-Term Debt$33,231$33,231Long-Term Obligations Under CapitalLeases3,1703,170Deferred Income Taxes and other5,508$8356,343Unsecured Debt and Other Borrowings10,64310,643Nonrecourse Debt Collaterized by CreditCard Receivables4,4754,475Other Noncurrent Liabilities1,9061,906Redeemable Noncontrolling Interest307307Total Long-Term Liabilities$42,216$17,859$60,075Stockholders' EquityPreferred StockCommon Stock(100 + 378)$478Capital in Excess of Par Value(3,803+49,900)53,703Retained Earnings66,638Accumulated Other Comprehensive Loss(70 + 581)-651Total Stockholders' Equity120,168Noncontrolling Interest2,180Total Stockholders' Equity122,348Total Liabilities and Stockholders' Equity$249,311

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Chapter 2STOCK INVESTMENTS—INVESTOR ACCOUNTING AND REPORTINGAnswers to Questions1Only 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 theinvestee. The investor records the investment at its cost and the investee adjusts its asset and owners’ equityaccounts to reflect the issuance of previously unissued stock.2Goodwill arising from an equity investment of 20 percent or more is not recorded separately from theinvestment account. Under the equity method, the investment is presented on one line of the balance sheetin accordance with the one-line consolidation concept.3Dividends received from earnings accumulated before an investment is acquired are treated as decreases inthe investment account balance under the fair value/cost method. Such dividends are considered a return ofa part of the original investment.4The equity method of accounting for investments increases the investment account for the investor’s shareof the investee’s income and decreases it for the investor’s share of the investee’s losses and for dividendsreceived from the investee. In addition, the investment and investment income accounts are adjusted foramortization of any investment cost-book value differentials related to the interest acquired. Adjustments tothe investment and investment income accounts are also needed for unrealized profits and losses fromtransactions between the investor and investee companies.A fair value adjustment is optional under SFASNo. 159.5The equity method is referred to as a one-line consolidation because the investment account is reported onone line of the investor’s balance sheet and investment income is reported on one line of the investor’sincomestatement(exceptwhentheinvesteehasextraordinarygains/lossesorgains/lossesfromdiscontinued operations). In addition, the investment income is computed such that the parent company’sincome 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.6If the equity method of accounting is applied correctly, the income of the parent company will generallyequalthe controlling interest share ofconsolidated net income.If the subsidiary is 100% owned by theparent, the parent’s net income under the equity method will equal the consolidated net income of theparent and it’s subsidiary.7The difference in the equity method and consolidation lies in the detail reported, but not in the amount ofincome reported. The equity method reports investment income on one line of the income statementwhereas the details of revenues and expenses are reported in the consolidated income statement.8The investment account balance of the investor will equal underlying book value of the investee if (a) theequity method is correctly applied, (b) the investment was acquired at book value which was equal to fairvalue, the pooling method was used, or the cost-book value differentials have all been amortizedor writtenoff as impairment losses, and (c) there have been no intercompany transactions between the affiliatedcompanies that have created investment account-book value differences.9The investment account balance must be converted from the cost to the equity method when acquisitionsincrease the interest held to 20 percent or more. The amount of the adjustment is the difference between theinvestment income reported under the cost method in prior years and the income that would have beenreported if the equity method of accounting had been used.The offsetting account in the journal entry isRetained Earnings.Changes from the cost to the equity method of accounting for equity investments are

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2-2Stock Investments—Investor Accounting and Reportingchanges in the reporting entity that require restatement of prior years’ financial statements when the effectis material.10The one-line consolidation is adjusted when the investee’s income includes extraordinary itemsorgains orlosses from discontinued operations. In this case, the investor’s share of the investee’s ordinary income isreported as investment income under a one-line consolidation, but the investor’s share of extraordinaryitems, and gains and losses from discontinued operations is combined with similar items of the investor.11The remaining 15 percent interest in the investee is accounted for under the fair value/cost method, and theinvestment account balance immediately after the sale becomes the new cost basis.12Yes. When an investee has preferred stock in its capital structure, the investor has to allocate the investee’sincome to preferred and common stockholders. Then, the investor takes up its share of the investee’sincome allocated to common stockholders in applying the equity method. The allocation is not necessarywhen the investee has only common stock outstanding.13Goodwill impairment losses are calculated by business reporting units. For each reporting unit, thecompany must first determine the fair values of net assets. The fair value of the reporting unit is the amountat 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 doneto originally record a combination. Any excess measured fair valueover identifiable assets and liabilitiesistheimpliedfair value of goodwill. The company then compares theimpliedgoodwill fair value to thecarrying value of goodwill to determine if there has been an impairmentlossduring the period.If thecarrying value exceeds the implied fair value, an impairment loss equal to the difference is recognized.14Yes.Goodwill impairment 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 mayrecognize impairmentlossesfor equity method investments as a whole, but perform no separate impairmenttests for goodwill associated with an equity method investment.SOLUTIONSTOEXERCISESSolutionE2-11d2c3c4d5bSolutionE2-2[AICPAadapted]1d2b3d4bGar’sinvestmentisreportedatits$600,000costbecausetheequitymethodisnotappropriateandbecauseGar’sshareofMed’sincomeexceedsdividendsreceivedsinceacquisition[($520,00015%)>$40,000].

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Chapter 22-35cDividendsreceivedfromZefforthetwoyearswere$10,500($70,00015%-allin2012),butonly$9,000(15%ofZef’sincomeof$60,000forthetwoyears)canbeshownonTwo’sincomestatementasdividendincomefromtheZefinvestment.Theremaining$1,500reducestheinvestmentaccountbalance.6c[$100,000+$300,000+($600,00010%)]7a8dInvestmentbalanceJanuary2$250,000Add:IncomefromPod($100,00030%)30,000InvestmentinPodDecember31$280,000SolutionE2-31Bow’spercentageownershipinTreBow’s20,000shares/(60,000+20,000)shares=25%2GoodwillInvestmentcost$500,000Bookvalue($1,000,000+$500,000)25%(375,000)Goodwill$125,000SolutionE2-4IncomefromMedfor2011ShareofMed’sincome($200,0001/2year30%)$30,000

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2-4Stock Investments—Investor Accounting and ReportingSolutionE2-51IncomefromOakShareofOak’sreportedincome($800,00030%)$240,000Less:Excessallocatedtoinventory(100,000)Less:Depreciationofexcessallocatedtobuilding($200,000/4years)(50,000)IncomefromOak$90,0002InvestmentaccountbalanceatDecember31CostofinvestmentinOak$2,000,000Add:IncomefromOak90,000Less:Dividends($200,000x30%)(60,000)InvestmentinOakDecember31$2,030,000AlternativesolutionUnderlyingequityinOakatJanuary1($1,500,000/.3)$5,000,000Incomelessdividends600,000UnderlyingequityDecember315,600,000Interestowned30%BookvalueofinterestownedDecember311,680,000Add:Unamortizedexcess350,000InvestmentinOakDecember31$2,030,000SolutionE2-6JournalentryonMan’sbooksInvestmentinNib($600,000x40%)240,000Lossfromdiscontinuedoperations40,000IncomefromNib280,000Torecognizeincomefrom40%investmentinNib.

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Chapter 22-5SolutionE2-71aDividendsreceivedfromBen($120,00015%)$18,000Shareofincomesinceacquisitionofinterest2011($20,00015%)(3,000)2012($80,00015%)(12,000)Excessdividendsreceivedovershareofincome$3,000InvestmentinBenJanuary3,2011$50,000Less:Excessdividendsreceivedovershareofincome(3,000)InvestmentinBenDecember31,2012$47,0002bCostof10,000of40,000sharesoutstanding$1,400,000Bookvalueof25%interestacquired($4,000,000stockholders’equityatDecember31,2011+$1,400,000fromadditionalstockissuance)25%1,350,000Excesscostoverbookvalue(goodwill)$50,0003dTheinvestmentinMoebalanceremainsattheoriginalcost.4cIncomebeforeextraordinaryitem$200,000Percentowned40%IncomefromKazProducts$80,000SolutionE2-8PreliminarycomputationsCostof40%interestJanuary1,2011$2,400,000Bookvalueacquired($4,000,00040%)(1,600,000)Excesscostoverbookvalue$800,000ExcessallocatedtoInventories$100,00040%$40,000Equipment$200,00040%80,000Goodwillfortheremainder680,000Excesscostoverbookvalue$800,000Ray’sunderlyingequityinTon($5,500,00040%)$2,200,000Add:Goodwill680,000InvestmentbalanceDecember31,2016$2,880,000AlternativecomputationRay’sshareofthechangeinTon’sstockholders’equity($1,500,00040%)$600,000Less:Excessallocatedtoinventories($40,000100%)(40,000)Less:Excessallocatedtoequipment($80,000/4years4years)(80,000)Increaseininvestmentaccount480,000Originalinvestment2,400,000InvestmentbalanceDecember31,2016$2,880,000

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2-6Stock Investments—Investor Accounting and ReportingSolutionE2-91IncomefromRunShareofincometocommon($400,000-$30,000preferreddividends)30%$111,0002InvestmentinRunDecember31,2012NOTE:The$50,000directcostsofacquiringtheinvestmentareapartofthecostoftheinvestment.Theyarechargedagainstadditionalpiad-incapital.Investmentcost$1,200,000Add:IncomefromRun111,000Less:DividendsfromRun($200,000dividends-$30,000dividendstopreferred)30%(51,000)InvestmentinRunDecember31,2012$1,260,000SolutionE2-101IncomefromTee($400,000–$300,000)25%InvestmentincomeOctober1toDecember31$25,0002InvestmentbalanceDecember31InvestmentcostOctober1$600,000Add:IncomefromTee25,000Less:Dividends---InvestmentinTeeatDecember31$625,000

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Chapter 22-7SolutionE2-11PreliminarycomputationsGoodwillfromfirst10%interest:Costofinvestment$25,000Bookvalueacquired($210,00010%)(21,000)Excesscostoverbookvalue$4,000Goodwillfromsecond10%interest:Costofinvestment$50,000Bookvalueacquired($250,00010%)(25,000)Excesscostoverbookvalue$25,0001CorrectingentryasofJanuary2,2012toconvertinvestmenttotheequitybasisUnrealizedgain/lossonavailable-for-salesecurities25,000Allowancetoadjustavailable-for-saleSecuritiestomarketvalue25,000ToremovethevaluationallowanceenteredonDecember31,2011underthefairvaluemethodforanavailableforsalesecurity.InvestmentinFed4,000Retainedearnings4,000Toadjustinvestmentaccounttoanequitybasiscomputedasfollows:ShareofFed’sincomefor2011$10,000Less:Shareofdividendsfor2011(6,000)$4,0002IncomefromFedfor2012IncomefromFedonoriginal10%investment$5,000IncomefromFedonsecond10%investment5,000IncomefromFed$10,000

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2-8Stock Investments—Investor Accounting and ReportingSolutionE2-12PreliminarycomputationsStockholders’equityofTalonDecember31,2011$380,000Saleof12,000previouslyunissuedsharesonJanuary1,2012250,000Stockholders’equityafterissuanceonJanuary1,2012$630,000Costof12,000sharestoRiv$250,000Bookvalueof12,000sharesacquired$630,00012,000/36,000shares210,000Excesscostoverbookvalue$40,000ExcessisallocatedasfollowsBuildings$60,00012,000/36,000shares$20,000Goodwill20,000Excesscostoverbookvalue$40,000JournalentriesonRiv’sbooksduring2012January1InvestmentinTal250,000Cash250,000Torecordacquisitionofa1/3interestinTal.During2012Cash30,000InvestmentinTal30,000TorecorddividendsreceivedfromTal($90,0001/3).December31InvestmentinTal38,000IncomefromTal38,000TorecordinvestmentincomefromTalcomputedasfollows:ShareofTal’sincome($120,0001/3)$40,000Depreciationonbuilding($20,000/10years)(2,000)IncomefromTal$38,000

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Chapter 22-9SolutionE2-131JournalentriesonBIP’sbooksfor2012Cash60,000InvestmentinCow(30%)60,000TorecorddividendsreceivedfromCow($200,00030%).InvestmentinCow(30%)120,000Extraordinaryloss(fromCow)12,000IncomefromCow132,000TorecordinvestmentincomefromCowcomputedasfollows:Shareofincomebeforeextraordinaryitem$340,00030%$102,000Add:Excessfairvalueovercostrealizedin2012$100,00030%30,000IncomefromCowbeforeextraordinaryloss$132,0002InvestmentinCowbalanceDecember31,2012Investmentcost$390,000Add:IncomefromCowafterextraordinaryloss120,000Less:DividendsreceivedfromCow(60,000)InvestmentinCowDecember31$450,000Check:Investmentbalanceisequaltounderlyingbookvalue($1,400,000+$300,000-$200,000)30%=$450,0003BIPCorporationIncomeStatementfortheyearendedDecember31,2012Sales$2,000,000Expenses1,400,000Operatingincome600,000IncomefromCow(beforeextraordinaryitem)132,000Incomebeforeextraordinaryitem732,000Extraordinaryloss(netoftaxeffect)12,000Netincome$720,000SolutionE2-141IncomefromWatfor2012Equityinincome($108,000-$8,000preferred)40%$40,0002InvestmentinWatDecember31,2012CostofinvestmentinWatcommon$290,000Add:IncomefromWat40,000

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2-10Stock Investments—Investor Accounting and ReportingLess:Dividends*($40,000x40%)(16,000)InvestmentinWatDecember31$314,000*$48,000totaldividendsless$8,000preferreddividend

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Chapter 22-11SolutionE2-15December31,2012:TotalfairvalueofSel$320,000Fairvalueofidentifiableassets(net)$250,000Impliedfairvalueofgoodwill$70,000Goodwillcarryingvalue$100,000Goodwillimpliedfairvalue$70,000Impairmentloss$30,000The$30,000impairmentlossisdeductedincalculatingPar’sincomefromcontinuingoperations.SolutionE2-16Goodwillimpairmentsarecalculatedatthebusinessreportingunitlevel.Increasesanddecreasesinfairvaluesacrossbusinessunitsarenotoffsetting.Flashmustreportanimpairmentlossof$5,000incalculating2012incomefromcontinuingoperations.Thecalculationfollows:Carryingvalueofgoodwill$35,000Estimatedvalueofgoodwill30,000Impairmentloss$5,000SOLUTIONSTOPROBLEMSSolutionP2-11GoodwillCostofinvestmentinTelonApril1$1,372,000Bookvalueacquired:NetassetsatDecember31$4,000,000Add:Incomefor1/4year($480,00025%)120,000Less:DividendspaidMarch15(80,000)BookvalueatApril14,040,000Interestacquired30%1,212,000GoodwillfrominvestmentinTel$160,0002IncomefromTelfor2011Equityinincomebeforeextraordinaryitem($480,0003/4year30%)$108,000ExtraordinarygainfromTel($160,00030%)48,0003InvestmentinTelatDecember31,2011InvestmentcostApril1$1,372,000Add:IncomefromTelplusextraordinarygain156,000Less:Dividends($80,0003quarters)30%(72,000)InvestmentinTelDecember31$1,456,0004EquityinTel’snetassetsatDecember31,2011Tel’sstockholders’equityJanuary1$4,000,000Add:Netincome640,000Less:Dividends(320,000)Tel’sstockholders’equityDecember314,320,000Investmentinterest30%EquityinTel’snetassets$1,296,000

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2-12Stock Investments—Investor Accounting and Reporting5Extraordinarygainfor2011tobereportedbyRitTel’sextraordinarygain30%$48,000SolutionP2-21CostmethodInvestmentinSelJuly1,2011(atcost)$220,000Dividendschargedtoinvestment(2,400)InvestmentinSelbalanceatDecember31,2011$217,600July1,2011InvestmentinSel220,000Cash220,000Torecordinitialinvestmentfor80%interest.November1,2011Cash6,400Dividendincome6,400Torecordreceiptofdividends($8,00080%).December31,2011Dividendincome2,400InvestmentinSel2,400Toreduceinvestmentfordividendsinexcessofearnings($6,400dividends-$4,000earnings).2EquitymethodInvestmentinSelJuly1,2011$220,000Add:Shareofreportedincome4,000Deduct:Dividendschargedtoinvestment(6,400)Deduct:ExcessDepreciation(6,600)InvestmentinSelbalanceatDecember31,2011$211,000July1,2011InvestmentinSel220,000Cash220,000Torecordinitialinvestmentfor80%interestofSel.November1,2011Cash6,400InvestmentinSel6,400Torecordreceiptofdividends($8,00080%).December31,2011LossfromSel(IncomefromSel)2,600InvestmentinSel2,600TorecordlossfromSelcomputedasfollows:ShareofSel’sincome($10,0001/2year80%)lessexcessdepreciation($132,000/10years1/2year).

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Chapter 22-13SolutionP2-3PreliminarycomputationsCostofinvestmentinZel$331,000Bookvalueacquired($1,000,00030%)300,000Excesscostoverbookvalue$31,000ExcessallocatedUndervaluedinventories($30,00030%)$9,000Overvaluedbuilding(-$60,00030%)(18,000)Goodwillfortheremainder40,000Excesscostoverbookvalue$31,0001IncomefromZelShareofZel’sreportedincome($100,00030%)$30,000Less:Excessallocatedtoinventoriessoldin2011(9,000)Add:Amortizationofexcessallocatedtoovervaluedbuilding$18,000/10years1,800IncomefromZel—2011$22,8002InvestmentbalanceDecember31,2011Costofinvestment$331,000Add:IncomefromZel22,800Less:ShareofZel’sdividends($50,00030%)(15,000)InvestmentinZelbalanceDecember31$338,8003Vat’sshareofZel’snetassetsShareofstockholders’equity($1,000,000+$100,000income-$50,000dividends)30%$315,000

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2-14Stock Investments—Investor Accounting and ReportingSolutionP2-4PreliminarycomputationsInvestmentcostof40%interest$380,000Bookvalueacquired[$500,000+($100,0001/2year)]40%220,000Excesscostoverbookvalue$160,000ExcessallocatedLand$30,00040%$12,000Equipment$50,00040%20,000Remaindertogoodwill128,000Excesscostoverbookvalue$160,000July1,2011InvestmentinJill380,000Cash380,000Torecordinitialinvestmentfor40%interestinJill.November2011Cash(otherreceivables)20,000InvestmentinJill20,000Torecordreceiptofdividends($50,00040%).December31,2011InvestmentinJill20,000IncomefromJill20,000TorecordshareofJill’sincome($100,0001/2year40%).December31,2011IncomefromJill2,000InvestmentinJill2,000TorecorddepreciationonexcessallocatedtoUndervaluedequipment($20,000/5years1/2year).

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