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Problem 1-15 [LO3, LO4, LO7] complete solution correct answer key

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Problem 1-15 [LO3, LO4, LO7] complete solution correct answer key

 

On January 1, 2012, Alison, Inc., paid $72,000 for a 40 percent interest in Holister Corporation’s common stock. This investee had assets with a book value of $260,500 and liabilities of $115,500. A patent held by Holister having a $10,200 book value was actually worth $23,700. This patent had a six-year remaining life.  Any further excess cost associated with this acquisition was attributed to goodwill. During 2012, Holister earned income of $39,000 and paid dividends of $13,000. In 2013, it had income of $61,500 and dividends of $18,000. During 2013, the fair value of Allison’s investment in Holister had risen from $84,500 to $92,700.

 

a.

Assuming Alison uses the equity method, what balance should appear in the Investment in Holister account as of December 31, 2013?

 

  Investment in Holister

 $  

 

Problem 1-17 [LO1, LO2, LO3, LO4]

 

Waters, Inc., acquired 10 percent of Denton Corporation on January 1, 2012, for $310,500 although Denton’s book value on that date was $2,380,000. Denton held land that was undervalued by $185,000 on its accounting records. During 2012, Denton earned a net income of $280,000 while paying cash dividends of $105,000. On January 1, 2013, Waters purchased an additional 30 percent of Denton for $845,610. Denton’s land is still undervalued on that date, but then by $209,700. Any additional excess cost was attributable to a trademark with a 10-year life for the first purchase and a 9-year life for the second. The initial 10 percent investment had been maintained at cost because fair values were not readily available. The equity method will now be applied. During 2013, Denton reported income of $350,500 and distributed dividends of $131,000.

 

Prepare all of the 2013 journal entries for Waters.

 

General Journal  

     Debit

   Credit

  To record second acquisition of Denton stock.

 

 

  (Click to select)Equity Income-Investment in DentonDividendsInterest PayableRetained Earnings-Prior Period Adjustment-2012 Equity IncomeAccounts PayableAccounts ReceivableCashInvestment in Denton

  

 

       (Click to select)Investment in DentonCashAccounts ReceivableInterest PayableRetained Earnings-Prior Period Adjustment-2012 Equity IncomeDividendsAccounts PayableEquity Income-Investment in Denton

 

  

 

 

 

  To restate reported figures for 2012 to the equity method for comparability.

 

 

  (Click to select)Accounts PayableCashEquity Income-Investment in DentonInterest PayableAccounts ReceivableRetained Earnings-Prior Period Adjustment-2012 Equity IncomeInvestment in DentonDividends

 

 

       (Click to select)Accounts ReceivableInvestment in DentonCashEquity Income-Investment in DentonAccounts PayableInterest PayableRetained Earnings-Prior Period Adjustment-2012 Equity IncomeDividends

 

  

 

 

 

  To record income for the year.

 

 

  (Click to select)Investment in DentonAccounts ReceivableEquity Income-Investment in DentonDividendsRetained Earnings-Prior Period Adjustment-2012 Equity IncomeCashInterest PayableAccounts Payable

 

 

       (Click to select)Accounts ReceivableInterest PayableDividendsRetained Earnings-Prior Period Adjustment-2012 Equity IncomeCashInvestment in DentonEquity Income-Investment in DentonAccounts Payable

 

  

 

 

 

  To record collection of dividends from Denton.

 

 

  (Click to select)Retained Earnings-Prior Period Adjustment-2012 Equity IncomeInterest PayableAccounts ReceivableInvestment in DentonAccounts PayableCashDividendsEquity Income-Investment in Denton

 

 

       (Click to select)Investment in DentonAccounts ReceivableEquity Income-Investment in DentonInterest PayableDividendsRetained Earnings-Prior Period Adjustment-2012 Equity IncomeAccounts PayableCash

 

  

 

 

 

  To record amortization for 2013.

 

 

  (Click to select)Equity Income-Investment in DentonInvestment in DentonCashRetained Earnings-Prior Period Adjustment-2012 Equity IncomeAccounts ReceivableDividendsAccounts PayableInterest Payable

 

 

       (Click to select)Investment in DentonAccounts ReceivableCashRetained Earnings-Prior Period Adjustment-2012 Equity IncomeAccounts PayableDividendsEquity Income-Investment in DentonInterest Payable

 

  

 

Problem 1-20 [LO1, LO2, LO3]

 

On January 1, 2011, Monroe, Inc., purchased 17,600 shares of Brown Company for $580,800, giving Monroe 10 percent ownership of Brown. On January 1, 2012, Monroe purchased an additional 35,200 shares (20 percent) for $1,320,000. This latest purchase gave Monroe the ability to apply significant influence over Brown. The original 10 percent investment was categorized as an available-for-sale security. Any excess of cost over book value acquired for either investment was attributed solely to goodwill.

      Brown reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout these years.

 

 

Net Income

Cash Dividends
(paid quarterly)

2011

$377,000        

$170,000        

2012

594,000        

204,500        

2013

655,500        

251,000        

 

     On July 1, 2013, Monroe sells 3,520 shares of this investment for $52 per share, thus reducing its interest from 30 to 28 percent. However, the company retains the ability to significantly influence Brown. Using the equity method, what amounts appear in Monroe’s 2013 income statement? (Input all amounts as positive values. Do not round intermediate calculations. Round your answers to the nearest dollar amount.)

 

 

 

  As total income accrual (no unearned gains)

$  

  As (Click to select)gainloss on sale of shares

$  

 

Problem 1-24 [LO3, LO4, LO6]

 

Russell owns 30 percent of the outstanding stock of Thacker and has the ability to significantly influence the investee’s operations and decision making. On January 1, 2013, the balance in the Investment in Thacker account is $352,000. Amortization associated with this acquisition is $18,600 per year. In 2013, Thacker earns an income of $154,000 and pays cash dividends of $77,000. Previously, in 2012, Thacker had sold inventory costing $44,000 to Russell for $55,000. Russell consumed all but 25 percent of this merchandise during 2012 and used the rest during 2013. Thacker sold additional inventory costing $53,200 to Russell for $70,000 in 2013. Russell did not consume 40 percent of these 2013 purchases from Thacker until 2014.

 

a.

What amount of equity method income would Russell recognize in 2013 from its ownership interest in Thacker?

 

  Equity income

$  

 

b.

What is the equity method balance in the Investment in Thacker account at the end of 2013?

 

  Investment in Thacker

$  

 

 

Problem 1-25 [LO1, LO3, LO7]

 

On January 1, 2012, Allan acquires 15 percent of Bellevue’s outstanding common stock for $66,450. Allan classifies the investment as an available-for-sale security and records any unrealized holding gains or losses directly in owners’ equity. On January 1, 2013, Allan buys an additional 10 percent of Bellevue for $46,800, providing Allan the ability to significantly influence Bellevue’s decisions.

     During the next two years, the following information is available for Bellevue:

 

 

Income

Dividends

Common Stock
Fair Value (12/31)

  2012

$

118,000

 

$

68,000

 

$

482,000

 

  2013

 

157,200

 

 

87,600

 

 

540,800

 

 

In each purchase, Allan attributes any excess of cost over book value to Bellevue’s franchise agreements that had a remaining life of 10 years at January 1, 2012. Also at January 1, 2012, Bellevue reports a net book value of $283,000.

 

Assume Allan applies the equity method to its Investment in Bellevue account:

 

a-1.

On Allan’s December 31, 2013, balance sheet, what amount is reported for the Investment in Bellevue account?

 

  Investment in Bellevue

 $  

 

a-2.

What amount of equity income should Allan report for 2013?

 

  Equity income

$  

 

a-3.

Prepare the January 1, 2013, journal entry to retrospectively adjust the Investment in Bellevue account to the equity method.

 

General Journal

  Debit

  Credit

  To eliminate AFS fair value adjustment account.

 

 

  (Click to select)Fair Value Adjustment (Available-for-Sale Securities)Investment in BellevueInterest PayableUnrealized Holding Gain-Shareholders' EquityAccounts PayableCashRetained Earnings (January 1, 2013)Accounts Receivable

  

 

       (Click to select)Accounts ReceivableInterest PayableRetained Earnings (January 1, 2013)CashAccounts PayableFair Value Adjustment (Available-for-Sale Securities)Unrealized Holding Gain-Shareholders' EquityInvestment in Bellevue

 

 

 

 

  To record retrospective adjustment.

 

 

  (Click to select)Accounts ReceivableInvestment in BellevueCashFair Value Adjustment (Available-for-Sale Securities)Unrealized Holding Gain-Shareholders' EquityInterest PayableAccounts PayableRetained Earnings (January 1, 2013)

 

 

       (Click to select)CashInterest PayableFair Value Adjustment (Available-for-Sale Securities)Accounts ReceivableUnrealized Holding Gain-Shareholders' EquityRetained Earnings (January 1, 2013)Accounts PayableInvestment in Bellevue

 

 

 

Assume Allan elects the fair-value reporting option for its investment in Bellevue:

 

b-1.

On Allan’s December 31, 2013, balance sheet, what amount is reported for the Investment in Bellevue account?

 

  Investment in Bellevue

$  

 

b-2.

What amount of income from its investment in Bellevue should Allan report for 2013?

 

  Reported income

$  

 

Problem 1-28 [LO3, LO4, LO6]

 

Hobson acquires 40 percent of the outstanding voting stock of Stokes Company on January 1, 2012, for $259,200 in cash. The book value of Stokes’s net assets on that date was $465,000, although one of the company’s buildings, with a $72,200 carrying value, was actually worth $129,700. This building had a 10-year remaining life. Stokes owned a royalty agreement with a 20-year remaining life that was undervalued by $125,500.

     Stokes sold inventory with an original cost of $109,200 to Hobson during 2012 at a price of $156,000. Hobson still held $16,200 (transfer price) of this amount in inventory as of December 31, 2012. These goods are to be sold to outside parties during 2013.

     Stokes reported a loss of $76,800 for 2012, $49,800 from continuing operations and $27,000 from an extraordinary loss. The company still manages to pay a $9,000 cash dividend during the year.

     During 2013, Stokes reported a $55,000 net income and distributed a cash dividend of $11,000. It made additional inventory sales of $124,000 to Hobson during the period. The original cost of the merchandise was $77,500. All but 30 percent of this inventory had been resold to outside parties by the end of the 2013 fiscal year.

Prepare all journal entries for Hobson for 2012 and 2013 in connection with this investment. Assume that the equity method is applied. (Do not round intermediate calculations.)

 

Date

General Journal

          Debit

          Credit

1/1/12  

  To record initial investment

 

 

 

  (Click to select)CashInventoryEquity in Stokes Income-LossBuildingsDividend IncomeAccounts ReceivableExtraordinary Loss of StokesInvestment in Stokes Co.

 

       (Click to select)Equity in Stokes Income-LossBuildingsInvestment in Stokes Co.InventoryExtraordinary Loss of StokesAccounts ReceivableDividend IncomeCash

 

 

 

 

 

During  

  To record receipt of dividend

2012  

  (Click to select)Dividend IncomeInvestment in Stokes Co.Extraordinary Loss of StokesBuildingsCashAccounts ReceivableInventoryEquity in Stokes Income-Loss

 

 

       (Click to select)BuildingsAccounts ReceivableEquity in Stokes Income-LossInventoryExtraordinary Loss of StokesDividend IncomeInvestment in Stokes Co.Cash

 

12/31/12  

  To record accrual of income.

 

  (Click to select)Investment in Stokes Co.Equity in Stokes Income-LossBuildingsExtraordinary Loss of StokesInventoryAccounts ReceivableCashDividend Income

 

 

  (Click to select)Extraordinary Loss of StokesCashAccounts ReceivableInvestment in Stokes Co.Dividend IncomeEquity in Stokes Income-LossBuildingsInventory

 

 

       (Click to select)Investment in Stokes Co.CashEquity in Stokes Income-LossBuildingsExtraordinary Loss of StokesAccounts ReceivableInventoryDividend Income

 

12/31/12  

  To record amortization relating to acquisition of Stokes

 

 

 

  (Click to select)Accounts ReceivableExtraordinary Loss of StokesCashInvestment in Stokes Co.BuildingsDividend IncomeEquity in Stokes Income-LossInventory

 

       (Click to select)InventoryDividend IncomeInvestment in Stokes Co.CashEquity in Stokes Income-LossAccounts ReceivableBuildingsExtraordinary Loss of Stokes

 

12/31/12  

  To defer unrealized gross profit on intra-entity sale

 

 

 

  (Click to select)Accounts ReceivableEquity in Stokes Income-LossExtraordinary Loss of StokesInvestment in Stokes Co.Dividend IncomeInventoryCashBuildings

 

       (Click to select)CashInventoryDividend IncomeEquity in Stokes Income-LossExtraordinary Loss of StokesAccounts ReceivableInvestment in Stokes Co.Buildings

 

 

 

 

 

During  

  To record receipt of dividend

2013  

  (Click to select)InventoryExtraordinary Loss of StokesAccounts ReceivableBuildingsCashEquity in Stokes Income-LossInvestment in Stokes Co.Dividend Income

 

 

       (Click to select)Dividend IncomeBuildingsCashEquity in Stokes Income-LossInvestment in Stokes Co.Accounts ReceivableExtraordinary Loss of StokesInventory

 

 

 

 

 

12/31/13  

    To record accrual of income.

 

  (Click to select)InventoryExtraordinary Loss of StokesBuildingsAccounts ReceivableInvestment in Stokes Co.Equity in Stokes Income-LossCashDividend Income

 

       (Click to select)Equity in Stokes Income-LossBuildingsExtraordinary Loss of StokesDividend IncomeCashInvestment in Stokes Co.Accounts ReceivableInventory

 

 

 

 

 

12/31/13  

  To record amortization relating to acquisition of Stokes

 

  (Click to select)CashInvestment in Stokes Co.Equity in Stokes Income-LossAccounts ReceivableDividend IncomeBuildingsInventoryExtraordinary Loss of Stokes

 

       (Click to select)BuildingsExtraordinary Loss of StokesInvestment in Stokes Co.CashDividend IncomeInventoryEquity in Stokes Income-LossAccounts Receivable

 

 

 

 

 

12/31/13  

  To recognize income deferred from 2012

 

  (Click to select)Accounts ReceivableCashInvestment in Stokes Co.Dividend IncomeInventoryBuildingsEquity in Stokes Income-LossExtraordinary Loss of Stokes

 

       (Click to select)Extraordinary Loss of StokesEquity in Stokes Income-LossInventoryInvestment in Stokes Co.BuildingsCashAccounts ReceivableDividend Income

 

 

 

 

 

12/31/13  

  To defer unrealized gross profit on intra-entity sale

 

  (Click to select)Accounts ReceivableCashExtraordinary Loss of StokesInvestment in Stokes Co.Equity in Stokes Income-LossDividend IncomeInventoryBuildings

 

       (Click to select)Extraordinary Loss of StokesDividend IncomeInvestment in Stokes Co.InventoryBuildingsCashEquity in Stokes Income-LossAccounts Receivable

 

 

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[Solved] Problem 1-15 [LO3, LO4, LO7] complete solution correct answer key

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  • Submitted On 29 Jul, 2015 10:22:11
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PROBLEM 1-15 Acquisition Price $ 72,000 Book Value [($260,500 - $115,500) x 40%] 58,000 Excess of Cost over Book Value $ 14,000 Excess value of patent over book value [($23,700 - $10,200) x 40%] 5,400 Goodwill $ 8,600 Amortization: Patent [$5,400 ÷ 6 years] $ 900 Goodwill -0- Annual Amortization $ 900 Acquisition Price $ 72,000 Basic equity accrual 2012 [$39,000 x 40%] 15,600 Dividends – 2012 [$13,000 x 40%] ( 5,200) Amortization – 2012 ( 900) Investment in Holister, 12/31/2012 $ 81,500 Basic equity accrual 2013 [$61,500 x 40%] 24,600 Dividends – 2013 [$18,000 x 40%] ( 7,200) Amortization – 2013 ( 900) Investment in Holister, 12/31/2013 $ 98,000 PROBLEM 1-17 JOURNAL ENTRIES Investment in Denton 845,610 Cash 845,610 Investment in Denton 12,100 Retained Earnings – Prior Period Adjustment 12,100 Investment in Denton ($350,500 x 40%) 140,200 Equity Income – Investment in Denton 140,200 Cash ($131,000 x 40%) 52,400 Investment in Denton 52,400 Equity Income – Investment in Denton 7,200 Investment in Denton (5,400 + 1,800) 7,200 Supporting Calculations: Acquisition Price $ 310,500 Book Value [($2,380,000x 10%] 238,000 Excess of Cost over Book Value $ 72,500 Excess value of patent over book value Land [($185,000 x 10%] 18,500 Trademark $ 54,000 Useful Life ÷ 10 years Amortization $ 5,400 January 1, 2012 Book Value $ 2,380,000 Net Income – 2012 280,000 Dividends – 2012 ( 105,000) January 1, 2013 Book Value $ 2,555,000 Acquisition Price $ 845,610 Book Value [($2,555,000x 30%] 766,500 Excess of Cost over Book Value $ 79,110 Excess value of patent over book value Land [($209,700 x 30%] 62,910 Trademark $ 16,200 Useful Life ÷ 9 years Amortization $ 1,800 Entry 2: Had it been equity method from the begin...
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