Solution manual advanced accounting 10e by fischer taylor CH10

$204,000 c The investment balance is the cost of the investment plus the investor’s share of the investee’s undistributed income, less the amortization of the excess of the price paid o

SPECIAL APPENDIX 2

UNDERSTANDING THE ISSUES

1 (a) Company E net income $ 40,000

Parent’s share × 30%

Less: Equipment amortization

[$200,000 – ($500,000 × 30%)] ÷ 10 (5,000)

Investment income $ 7,000

(b) Beginning balance $200,000

Investment income 7,000

Less dividends ($10,000 × 30%) (3,000)

Investment balance $204,000

(c) The investment balance is the cost of the investment plus the investor’s share of the investee’s undistributed income, less the amortization of the excess of the price paid over the investor’s share of book value

2 (a) Company E income $ 50,000

Gain on sale of equipment (20,000)

Realized gain ($20,000 ÷ 5) 4,000

Parent’s share × 30%

Investment income $ 10,200

There is no further adjustment for the profit on the equipment

(b) Investment income = $50,000 × 30% = $15,000

Adjustment for equipment profit:

Gain on Sale of Equipment

($20,000 × 30%) 6,000

Deferred Gain 6,000

Deferred Gain ($6,000/5) 1,200

Realized Gain on Equipment Sale 1,200

3 (a) Investment income = $10,000 dividends × 10% = $1,000

(b) Investment income = [($100,000 × ½) × 10%] + [($100,000 × ½) × 25%] = $17,500

(c) Investment income = [($100,000 × ½) × 30%] + ($10,000 dividends × 10%) = $16,000

4 Cost of investment $ 20,000

20X0–20X4 income, 25% × $200,000 50,000

20X5–20X9 loss, 25% × ($300,000) (75,000)

Unrecorded loss $ (5,000)

20Y0 income (25% × $30,000 reported income) – unrecorded $5,000 prior loss = $2,500

Investment balance = ($5,000 unrecorded loss) – (25% × $30,000 reported income) = $2,500

EXERCISES

EXERCISE SA2-1

Investment in Like 4,000

Investment Income 4,000

To record 20X7 investment income

Investment in Like 3,500

Dividends Receivable 1,250

Investment Income 4,750

To record 20X8 investment income and dividends receivable

(20,000 shares × 25% × $0.25 per share)

Like Company income $20,000 $24,000 Adjustment for inventory profit ($5,000 profit × 20%) (1,000) Adjusted income $20,000 $23,000 Ownership percentage × 25% × 25%

Less amortization of excess:

Equipment ($10,000 ÷ 10 years) (1,000) (1,000) Investment income $ 4,000 $ 4,750

EXERCISE SA2-2

Determination and Distribution of Excess Schedule

Price paid for investment $90,000

Less book value of interest acquired:

Common stock ($10 par) $100,000

Paid-in capital in excess of par 20,000

Retained earnings 130,000

Total stockholders’ equity $250,000

Interest acquired × 30% 75,000

Excess of cost over book value (debit) $15,000

Building, amortized over 20 periods, $750 per year

Exercise SA2-2 Concluded Minnie Company Income Distribution Profit in ending inventory Internally generated net

(40% × $40,000) $16,000 income $60,000

Realized profit on beginning inventory (40% × $10,000) 4,000

Turf’s ownership interest × 30%

Share of income $14,400 Less building depreciation (750) Turf’s net share of income $13,650

Investment in Minnie 13,650

Investment Income 13,650

Gain on Sale of Machine ($5,000 × 30%) 1,500

Deferred Gain 1,500

Deferred Gain ($1,500 ÷ 5) 300

Realized Profit on Machine Sale 300

EXERCISE SA2-3

Werl Corporation Income Distribution Profit in ending inventory Internally generated net

(30% × $30,000) $9,000 income $90,000

Gain on sale of machine 5,000 Realize 1/5 of machine

Realize profit on beginning inventory (30% × $20,000) 6,000 Adjusted net income $83,000

Interest on adjusted income $24,900 Less equipment depreciation (3,2 Net investment income $21,700

Investment in Werl 21,700

Investment Income 21,700

EXERCISE SA2-4

Determination and Distribution of Excess Schedule

10% purchase:

Price paid $80,000

Less interest acquired:

Total stockholders’ equity $750,000

Interest acquired × 10% 75,000

Goodwill $ 5,000 Dr

15% purchase:

Price paid $110,000

Less interest acquired:

Total stockholders’ equity $800,000

Interest acquired × 15% 120,000

Excess of book value over cost (credit balance) $(10,000)

Decrease in equipment (4-year life) 10,000 Cr

(1) Investment in Novic 5,000

Retained Earnings 5,000

To record equity “catch-up” entry

Calculations:

Increase in retained earnings, January 1, 20X6,

to January 1, 20X8 $50,000

Ownership interest × 10%

Equity “catch-up” adjustment $ 5,000

(2) Investment in Novic 10,000

Cash (50,000 shares × 25% × $0.20 per share) 2,500

Investment Income 12,500

To record net share of subsidiary income and

dividends received

Income Distribution for Investment in Novic Company

Share of income $10,000 Decrease in equipment

($10,000 ÷ 4) 2,500 Investment income, net of

EXERCISE SA2-5

Determination and Distribution of Excess Schedule

Price paid $200,000

Equity interest purchased, 30% × $400,000 120,000

Excess of cost over book value (debit balance) $ 80,000

Allocate to machinery, 30% × $50,000, 5-year life,

$3,000 per year 15,000 Dr

Calculation of investment account balance, January 2, 20X9:

Original cost $200,000

Share of income:

20X7 $50,000

20X8 45,000

Dividends paid:

20X7 $10,000

20X8 10,000

Amortization of excess:

Machinery ($3,000 × 2 years) (6,000)

Balance $216,500

Entry:

Cash 230,000

Investment in Aluma-Boat Company 216,500

Realized Gain on Sale of Investment 13,500

PROBLEMS

PROBLEM SA-1

Determination and Distribution of Excess Schedule

Price paid for investment in Fink $320,000

Less interest acquired:

Total stockholders’ equity $1,000,000

Interest acquired × 25% 250,000

Excess of cost over book value (debit balance) $ 70,000

Attributable to long-lived assets:

Less undervaluation of building

($40,000 × 0.25, 20 years, $500 per year) 10,000

Goodwill $ 60,000

20X6 Income Distribution for Investment in Fink Company

Reported net income $48,000 Adjusted net income $48,000

Share of income $12,000 Less excess amortization 500 Net share of income $11,500

20X6 Entries:

Cash ($10,000 × 25%) 2,500

Investment in Fink ($11,500 – $2,500 dividends) 9,000

Investment Income 11,500

Sales ($8,000 × 25%) 2,000

Realized Gross Profit (1/10 × $2,000 × ½ year) 100

Deferred Gross Profit 1,900

Problem SA-1 Concluded 20X7 Income Distribution for Investment in Fink Company Profit in ending inventory Reported net income $50,000

($2,000 × 25%) $500

Adjusted net income $49,500

Share of income $12,375 Less excess amortization 500 Net share of income $11,875

20X7 Entries:

Cash ($10,000 × 25%) 2,500

Investment in Fink ($11,875 – $2,500 dividends) 9,375

Investment Income 11,875

Deferred Gross Profit 200

Realized Gross Profit 200

20X8 Income Distribution for Investment in Fink Company Profit in ending inventory Reported net income $65,000

($3,000 × 25%) $750 Beginning inventory profit

($2,000 × 25%) 500 Adjusted net income $64,750

Share of income $16,187 Less excess amortization 500 Share of income $15,687

20X8 Entries:

Cash ($10,000 × 25%) 2,500

Investment in Fink ($15,687 – $2,500 dividends) 13,187

Investment Income 15,687

Deferred Gross Profit 200

Realized Gross Profit 200

PROBLEM SA2-2

December 31, 20X6:

Investment in Cramer Company 8,500

Cash (for dividends) 1,250

Investment Income 9,750 Reported income of Cramer

($60,000 – $18,000 tax) $42,000

Ownership interest × 25% $10,500

Less amortizations of excess cost:

Equipment ($7,500 ÷ 10 years) 750

Adjusted income $ 9,750

Provision for Income Tax (30% × 20%* × $10,500) 630

Income Tax Payable (30% × 20%* × $1,250) 75

Deferred Tax Liability 555

To record provision for tax; amortizations of excess are

not deductible

*100% – 80% dividend exclusion

December 31, 20X7:

Investment in Cramer Company 9,963

Cash (for dividends) 2,500

Investment Income (See IDS, which follows) 12,463 Provision for Income Tax (30% × 20%* × $13,213) 793

Income Tax Payable (30% × 20%* × $2,500) 150

Deferred Tax Liability 643

*100% – 80% dividend exclusion

Sales ($4,000 × 40% × 25% interest) income before amortization 400

Deferred Gross Profit on Sales to Investee 400

Deferred Tax Liability 120

Provision for Income Tax 120

Tax on deferred gross profit on ending inventory

(30% × $400)

Problem SA2-2, Continued Cramer Company Income Distribution (20X7) Gain on machine sale $5,000 Reported net income $80,000

Realized gain on machine* 500

Income tax (30%) 22,650

Interest in income $13,213 Less amortization of excess

cost (as above) 750 Net investment income $12,463

*$5,000 × ½ year × 1/5

December 31, 20X8:

Investment in Cramer Company 14,425

Cash (for dividends) 2,500

Investment Income (See IDS, which follows) 16,925

Provision for Income Tax (30% × 20%* × $17,675) income before

amortization 1,061

Income Tax Payable (30% × 20%* × $2,500) 150

Deferred Tax Liability 911

*100% – 80% dividend exclusion

Sales (net increase $1,000* × 40% × 25% interest) 100

Deferred Gross Profit on Sales to Investee 100

*$5,000 ending inventory profit – $4,000 beginning inventory profit = net increase

Provision for Income Tax 30

Deferred Tax Liability 30

Tax on increase in deferred gross profit on ending

inventory (30% × $100)

Problem SA2-2, Concluded Cramer Company Income Distribution (20X8)

Reported net income $100,000 Realized gain on machine 1,000

Income tax (30%) 30,300

Interest in income $ 17,675 Less amortization of excess

cost (as above) 750 Net investment income $ 16,925