Solution manual financial accounting by valix ch11 15

The property held by Eragon for use in production is owner-occupied property and therefore part of property, plant and equipment.. The land leased by Eragon to a subsidiary under an oper

139CHAPTER 11

3 Memo – Received 2,000 shares as 10% stock dividend on

20,000 original shares Shares now held, 22,000

3 Memo – Received 2,000 shares as 10% stock dividend

Shares now held, 22,000

Investment in associate 1,500,000

June 30 Investment in associate 1,800,000

Dec 31 No entry is required for the share in net income

because the investor is now using the fair value

method by reason on the reduced 15% interest

Excess of cost over book value 700,000 Excess attributable to equipment (40% x 1,500,000) ( 600,000) Excess attributable to inventory (40% x 500,000)

Amortization of excess attributable to equipment ( 150,000)Amortization of excess attributable to inventory ( 200,000)Excess net fair value over cost 100,000Net investment income 1,350,000

Goodwill – not amortized 100,000

2 There is no need to adjust for the difference in depreciation method If both entities

a method that best reflects the flow of benefits as the assets are consumed, then there is no policy difference

Problem 11-12

1 Journal entries

Amortization of depreciable asset (750,000 / 5)

Excess attributable to goodwill (25% x 400,000)

1 Memo – Received 500 shares as 10% stock dividend on

5,000 original Dale ordinary shares Shares now

held, 5,500

4 Investment in associate 5,000,000

Acquisition cost 2,000,0005,000,000

Net assets acquired:

10% x 16,000,000 1,600,000

20% x 20,000,000 4,000,000 Goodwill 400,000 1,000,000 Income from Fox investment in 2007 (10% x 4,000,000)

Note – Investment in equity securities

Dale Corporation, 5,500 shares 1,250,000Ever Corporation, 10,000 shares 1,440,000

Dividend income (10% x 2,500,000) 250,000 Investment in equity securities 50,000

Problem 11-21 Answer B

Investment income (20% x 1,600,000)

320,000

148Problem 11-22 Answer A

Investment income (20% x 6,000,000)

1,200,000

Problem 11-23 Answer C

Interest (30,000/100,000) 30%Investment income (5,000,000 x 6/12 x 30%)

The excess of cost attributable to the land is not amortized because the land is

nondepreciable The goodwill is not amortized

Problem 11-29 Answer B

Acquisition cost – January 1 1,000,000Acquisition cost – December 31 3,000,000

Share in net income (10% x 8,000,000) 800,000Carrying value

Amortization of excess:

Equipment (320,000 / 4) ( 80,000) Building (240,000 / 12) ( 20,000)Carrying value of investment – 12/31/2008 2,700,000

Acquisition cost (30,000 x 120)

3,600,000

Deficit on January 1, 2008 (30% x 500,000)

( 150,000)

Carrying value of investment – 1/1/2008 3,450,000Net income for 2008 (30% x 700,000)

210,000

Net income for 2009 (30% x 800,000)

240,000

Cash dividend on 12/31/2009 (30% x 400,000) ( 120,000)Carrying value of investment – 12/31/2009 3,780,000

Accrued interest receivable 60,000

Dec 31 Accrued interest receivable 60,000

Jan 1 Interest income 60,000

Accrued interest receivable 60,000

Bonds held as trading

Jan 1 Trading securities 3,761,000

Cash 3,761,000

Interest income (4,000,000 x 12%) 240,000Dec 31 Accrued interest receivable 240,000

Interest income

240,000

31 Trading securities 439,000

Unrealized gain – TS (4,200,000 – 3,761,000)439,000

Bonds held as available for sale

Jan 1 Available for sale securities 3,761,000

Interest income

240,000

31 Available for sale securities 390,831

Unrealized gain – AFS 390,831 Market value (4,000,000 x 105)

1,880,000

Less: Cost of bonds sold (2,000/5,000 x 5,200,000)

Avco bonds (2,000,000 x 99%) 1,960,0001,980,000

5,080,0004,920,000

Interest income (4,000,000 x 12% x 1/12) 40,000

Cash 3,840,000Aug 1 Cash (2,000,000 x 12% x 6/12) 120,000

Interest income 120,000Sept 1 Cash (4,000,000 x 12% x 6/12) 240,000

Interest income 240,000

Oct 1 Cash (1,010,000 + 10,000) 1,020,000

Interest income (1,000,000 x 12% x 1/12)

10,000

Trading securities

950,000

Gain on sale of trading securities 60,000 Sales price (1,000,000 x 105%) 1,050,000 Less: Brokerage 40,000 Net proceeds 1,010,000 Less: Cost of bonds sold (1,000/4,000 x 3,800,000)

Book value

12/31/2008 160,000 190,050 30,050 1,930,55012/31/2009 160,000 193,055 33,055 1,963,60512/31/2010 160,000 196,395 36,395 2,000,000

31 Available for sale securities 269,450

Unrealized gain – AFS 269,450 Market value (2,000,000 x 110) 2,200,000

Unrealized gain 269,450

2009

158Problem 12-8

Requirement 1

Discount Date Interest received Interest income amortization

Book value

12/31/2008 300,000 379,360 79,360 4,821,36012/31/2009 300,000 385,709 85,709 4,907,06912/31/2010 300,000 392,931 92,931 5,000,000

31 Available for sale securities 428,640

Unrealized gain – AFS 428,640 Market value - 12/31/2008 (5,000,000 x 105)

5,250,000

Book value – 12/31/2008 4,821,360 Unrealized gain – 12/31/2008 428,640

Unrealized gain - AFS 428,640

Available for sale securities 5,335,709

159 Another computation

May 1 Held to maturity securities (6,000,000 x 94%) 5,640,000

Interest income (6,000,000 x 12% x 3/12) 180,000

Cash 5,820,000

Interest income (6,000,000 x 12% x 6/12) 360,000Dec 31 Accrued interest receivable 300,000

Interest income (6,000,000 x 12% x 5/12) 300,000

31 Held to maturity securities (8,000 x 8) 64,000

Interest income

64,000

May 1, 2008 – February 1, 2012 = 45 months

360,000 / 45 = 8,000 monthly amortization

Requirement b 2010

May 1 Held to maturity securities (8,000 x 4) 32,000

160Problem 12-10

1 Held to maturity securities 8,598,400

Bond Months Peso Discount

Bond year outstanding outstanding months Fraction

Dec 31 Accrued interest receivable 150,000

Accrued interest receivable 150,000Feb 1 Cash (3,000,000 x 12% x 6/12) 180,000

1 Journal entries

a Held to maturity securities 7,679,000

3 Held to maturity securities 4,576,800

Held to maturity securities

Premium on sale of bonds 140,000Unamortized discount (100,000 – 20,000) 80,000Gain on sale of bonds

220,000

Problem 12-25 Answer A

Acquisition cost – 1/1/2008 3,767,000Discount amortization for 2008:

10,000,000 200,000Interest for the year 2008:

From January 1 to March 31, 2008 (4,000,000 x 12% x 3/12) 120,000

From April 1 to December 31, 2008 (3,000,000 x 12% x 9/12) 270,000

390,000

Amortization of discount for year 2008:

From January 1 to March 31, 2008 (80,000 x 3/12) 20,000

From April 1 to December 31, 2008 (60,000 x 9/12) 45,00065,000

Interest income for year 2008

Interest accrued from July 1 to December 31, 2008 (5,000,000 x 8% x 6/12)

Interest accrued (1,000,000 x 8% x 6/12) 40,000Interest income (906,000 x 10% x 6/12) 45,300Discount amortization

April 1 Sinking fund securities 384,000

Sinking fund cash

384,000

Oct 1 Sinking fund cash 24,000

Sinking fund income (400,000 x 12% x 6/12) 24,000Dec 31 Sinking fund cash 400,000

31 Accrued interest receivable 12,000

Sinking fund income (400,000 x 12% x 3/12) 12,000 Sinking fund securities 3,000

Amortization of discount on sinking fund securities

for 9 months (16,000/4 years = 4,000 x 9/12 = 3,000)

31 Retained earnings 439,000

Retained earnings appropriated for sinking fund 439,000

Sinking fund securities 387,000 Accrued interest receivable

Jan 1 Sinking fund income 12,000

Accrued interest receivable 12,000April 1 Sinking fund cash 24,000

1 Sinking fund expenses 12,000

Sinking fund cash

12,000

Oct 1 Sinking fund cash 24,000

1 Sinking fund securities (4,000 x 9/12) 3,000

1 Sinking fund cash (400,000 x 106%) 424,000

Gain on sale of securities

18 Sinking fund securities 2,500,000

Sinking fund cash 2,500,000

173 2008

July 5 Sinking fund expenses 100,000

Sinking fund cash 100,000Sept 9 Sinking fund cash 530,000

Loss on sale of securities 70,000

Sinking fund securities

600,000

Dec 20 Sinking fund cash 150,000

Sinking fund income 150,000

2009

Feb 12 No entry

Sinking fund income 270,000

31 Sinking fund cash 2,250,000

Sinking fund securities

Sinking fund income (500,000 x 12%)

60,000

Sinking fund securities 10,000

Amortization of bond discount (50,000/5 years = 10,000 per year)

174

6 Sinking fund securities 400,000

Sinking fund income (500,000 x 10%)

50,000

8 Sinking fund cash 20,000

Sinking fund securities

Sinking fund income (60,000 + 10,000)

Date Interest income Annual contribution Fund

balance

12/31/2009 81,899 818,987 1,719,87312/31/2010 171,987 818,987 2,710,84712/31/2011 271,085 818,987 3,800,91912/31/2012 380,094 818,987 5,000,000

Increase in cash surrender value 24,000

Jan 1 Life insurance 15,000

Prepaid life insurance

Prepaid life insurance

15,000

177

April 1 Life insurance 60,000

Prepaid life insurance

24,000

Increase from April 1, 2010 to December 31, 2010 (24,000 x 9/12)

18,000

2011

Prepaid life insurance

Cash 60,000July 1 Cash surrender value 8,000

Life insurance

8,000

Balance – April 1, 2012 116,000 Balance – April 1, 2011 84,000 Increase from April 1, 2011 to April 1, 2012

b The property held by Eragon for use in production is owner-occupied property and

therefore part of property, plant and equipment

c The land leased by Eragon to a subsidiary under an operating lease is owner- occupied property for purposes of consolidated financial statements However,from the perspective of separate financial statements of Eragon, the land is aninvestment

property

d The property under construction for use as investment property is owner-occupied property until the land is completed Upon completion, the building becomes investment property

e The land held for future factory site is owner-occupied property and therefore partof

property, plant and equipment

f The machinery leased out to an unrelated party is part of property, plant and equipment because investment property includes only land and building, and not movable property like machinery

Future amount of maturity 7,160,000

Divide by future value of 1 for 10 periods at 6% 1.79

Initial investment 4,000,000The annual interest of 12% is compounded semiannually for 5 years Therefore, thereare

Increase in cash surrender value (270,000 – 245,000) 25,000

The dividend of P30,000 is not deducted anymore because it is already part of theincrease in cash surrender value

Problem 13-23 Answer A

Sinking fund securities

1,000,000

Land held for capital appreciation 3,000,000

Investment in joint venture 2,000,000

7,500,000

31 Interest rate swap receivable 70,160

Unrealized gain – interest rate swap (80,000 x 877)70,160

2009

Cash (14% x 4,000,000) 560,000

31 Unrealized loss – interest rate swap 36,040

Interest rate swap payable (40,000 x 901) 36,040

2009

31 Interest rate swap payable 36,040

Unrealized loss - Interest rate swap 3,960

Unrealized gain – interest rate swap (180,000 x 885)159,300

31 Interest rate swap receivable 97,200

Unrealized gain – interest rate swap (30,000 x 3.24)97,200

Batangas Company will receive P30,000 at the end of

2009 and can expect to receive P30,000 at the end of

2010, 2011 and 2012 Thus, the present value of the four

annual payments of P30,000 is recognized on December 31,

2008 as interest rate swap receivable

2009

Cash (9% x 3,000,000)270,000

Interest rate swap receivable (97,200 – 30,000) 67,200

31 Unrealized loss – interest rate swap 160,200

Interest rate swap payable (60,000 x 2.67) 160,200 Batangas Company will make a payment of P60,000 at

The end of 2010 by reason of the reduced interest rate and can expect to make payment of P60,000 at the end

of 2011 and 2012 Thus, the present value of the three

annual payments of P60,000 is recognized on December 31,

2009 as the interest rate swap payable

31 Interest swap receivable 464,000

Unrealized gain – interest swap

Interest rate swap receivable 200,000

31 Unrealized gain – interest rate swap 200,000

Interest expense

200,000

31 Unrealized gain – interest swap 95,000

Interest rate swap receivable 95,000 Unrealized gain – 12/31/2009 (5,000,000 x 2% x 1.69) 169,000 Unrealized gain per book (464,000 – 200,000) 264,000 Decrease in unrealized gain

31 Unrealized gain – interest rate swap 100,000

Interest expense

100,000

31 Unrealized gain – interest swap 24,000

Interest rate swap receivable 24,000 Unrealized gain – 12/31/2010 (5,000,000 x 1% x 90)

31 Interest swap receivable 249,000

Unrealized gain – interest rate swap 249,000

Interest rate swap receivable 100,000

31 Unrealized gain – interest rate swap 100,000

Interest expense

100,000

31 Interest rate swap receivable 107,500

Unrealized gain – interest rate swap 107,500

(5,000,000 x 2% x 2.49) Unrealized gain – 12/31/2009 (5,000,000 x 3% x 1.71) 256,500 Unrealized gain per book (249,000 – 100,000) 149,000 Increase in unrealized gain

Interest swap receivable 150,000

31 Unrealized gain – interest rate swap 150,000

Interest expense

150,000

31 Interest rate swap receivable 71,500

Unrealized gain – interest rate swap 71,500

187

Unrealized gain – 12/31/2010 (5,000,000 x 4% x 89) 178,000 Unrealized gain per book (256,500 – 150,000) 106,500 Increase in unrealized gain

31 Note payable 34,760

Gain on note payable 34,760

On every year-end the note payable is measured at fair value The fair value isequal to the present value of the principal plus the present value of futureinterest

31 Loss on interest rate swap 34,760

Interest rate swap payable 34,760 The derivative which is the interest rate swap is also measured at fair value.The

fair value is equal to the present value of the net cash settlement with the