Advanced Accounting, Global Edition, 13th edition By Floyd A Beams Solution Manuals by TBtutors

Type:

Solution Manual

Resource:

Advanced Accounting, Global Edition

Edition:

13th Edition

Author(s):

Floyd A. Beams Joseph H. Anthony Bruce Bettinghaus Kenneth Smith

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. Three 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.

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.

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.

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 not 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 recognized.

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.

.. 1-1

1-2

Business Combinations

SOLUTIONS TO EXERCISES Solution E1-1 1 2 3 4

b c c c

Solution E1-2 [AICPA adapted] 1

a Plant and equipment should be recorded at the $220,000 fair value.

c Investment cost Less: Fair value of net assets Cash Inventory Property and equipment — net Liabilities Goodwill

$1,600,000 $

160,000 380,000 1,120,000 (360,000) $

1,300,000 300,000

Solution E1-3 Stockholders’ equity — Pop Corporation on January 3 Capital stock, $10 par, 600,000 shares outstanding

$ 6,000,000

Other paid-in capital [$400,000 + $3,000,000 – $10,000]

3,390,000

Retained earnings [$1,200,000 - $20,000] Total stockholders’ equity

1,180,000 $10,570,000

Entry to record combination Investment in Son Capital stock, $10 par Other paid-in capital

6,000,000 3,000,000 3,000,000

Investment expense Other paid-in capital Cash Check: Net assets per books (book value) Goodwill and write-up of assets Less: Expense of direct costs

20,000 10,000 30,000 $ 7,600,000 3,000,000 (20,000)

Less: Issuance of stock (10,000) $10,570,000

Chapter 1

1-3

Solution E1-4 Journal entries on Pam’s books to record the acquisition Investment in Sun 10,200,000 Common stock, $10 par 4,800,000 Additional paid-in capital 5,400,000 To record issuance of 480,000 shares of $10 par common stock with a fair value of $10,200,000 for the common stock of Sun in a business combination. Additional paid-in capital 60,000 Investment expenses 180,000 Other assets (or Cash) 240,000 To record costs of registering and issuing securities as a reduction of paidin capital, and record direct and indirect costs of combination as expenses. Current assets 4,400,000 Plant assets 8,800,000 Liabilities 1,200,000 Investment in Sun 10,200,000 Gain from bargain purchase 1,800,000 To record allocation of the $10,200,000 cost of Sun Company to identifiable assets and liabilities according to their fair values, and the gain from the bargain purchase,computed as follows: Cost $10,200,000 Fair value of net assets acquired 12,000,000 Bargain purchase amount $ 1,800,000

1-4

Business Combinations

Solution E1-5 Journal entries on the books of Pop Corporation to record merger with Son Corporation Investment in Son 1,060,000 Common stock, $10 par 360,000 Additional paid-in capital 300,000 Cash 400,000 To record issuance of 36,000 common shares and payment of cash in the acquisition of Son Corporation in a merger. Investment expenses 140,000 Additional paid-in capital 60,000 Cash 200,000 To record costs of registering and issuing securities and additional direct costs of combination. Cash 80,000 Inventories 200,000 Other current assets 40,000 560,000 Plant assets — net Goodwill 320,000 Current liabilities 60,000 Other liabilities 80,000 Investment in Son 1,060,000 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 Fair value of net assets acquired Goodwill Solution E1-6* Net assets (+A) Common stock (+SE) Additional paid-in capital (+SE) Retained earnings (+SE) Expenses (E, -SE) Cash (-A)

$1,060,000 740,000 $ 320,000 2,200 1,200 800 200 60 60

Solution E1-7* Net assets (+A) Capital stock (+SE) Retained earnings (+SE) Investment in Sun Corporation (-A)

2,100 1,470 600 30

Chapter 1

1-5

SOLUTIONS TO PROBLEMS Solution P1-1 (in thousands) Preliminary computations Fair Value: Cost of investment in Son at January 2 (240,000 shares  $40) Book value of net assets ($8,000 - $960) Excess fair value over book value Excess assigned to: Current assets Remainder to goodwill Excess fair value over book value

$9,600 (7,040) $2,560 $

640 1,920 $2,560

Note: $400,000 direct costs of combination are expensed. The excess fair value of Pop’s buildings is not considered.

Pop Corporation Balance Sheet at January 2, 2016 (in thousands) Assets Current assets ($2,080 + $960 + $640 excess - $640 direct costs)

$ 3,040

Land ($800 + $1,600)

2,400

Buildings — net ($4,800 + $1,600)

6,400

Equipment — net ($3,520 + $3,840)

7,360

Goodwill Total assets

1,920 $21,120

Liabilities and Stockholders’ Equity Current liabilities ($800 + $960)

$ 1,760

Capital stock, $10 par ($8,000 + $2,400 new issue)

10,400

Additional paid-in capital [$800 + ($30  240 shares) — $240 costs of issuing and registering securities]

7,760

Retained earnings (subtract $400 expensed direct cost) Total liabilities and stockholders’ equity

1,200 $ 21,120

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Business Combinations

Solution P1-2 Preliminary computations Fair Value: Cost of acquiring Son Fair value of assets acquired and liabilities assumed Goodwill from acquisition of Son

$1,650,000 1,340,000 $ 310,000

Pop Corporation Balance Sheet at January 2, 2016 Assets Current assets Cash [$300,000 + $60,000 - $280,000 expenses paid]

80,000 540,000

Accounts receivable — net [$460,000 + $80,000 fair value] Inventories [$1,040,000 + $240,000 fair value]

1,280,000

Plant assets Land [$800,000 + $300,000 fair value]

1,100,000

Buildings — net [$2,000,000 + $600,000 fair value]

2,600,000

Equipment — net [$1,000,000 + $500,000 fair value]

1,500,000

Goodwill Total assets

310,000 $7,410,000

Liabilities and Stockholders’ Equity Liabilities Accounts payable [$600,000 + $80,000] Note payable [$1,200,000 + $360,000 fair value]

680,000 1,560,000

Stockholders’ equity Capital stock, $10 par [$1,600,000 + (66,000 shares  $10)]

2,260,000

Other paid-in capital [$1,200,000 - $80,000 + ($1,650,000 - $660,000)]

2,110,000

Retained earnings (subtract $200,000 expensed direct costs) Total liabilities and stockholders’ equity

800,000 $7,410,000

Chapter 1

1-7

Solution P1-3 Pam issues 25,000 shares of stock for Sun’s outstanding shares 1a

Investment in Sun 1,500,000 Capital stock, $10 par 250,000 Additional paid-in capital 1,250,000 To record issuance of 25,000, $10 par shares with a market price of $60 per share in a business combination with Sun. Investment expenses 60,000 Additional paid-in capital 40,000 Cash 100,000 To record costs of combination in a business combination with Sun. Cash 20,000 Inventories 120,000 Other current assets 200,000 Land 200,000 700,000 Plant and equipment — net Goodwill 360,000 Liabilities 100,000 Investment in Sun 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: $1,500,000 cost - $1,140,000 fair value of net assets acquired.

Pam Corporation Balance Sheet January 2, 2016 (after business combination) Assets Cash [$240,000 + $20,000 - $100,000] Inventories [$100,000 + $120,000] Other current assets [$200,000 + $200,000] Land [$160,000 + $200,000] Plant and equipment — net [$1,300,000 + $700,000] Goodwill Total assets Liabilities and Stockholders’ Equity Liabilities [$400,000 + $100,000] Capital stock, $10 par [$1,000,000 + $250,000] Additional paid-in capital [$400,000 + $1,250,000 $40,000] Retained earnings (subtract $60,000 direct costs) Total liabilities and stockholders’ equity

160,000 220,000 400,000 360,000 2,000,000 360,000 $3,500,000 $

500,000 1,250,000 1,610,000

140,000 $3,500,000

1-8

Business Combinations

Solution P1-3 (continued) Pam issues 15,000 shares of stock for Sun’s outstanding shares 2a

900,000 Investment in Sun (15,000 shares  $60) Capital stock, $10 par 150,000 Additional paid-in capital 750,000 To record issuance of 15,000, $10 par common shares with a market price of $60 per share. Investment expense 60,000 Additional paid-in capital 40,000 Cash 100,000 To record costs of combination in the acquisition of Sun. Cash 20,000 Inventories 120,000 Other current assets 200,000 Land 200,000 700,000 Plant and equipment — net Liabilities 100,000 Investment in Sun 900,000 Gain on bargain purchase 240,000 To record Sun’s net assets at fair values and the gain on the bargain purchase.

Fair value of net assets acquired Investment cost (Fair value of consideration) Gain on Bargain Purchase 2b

$1,140,000 900,000 $ 240,000

Pam Corporation Balance Sheet January 2, 2016 (after business combination) Assets Cash [$240,000 + $20,000 - $100,000] Inventories [$100,000 + $120,000] Other current assets [$200,000 + $200,000] Land [$160,000 + $200,000] Plant and equipment — net [$1,300,000 + $700,000] Total assets Liabilities and stockholders’ equity Liabilities [$400,000 + $100,000] Capital stock, $10 par [$1,000,000 + $150,000] Additional paid-in capital [$400,000 + $750,000 $40,000] Retained earnings (subtract $60,000 direct costs and add $240,000 Gain from bargain purchase) Total liabilities and stockholders’ equity

160,000 220,000 400,000 360,000 2,000,000 $3,140,000 $

500,000 1,150,000 1,110,000 380,000

$3,140,000

Chapter 1

1-9

Solution P1-4 1

Schedule to allocate investment cost to assets and liabilities Investment cost (fair value), January 1 Fair value acquired from Diego ($300,000  100%) Excess fair value over cost (bargain purchase gain)

$250,000 300,000 $ 50,000

Allocation: Allocation 40,000 30,000 100,000 50,000 100,000 75,000 (50,000) (45,000) (50,000) $ 250,000

Cash Receivables — net Inventories Land Buildings — net Equipment — net Accounts payable Other liabilities Gain on bargain purchase Totals

Pablo Corporation Balance Sheet at January 1, 2017 (after combination) Liabilities

Assets Cash Receivables — net Inventories Land Buildings — net Equipment — net

90,000 80,000 230,000 100,000 250,000 175,000

Total assets $ 925,000

Accounts payable Note payable (5 years) Other liabilities Liabilities

130,000 200,000 145,000 475,000

Stockholders’ Equity Capital stock, $10 par Other paid-in capital Retained earnings* Stockholders’ equity Total equities

200,000 100,000 150,000 450,000 925,000

* Retained earnings reflects the $50,000 gain on the bargain purchase.

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Business Combinations

Solution P1-5 1

Journal entries to record the acquisition of Huang Corporation

Investment in Huang 350,000 Common stock, $10 par 100,000 Other paid-in capital 200,000 Cash 50,000 To record acquisition of Huang for 10,000 shares of common stock and $50,000 cash Investment expense 30,000 Other paid-in capital 10,000 Cash 40,000 To record payment of costs to register and issue the shares of stock ($10,000) and for accounting and legal fees ($30,000). Cash 50,000 Receivables—net 50,000 Inventories 100,000 Land 100,000 Buildings—net 100,000 Equipments—net 100,000 Accounts payable 50,000 Other liabilities 75,000 Investment in Huang 350,000 Gain on bargain purchase 25,000 To record the net assets of Saw at fair value and the gain on the bargain purchase. Gain on Bargain Purchase Calculation Acquisition price $ 350,000 Fair value of net assets acquired 375,000 Gain on bargain purchase $ 25,000

Balance Sheet:

Assets

Cash Receivable—net Inventories Land Buildings—net Equipment—net

Ling Corporation Balance Sheet at January 1, 2017 Liabilities 960,000 800,000 1,600,000 1,100,000 2,100,000 1,600,000

Total assets

8,160,000

Accounts payable Other liabilities Liabilities

850,000 1,075,000 1,925,000

Stockholders’ equity Common stock, $10 par Other paid-in capital Retained earnings* Stockholders’ equity Total equities

3,100,000 1,390,000 1,745,000 6,235,000 8,160,000

Chapter 1

1-11

Solution P1-5 (continued) 2

Journal entries to record the acquisition of Huang Corporation:

Investment in Huang 400,000 Common Stock, $10 par 100,000 Other paid-in capital 200,000 Cash 100,000 To record acquisition of Huang for 10,000 shares of common stock and $50,000 cash. Investment expense 30,000 Other paid-in capital 10,000 Cash 40,000 To record payment of costs to register and issue the shares of stock ($10,000) and for accounting and legal fees ($30,000). Cash 50,000 Receivables—net 50,000 Inventories 100,000 Land 100,000 Buildings—net 100,000 Equipments—net 100,000 Goodwill 25,000 Accounts payable 50,000 Other liabilities 75,000 Investment in Huang 400,000 To record the net assets of Saw at fair value and the goodwill. Goodwill calculation Acquisition price $400,000 Fair value of net assets acquired 375,000 Goodwill $ 25,000

Balance Sheet: Ling Corporation Balance Sheet at January 1, 2017 Liabilities

Assets Cash Receivable—net Inventories Land Buildings—net Equipment—net Goodwill

Total assets

910,000 800,000 1,600,000 1,100,000 2,100,000 1,600,000 25,000

8,135,000

Accounts Payable Other Liabilities Liabilities

850,000 1,075,000 1,925,000

Stockholders’ Equity Common Stock, $10 par Other paid-in capital Retained Earnings* Stockholders’ equity Total equities

3,100,000 1,390,000 1,720,000 6,210,000 8,135,000

1-12

Business Combinations

Solution P1-6* Pooled Balance Sheets Pop

800,000 shares

Son

1,000,000 shares

Current assets

15,000

4,000

19,000

Plant assets - net

40,000

6,000

46,000

Total assets

55,000

10,000

65,000

Liabilities

10,000

3,000

13,000

Common stock

30,000

4,000

38,000

40,000

APIC

3,000

2,000

1,000

Retained earnings

12,000

1,000

13,000

12,000

Total equities

55,000

10,000

65,000

Solution P1-7* 1. Net assets (+A) Capital stock (+SE) Additional paid-in capital (+SE) Retained earnings (+SE)

2. Net assets (+A) Additional paid-in capital (-SE) Capital stock (+SE) Retained earnings (+SE)

800 350 150 300

800 200 770 230

Chapter 1

1-13

Solution P1-8* a. Net assets (+A) Treasury stock (-SE) Common stock (+SE) Additional paid-in capital (+SE) Retained earnings (+SE)

11,500 500

Investment expenses (E, -SE) Cash(-A)

10,000 1,000 1,000 300 300

b. Pop Corporation Son Corporation Merger Pop’s Books Current Assets $6,500 $4,500 $10,700 Plant & Equipment--net 10,000 10,000 20,000 Investment in Pop ______ ___500 ______ Total Assets $16,500 $15,000 $30,700 Liabilities $1,500 $3,000 $4,500 Common Stock 10,000 8,000 20,000 Add. Paid-in Capital 2,000 3,000 3,000 Retained Earnings 3,000 1,000 3,700 Treasury Stock ______ ______ (500) Total Equities $16,500 $15,000 $30,700 *Current assets and retained earnings are reduced $300 for investment expenses. Solution PR 1-1 (ASC 350-20-50)GAAP requires the following information for each balance sheet presented: The change in the carrying amount of goodwill during the period. a. The gross amount and accumulated impairment losses at the beginning of the period b. Additional goodwill recognized during the period, except goodwill included in a disposal group that, on acquisition, meets the criteria to be classified as held for sale c. Adjustments resulting from the subsequent recognition of deferred tax assets during the period d. Goodwill included in a disposal group classified as held for sale e. Impairment losses recognized during the period in accordance with this Subtopic f.

Net exchange differences arising during the period

Any other changes in the carrying amounts during the period

h. The gross amount and accumulated impairment losses at the end of the period.

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Business Combinations

Solution PR 1-2 (ASC 805-20-30-12) Yes, there are fair value exceptions. The codification lists those exceptions and provides separate guidance in accounting for these items. Here are the listed exceptions: a. Income taxes b.

Employee benefits

Indemnification assets

Reacquired rights

Share-based payment awards

Assets held for sale

Certain assets and liabilities arising from contingencies.

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.

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.

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.

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.

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 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.

If the equity method is applied correctly, the income of the parent company will generally equal the controlling interest share of consolidated net income.

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 a consolidated income statement.

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, and (c) there have been no intercompany transactions between the affiliated companies that have created investment account-book value differences.

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. Changes from the cost to the equity method of accounting for equity investments are changes in the reporting entity that require restatement of prior years’ financial statements when the effect is material. .. 2-1

2-2

Stock Investments — Investor Accounting and Reporting

The one-line consolidation is adjusted when the investee’s income includes 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 gains and losses from discontinued operations is combined with similar items of the investor.

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.

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.

Goodwill impairment losses are calculated by business reporting units. For each reporting unit, the company must first determine the fair values of the 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. The first step requires a comparison of the carrying value and fair value of all the net assets at the business reporting level. If the fair value exceeds the carrying value, goodwill is not impaired and no further tests are needed. If the carrying value exceeds the fair value, then we proceed to step two. In step two, we calculate the implied value of goodwill. Any excess measured fair value over the net identifiable assets is the implied fair value of goodwill. The company then compares the goodwill’s implied fair value estimate to the carrying value of goodwill to determine if there has been an impairment during the period.

Yes. 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 may recognize impairments for equity method investments as a whole, but perform no separate goodwill impairment tests.

SOLUTIONS TO EXERCISES Solution E2-1 Klaus AG recorded investment in Max AG using fair value/cost method because no significant influence was obtained. Journal entries on Klaus AG's book March 2 Investment in Max AG (+A) Cash (-A) To record purchase of Max AG’s outstanding shares

10,000 10,000

April 1 Cash (+A) 25,000 Dividend income (R, +SE) 25,000 To record dividends received from Max AG ($500,000  500 / 10,000) Note: under the fair value/cost method, there is no need to recognize a portion of Max AG earnings.

Chapter 2

2-3

Solution E2-2 Interest acquired (5,000 shares / 20,000 shares)

25%

Cost of 25% interest in Atah PLC Book value acquired ($100,000,000  25%) Excess fair value over book value

$29,000,000 $25,000,000 $4,000,000

Excess allocated to: Overvalued Inventories ($4,000,000  25%) Undervalued equipment ($24,000,000  25%) Undervalued notes payable ($8,000,000  25%) Goodwill for remainder Excess fair value over book value

($1,000,000) $6,000,000 ($2,000,000) $1,000,000 $4,000,000

Goodwill from Henry PLC investment in Atah PLC was $1,000,000 Solution E2-3 1

Cost of 30% common interest in William Ltd Book value (and fair value) acquired: Common stock, $10 par Additional paid-in capital Retained earnings Common stockholders’ equity Percent acquired Goodwill

$3,500,000 $3,000,000 $5,000,000 $3,000,000 $9,000,000 30%

$2,700,000 $800,000

William Ltd’s net income Less: preferred income ($1,000,000  10%) Income to common

$1,000,000 $100,000 $900,000

Income from William Ltd ($900,000  30%)

$270,000

Solution E2-4 Income from Sun for 2016 Share of Sun’s income ($100,000  1/2 year  30%)

$ 15,000

Stock Investments — Investor Accounting and Reporting

2-4

Solution E2-5 1

Income from Son Share of Son’s reported income ($200,000  30%) Less: Excess allocated to inventory Less: Depreciation of excess allocated to building ($50,000/4 years) Income from Son

60,000 (25,000) (12,500)

22,500

500,000 22,500 (15,000) 507,500

Investment account balance at December 31 Cost of investment in Son Add: Income from Son Less: Dividends ($50,000 x 30%) Investment in Son December 31

Alternative solution Underlying equity in Son at January 1 ($375,000/.3) Income less dividends Underlying equity December 31 Interest owned Book value of interest owned December 31 Add: Unamortized excess Investment in Son December 31

$1,250,000 150,000 1,400,000 30% 420,000 87,500 $ 507,500

Solution E2-6 Journal entry on Pam’s books Investment in Sun ($1,200,000 x 40%) Loss from discontinued operations Income from Sun To recognize income from 40% investment in Sun.

480,000 80,000 560,000

Chapter 2

2-5

Solution E2-7 1

a Dividends received from Son ($120,000  15%) Share of income since acquisition of interest 2016 ($20,000  15%) 2017 ($80,000  15%) Excess dividends received over share of income Investment in Son January 3, 2016 Less: Excess dividends received over share of income Investment in Son December 31, 2017

b Cost of 10,000 of 40,000 shares outstanding Book value of 25% interest acquired ($4,000,000 stockholders’ equity at December 31, 2016 + $1,400,000 from additional stock issuance)  25% Excess fair value over book value(goodwill)

d The investment in Son balance remains at the original cost.

c Income from continuing operations Percent owned Income from Son Products

18,000

(3,000) (12,000) 3,000

$ $

50,000 (3,000) 47,000

$1,400,000 1,350,000 $ 50,000

$ $

200,000 40% 80,000

Stock Investments — Investor Accounting and Reporting

2-6

Solution E2-8 Preliminary computations Cost of 40% interest January 1, 2016 Book value acquired ($4,000,000  40%) Excess fair value over book value Excess allocated to Inventories $100,000  40% Equipment $200,000  40% Goodwill for the remainder Excess fair value over book value Pam’s underlying equity in Sun ($5,500,000  40%) Add: Goodwill Investment balance December 31, 2019 Alternative computation Pam’s share of the change in Sun’s stockholders’ equity ($1,500,000  40%) Less: Excess allocated to inventories ($40,000  100%) Less: Excess allocated to equipment ($80,000/4 years  4 years) Increase in investment account Original investment Investment balance December 31, 2019

$2,400,000 (1,600,000) $ 800,000 $

40,000 80,000 680,000 800,000

$2,200,000 680,000 $2,880,000

600,000 (40,000) (80,000) 480,000 2,400,000 $2,880,000

Solution E2-9 1

Income from Son Share of income to common ($400,000 - $30,000 preferred dividends)  30% Investment in Son December 31, 2017 NOTE: The $50,000 direct costs of acquiring the investment must be expensed when incurred. They are not a part of the cost of the investment. Investment cost Add: Income from Son Less: Dividends from Son ($200,000 dividends - $30,000 dividends to preferred)  30% Investment in Son December 31, 2017

111,000

$1,200,000 111,000 (51,000) $1,260,000

Chapter 2

2-7

Solution E2-10 1

Income from Sun ($200,000 – $150,000)  25% Investment income October 1 to December 31 Investment balance December 31 Investment cost October 1 Add: Income from Sun Less: Dividends Investment in Sun at December 31

12,500

300,000 12,500 --312,500

December 31 $ 600,000 400,000 $200,000

Sales Expenses Net Income

October 1 $450,000 300,000 $150,000

Solution E2-11 Preliminary computations Goodwill from first 10% interest: Cost of investment Book value acquired ($210,000  10%) Excess fair value over book value Goodwill from second 10% interest: Cost of investment Book value acquired ($250,000  10%) Excess fair value over book value 1.

Correcting entry as of January 2, 2017 to convert investment to the equity method Accumulated gain/loss on stock available for Sale Valuation allowance to record Son at fair value To remove the valuation allowance entered on December 31, 2016 under the fair value method for an available for sale security. Investment in Son Retained earnings To adjust investment account to an equity basis computed as follows: Share of Son’s income for 2016 Less: Share of dividends for 2016

$ $ $ $

25,000 (21,000) 4,000 50,000 (25,000) 25,000

25,000 25,000

4,000 4,000 $ $

10,000 (6,000) 4,000

Income from Son on original 10% investment

5,000

Income from Son on second 10% investment 2017 Income from Son

5,000 10,000

Income from Son for 2017

Stock Investments — Investor Accounting and Reporting

2-8

Solution E2-12 Preliminary computations Stockholders’ equity of Sun on December 31, 2016 Sale of 12,000 previously unissued shares on January 1, 2017 Stockholders’ equity after issuance on January 1, 2017 Cost of 12,000 shares to Pam Book value of 12,000 shares acquired $630,000  12,000/36,000 shares Excess fair value over book value

$380,000 250,000 $630,000 $250,000 210,000 $ 40,000

Excess is allocated as follows Buildings $60,000  12,000/36,000 shares Goodwill Excess fair value over book value

$ 20,000 20,000 $ 40,000

Journal entries on Pam’s books during 2017 January 1 Investment in Sun Cash To record acquisition of a 1/3 interest in Sun. During 2017 Cash Investment in Sun To record dividends received from Sun ($90,000  1/3).

250,000 250,000

30,000

December 31 Investment in Sun 38,000 Income from Sun To record investment income from Sun computed as follows: Share of Sun’s income ($120,000  1/3) Depreciation on building ($20,000/10 years) Income from Sun

30,000

38,000 $ 40,000 (2,000) $ 38,000