On January 1, Year 2, Point Inc. purchased 10% of Iona Co.’s common stock. Point purchased additional shares bringing its ownership up to 40% of Iona’s common stock outstanding on August 1, Year 2. During October, Year 2, Iona declared and paid a cash dividend on all of its outstanding common stock. How much income from the Iona investment should Point’s Year 2 income statement report?
40% starting on august 1st and after since income is recognized when using equity method is used upon owning over 20%-25% and significant influence.
Palmetto Inc. is currently using the equity method to account for its 30% investment in Royal Company. In the acquisition last year of Royal Co. common stock, Palmetto calculated $1,000,000 of goodwill. The correct accounting for this goodwill on a quarterly basis during the current year is:
No accounting necessary
Since there is no need for consildation,
Goodwill under the equity method is not tested by itself but the whole investment account is tested for impairment
Goodwill is never amortized in any situation under GAAP.
Anchor Co. owns 40% of Main Co.’s common stock outstanding and 75% of Main’s noncumulative preferred stock outstanding. Anchor exercises significant influence over Main’s operations. During the current period, Main declared dividends of $200,000 on its common stock and $100,000 on its noncumulative preferred stock. What amount of dividend income should Anchor report on its income statement for the current period related to its investment in Main?
100,000 X 0.75 = 75,000 preferred stock is related to the investment since it does not allow Anchor power over main.
Where as the 40% common stock gives power to Anchor over Main and would directly reduce the Anchor’s investment in main not reported as income.
Chatham Co. owned 25 percent of the voting stock of Boyrum Co. Chatham applied the equity method to account for this investment. Boyrum reported income of $100,000 and paid $30,000 in cash dividends during the period. What amount should Chatham report as investment income?
ASKING FOR INCOME NOT CARRYING VALUE
100,000 X .25 = 25,000
30,000 X 0.25 = 7,500 is viewed as return of capital lowering the investment in subsidary account it wouldn’t be income
Larkin Co. has owned 25% of the common stock of Devon Co. for a number of years, and has the ability to exercise significant influence over Devon. The following information relates to Larkin’s investment in Devon during the most recent year:
Carrying amount of Larkin’s investment in Devon at the beginning of the year
200,000
Net income of Devon for the year
600,000
Total dividends paid to Devon’s stockholders during the year
$ 400,000
What is the carrying amount of Larkin’s investment in Devon at year end?
ASKING FOR CARRYING AMOUNT NOT INCOME THEREFORE DIVIDENDS REDUCTION NEEDS TO BE ACCOUNTED FOR
200,000
600,000 X 0.25 = 150,000 (income)
400,000 X 0.25 = 100,000 (dividends paid)
150,000 - 100,000 = 50,000
200,000 + 50,000 = 250,000
On January 2, Year 3, Well Co. purchased 10 percent of Rea Inc.’s outstanding common shares for $400,000. Well is the largest single shareholder in Rea, and Well’s officers are a majority on Rea’s board of directors. Rea reported net income of $500,000 for Year 3 and paid dividends of $150,000. In its December 31, Year 3, balance sheet, what amount should Well report as investment in Rea?
ASKING FOR INVESTMENT IN SUB NOT INCOME
400,000 + 35,000 = 435,000
500,000 X 0.1 = 50,000
150,000 X 0.1 = -15,000
50,000 - 15,000 = 35,000
Moss Corp. owns 20 percent of Dubro Corp.’s preferred stock and 40 percent of its common stock. Moss exercises significant influence over the business affairs of Dubro. Dubro’s stock outstanding at December 31, Year 1, is as follows:
10% cumulative preferred stock 100K
Common stock 700K
Dubro reported net income of $60,000 and paid dividends of $10,000 to its preferred shareholders for the year ended December 31, Year 1. How much income should Moss record due to its investments in Dubro in its year ended December 31, Year 1, income statement?
100,000 X 0.1 = 10,000
60,000 - 10,000 = 50,000
10,000 X 0.2 = 2,000
50,000 X 0.4 = 20,000
20,000 + 2,000 = 22,000
Band Co. uses the equity method to account for its investment in Guard, Inc. common stock. How should Band record a 2% stock dividend received from Guard?
As a memorandum entry reducing the unit cost of all Guard stock owned.
Puff Co. acquired 40 percent of Straw Inc.’s voting common stock on January 2, Year 1 for $400,000. The carrying amount of Straw’s net assets at the purchase date totaled $900,000. Fair values equaled carrying amounts for all items except equipment, for which fair values exceeded carrying amounts by $100,000. The equipment has a five-year life. During Year 1, Straw reported net income of $150,000. What amount of income from this investment should Puff report in its Year 1 income statement?
150,000 X 0.4 = 60,000
100,000 / 5 = 20,000
20,000 X 0.4 = 8,000
60,000 - 8,000 = 52,000
irk Co. purchased 30 percent of Sled Co.’s outstanding common stock on December 31 for $200,000. On that date, Sled’s stockholders’ equity was $500,000, and the fair value of its identifiable net assets was $600,000. On December 31, what amount of goodwill should Birk attribute to this acquisition?
500,000 X 0.3 = 150,000
Find the value attributable to the purchase by taking the NBV from the purchase price
200,000 - 150,000 = 50,000
Then take the FV - NBV and subtract it from the remainder of above
600,000 X 0.3 = 180,000
180,000 - 150,000 = 30,000
50,000 - 30,000 = 20,000 (excess to goodwill)
Palmetto Inc. is currently using the equity method to account for its 30% investment in Royal Company. In the acquisition last year of Royal Co. common stock, Palmetto calculated $1,000,000 of goodwill. The correct accounting for this goodwill on a quarterly basis during the current year is:
A.
No accounting necessary.
B. Test for impairment at year-end. C. Amortization over 40 years. D. Amortization over the anticipated holding period of the Royal Company stock.
No accounting necessary
The entire investment is tested for impairment not just the goodwill.
Grant, Inc. acquired 30% of South Co.’s voting stock for $200,000 on January 2, Year 1. Grant’s 30% interest in South gave Grant the ability to exercise significant influence over South’s operating and financial policies. During Year 1, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the six months ended June 30, Year 2, and $200,000 for the year ended December 31, Year 2. On July 1, Year 2, Grant sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, Year 2.
In its Year 2 income statement, what amount should Grant report as gain from the sale of half of its investment?
200,000
80,000 - 50,000 = 30,000
30,000 X 0.3 = 9,000
200,000 + 9,000 = 209,000
100,000 X 0.3 = 30,000
209,000 + 30,000 = 239,000
239,000 / 2 = 119,500
150,000 - 119,500 = 30,500
Grant, Inc. acquired 30% of South Co.’s voting stock for $200,000 on January 2, Year 1. Grant’s 30% interest in South gave Grant the ability to exercise significant influence over South’s operating and financial policies. During Year 1, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the six months ended June 30, Year 2, and $200,000 for the year ended December 31, Year 2. On July 1, Year 2, Grant sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, Year 2.
Before income taxes, what amount should Grant include in its Year 1 income statement as a result of the investment?
80,000 X 0.3 = 24,000
State University sold all of its basketball tickets to its students for 15 home games on September 30 for $1,200,000 (basketball season starts November 1). Assuming the college basketball team played six home games prior to year-end, what adjusting journal entry (if any) is necessary on December 31, assuming the initial student ticket transactions were recorded on September 30?
A. (Dr) Unearned revenue 480,000
(Cr) Basketball revenue 480,000
B. (Dr) Cash 480,000
(Cr) Basketball revenue 480,000
C. (Dr) Unearned revenue 720,000
(Cr) Student receivables 720,000
D. No journal entry necessary.
1,200,000 / 15 = 80,000
80,000 X 6 = 480,000
DR Unearned Revenue 480,000
CR Basketball Revenue 480,000
Even if this threshold is not met, the investor is seen to have significant influence if it has
Board representation (not recommendations), participation in policy making, managerial intercompany transactions, or the investee has technological dependence on investor.
representation on the board of directors of the investee, participates in policy-making processes, has material intercompany transactions, interchanges managerial personnel, or the investee has technological dependency on the investor.
Day Co. received dividends from its common stock investments during the year ended December 31, Year 1, as follows:
A stock dividend of 400 shares from Parr Corp. on July 25, Year 1, when the market price of Parr’s shares was $20 per share. Day owns less than 1% of Parr’s common stock.
A cash dividend of $15,000 from Lark Corp. in which Day owns a 25% interest. A majority of Lark’s directors are also directors of Day.
What amount of dividend revenue should Day report in its Year 1 income statement?
First one is stock dividend not cash
Second uses equity method reducing carring value of investment opposed to recoginzed as rev
On January 2, Year 1, Kean Co. purchased a 30% interest in Pod Co. for $250,000. On this date, Pod’s stockholders’ equity was $500,000. The carrying amounts of Pod’s identifiable net assets approximated their fair values, except for land whose fair value exceeded its carrying amount by $200,000. Pod reported net income of $100,000 for Year 1, and paid no dividends. Kean accounts for this investment using the equity method. In its December 31, Year 1, balance sheet, what amount should Kean report as investment in subsidiary?
100,000 X 0.3 = 30,000
250,000 + 30,000 = 280,000
On January 1, Year 1, Mega Corp. acquired 10% of the outstanding voting stock of Penny, Inc. On January 2, Year 2, Mega gained the ability to exercise significant influence over financial and operating control of Penny by acquiring an additional 20% of Penny’s outstanding stock. The two purchases were made at prices proportionate to the value assigned to Penny’s net assets, which equaled their carrying amounts. For the years ended December 31, Year 1 and Year 2, Penny reported the following:
Div Paid 200k 300k
Net Inc 600k 650k
In Year 2, what amounts should Mega report as current year investment income and as an adjustment, before income taxes, to Year 1 investment income?
Year 2 Investment income
Adjustment Year 1 Investment income
650,000 X 0.3 = 195,000 Year 2 Income
No Adjustment needed for Year 1 did not execute 30%
Investment income only not investment amount into sub
Louis, Inc. acquired 40% of the outstanding non-voting preferred stock of Rich Co. What method for recording the investment should Louis use?
A. The fair value method. B. The equity method if it can acquire an additional 11% by year-end. C. The equity method if no other investor has more than a 40% interest. D. The equity method because significant influence must be assumed.
FV since these are non-voting stock even if there are no other significant investors.
Under the equity method, Kell paid $585,000 for its investment in Beck. Beck had net assets with a fair value of $1.3 million, the book value of the net assets acquired by Kell was $325,000, and goodwill is equal to $195,000.
What percentage of Beck did Kell acquire?
Paid amount - good will = FV
585,000 - 195,000 = 390,000
390,000 / 1,300,000 = 30%
When the equity method is used to account for investments in common stock, which of the following affects the investor’s reported investment income?
Undervalued asset amortization related to purchase
Cash dividends from investee
Undervalued asset amortization related to purchase = Yes affect income statement (investment income)
DR Equity Revenue (IS)
CR Investment Acct (BS)
Cash dividends from investee = No affects Balance Sheet
DR Cash (BS)
CR Investee Acct (BS)
An investor in common stock received dividends in excess of the investor’s share of investee’s earnings subsequent to the date of the investment. How will the investor’s investment account be affected by those dividends under each of the following accounting methods?
Fair Value Method
Equity Method
FVM = Decrease
Equity Method = Decrease
Liquidated dividends reduce the carrying amount of investment
Dividend in excess of the investor’s share of investee earnings is stating what?
That it is a liquidated dividend
On January 1, Year 1, Pepper Company acquired 30% of the voting common stock of Salt, Inc. for $60 per share. Pepper was able to exercise significant influence over the affairs of Salt. Salt had 50,000 common shares outstanding on January 1, Year 1. On July 1, Year 1, Pepper sold all but 500 shares of its investment in Salt, Inc. Pepper held all 500 shares through year-end Year 1. Salt declared and paid a $1 per share common stock dividend on March 31, Year 1, and a $1.50 per share dividend on September 30, Year 1. Salt’s net income was exactly $50,000 each quarter.
What amount of income should Pepper record for Year 1 from this investment?
Equity method used the first half then FV method second half.
50,000 X 2 = 100,000
100,000 X 0.3 = 30,000
500 X 1.50 = 750
30,000 Equity Method + 750 FV Method = 30,750
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Simple Notes32
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F1 - M1 (BS,IS, CI)59
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F1 - M2 (EPS/PublicCRT)34
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F1 - M3 (StockHE PT1)42
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F2 - M1 (RevR)38
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F2 - M2 (Acct Changes & Error Corrections)27
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F2 - M3 (AJE)41
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F2 - M4 (Notes FS)6
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F2 - M8 (Ratios)34
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F3 - M2 (Trade Receivables)23
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F3 - M4 (Cost Basis)1
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F2 - M7 (FV)11
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F6 - M6 (Gov Fund Struct/FA)25
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F6 - M6 (Gov Acct Over)10
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F6 - M4 (NFP)25
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F6 - M3 (NFP Rev Rec)69
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F6 - M1-M2 (NFP FR)91
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F1 - M7 (Spec Purp Framework)14
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F2 - M5 (SubEvents)3
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F5 - M7 (Inc Tax PT. 1/2)101
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F6 - M5 (SCF)32
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F5 - M4 (Partnerships)17
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F5 - M3 (Consolidation)47
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F5 - M1 (Financial Instr)36
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F4 - M7 (Lease Liabilities)44
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F4 - M6 (Troubled Restru)30
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F4 - M5 (Bonds)53
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F3 - M3 (Inv)66
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F3 - M4 (PPE Cost Basis)28
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F3 - M5 (PPE Dep, Disp, Impair)32
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F3 - M6 (Intangibles)12
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F4 - M1 (Payables Acc)50
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F4 - M2 (Contingencies and Commitments)12
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F4 - M3 (LT Liabilities)21
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F5 - M2 (Equity Method)42
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F3 - M1 Cash3
