Chapter 2 Stock Investments - Investor Accounting and Reporting (стр. 4 )

Required:

1. Calculate Pearl's income from Sandlin for 2013.

2. Calculate Pearl's income from Sandlin for 2014.

3. Determine the balance of Pearl's Investment in Sandlin account on December 31, 2014.

Answer: Cost of Pearl's 25% investment in Sandlin $150,000

Less: Book value of net assets acquired:

25% × $400,000 of net assets = 100,000

Excess cost over book value acquired = $50,000

Requirement 1:

Pearl's 2013 income from Sandlin equals:

(25% × $60,000) - $10,000 of

patent amortization $5,000

Requirement 2:

Pearl's 2014 income from Sandlin equals:

(25% × $80,000) - patent amortization of $10,000 = $10,000

Requirement 3:

Initial investment in Sandlin $150,000

Plus: Net change for 2013: (Income of $5,000 - Dividends of $3,000) 2,000

Plus: Net change for 2014: (Income of $10,000 - Dividends of $3,000) 7,000

Investment balance at December 31, 2014: $159,000

Objective: LO5

Difficulty: Moderate

13) On January 2, 2013, Slurg Corporation paid $600,000 to acquire 20% interest in Padwaddy Inc. At that time, the book value of Padwaddy's stockholders' equity included $700,000 of common stock and $1,800,000 of retained earnings. All the excess purchase cost over the book value acquired was attributable to a patent with an estimated life of 10 years. Padwaddy paid $6,250 of dividends each quarter for the next two years, and reported net income of $180,000 for 2013 and $220,000 for 2014. Slurg recorded all activities related to their investment using the equity method.

Required:

1. Calculate Slurg's income from Padwaddy for 2013.

2. Calculate Slurg's income from Padwaddy for 2014.

3. Determine the balance of Slurg's Investment in Padwaddy account on December 31, 2014.

Answer: Cost of Slurg's 20% investment in Padwaddy $600,000

Less: Book value of net assets acquired:

20% × $2,500,000 of net assets = 500,000

Excess cost over book value acquired = $100,000

Requirement 1:

Slurg's 2013 income from Padwaddy equals:

(20% × $180,000) - $10,000 of

patent amortization $26,000

Requirement 2:

Slurg's 2014 income from Padwaddy equals:

(20% × $220,000) - patent amortization of $10,000 = $34,000

Requirement 3:

Initial investment in Padwaddy $600,000

Plus: Net change for 2013: (Income of $26,000 -

Dividends of $5,000) 21,000

Plus: Net change for 2014: (Income of $34,000 -

Dividends of $5,000) 29,000

Investment balance at December 31, 2014: $650,000

Objective: LO5

Difficulty: Moderate

14) Shebing Corporation had $80,000 of $10 par value common stock outstanding on January 1, 2013, and retained earnings of $120,000 on the same date. During 2013 and 2014, Shebing earned net incomes of $30,000 and $45,000, respectively, and paid dividends of $8,000 and $10,000, respectively.

On January 1, 2013, Pentz Company purchased 25% of Shebing's outstanding common stock for $60,000. On January 1, 2014, Pentz purchased an additional 10% of Shebing's outstanding stock for $30,200. The payments made by Pentz in excess of the book value of net assets acquired were attributed to equipment, with each excess value amount depreciable over 8 years under the straight-line method.

Required:

1. What is the adjustment to Investment Income for depreciation expense relating to Pentz's Investment in Shebing in 2013 and 2014?

2. What will be the December 31, 2014 balance in the Investment in Shebing account after all adjustments have been made?

Answer: Calculation of Shebing's net assets at the end of each year:

Shebing's net assets on January 1, 2013 $200,000

Plus: 2013 net income minus dividends ($30,000 - $8,000) 22,000

Shebing's net assets at December 31, 2013 $222,000

Plus: 2014 net income minus dividends ($45,000 - $10,000) 35,000

Shebing's net assets at December 31, 2014 $257,000

Pentz's adjusted fair value payments for equipment

Pentz's January 1, 2013 initial investment cost $60,000

Less: Pentz's share of Shebing's net assets on this date = (25% × $200,000) = 50,000

Equals: fair value adjustment for equipment $10,000

Pentz's January 1, 2014 investment cost $30,200

Less: Pentz's share of Shebing's net assets on this date = (10% × $222,000) = 22,200

Equals: fair value adjustment for equipment $ 8,000

Requirement 1:

2013 equipment depreciation ($10,000/8 years) = $1,250

2014 equipment depreciation ($10,000/8 years) +

($8,000/8 years)= $2,250

Requirement 2:

Direct investment costs ($60,000 + $30,200) = $90,200

Plus: 2013 adjustments (25%) × ($30,000 - $8,000) - $1,250 = 4,250

Plus: 2014 adjustments (35%) × ($45,000 - $10,000) - $2,250= 10,000

Equals: December 31, 2014 investment account balance $104,450

Objective: LO5

Difficulty: Moderate

15) Shoreline Corporation had $3,000,000 of $10 par value common stock outstanding on January 1, 2012, and retained earnings of $1,000,000 on the same date. During 2012, 2013, and 2014, Shoreline earned net incomes of $400,000, $700,000, and $300,000, respectively, and paid dividends of $300,000, $550,000, and $100,000, respectively.

On January 1, 2012, Pebble purchased 21% of Shoreline's outstanding common stock for $1,240,000. On January 1, 2013, Pebble purchased 9% of Shoreline's outstanding stock for $510,000, and on January 1, 2014, Pebble purchased another 5% of Shoreline's outstanding stock for $320,000. All payments made by Pebble that are in excess of the appropriate book values were attributed to equipment, with each block depreciable over 20 years under the straight-line method.

Required:

1. What is the adjustment to Investment Income for depreciation expense for Pebble's investment in Shoreline in 2012, 2013, and 2014?

2. What will be the December 31, 2014 balance in the Investment in Shoreline account after all adjustments have been made?

Answer: Calculation of Shoreline's net assets at the end of each year:

Shoreline's net assets on January 1, 2012 $4,000,000

Plus: 2012 net income minus dividends ($400,000 - $300,000) 100,000

Shoreline's net assets at December 31, 2012 $4,100,000

Plus: 2013 net income minus dividends ($700,000 - $550,000) 150,000

Shoreline's net assets at December 31, 2013 4,250,000

Plus: 2014 net income minus dividends ($300,000 - $100,000) $200,000

Shoreline's net assets at December 31, 2014 $4,450,000

Pebble's adjusted fair value payments for equipment

Pebble's January 1, 2012 initial investment cost $1,240,000

Less: Pebble's share of Shoreline's net assets on this

date = (21% × $4,000,000) = 840,000

Equals: fair value adjustment for equipment $400,000

Pebble's January 1, 2013 investment cost $510,000

Less: Pebble's share of Shoreline's net assets on this

date = (9% × $4,100,000) = 369,000

Equals: fair value adjustment for equipment $141,000

Pebble's January 1, 2014 investment cost $320,000

Less: Pebble's share of Shoreline's net assets on this

date = (5% × $4,250,000) = 212,500

Equals: fair value adjustment for equipment $107,500

Requirement 1:

2012 equipment depreciation ($400,000/20 years) = $20,000

2013 equipment depreciation ($400,000/20 years) +

($141,000/20 years)= $ 27,050

2014 equipment depreciation ($400,000/20 years) +

($141,000/20 years) + ($107,500/20 years) = $32,425

Requirement 2:

Direct investment costs ($1,240,000 + $510,000 + $320,000)= $2,070,000

Plus: 2012 adjustments (21%) × ($400,000 - $300,000) - $20,000 = 1,000

Plus: 2013 adjustments (30%) × ($700,000 - $550,000) - $27,050 = 17,950

Plus: 2014 adjustments (35%) × ($300,000 - $100,000) - $32,425 = 37,575

Equals: December 31, 2014 investment account balance $2,126,525

Objective: LO5

Difficulty: Difficult

16) For 2013 and 2014, Sabil Corporation earned net income of $480,000 and $640,000 and paid dividends of $18,000 and $20,000, respectively. At January 1, 2013, Sabil had $200,000 of $10 par value common stock outstanding and $1,500,000 of retained earnings.

On January 1 of each of these years, Phyit Corporation bought 10% of the outstanding common stock of Sabil paying $200,000 per 10% block on January 1, 2013 and 2014. All payments made by Phyit in excess of book value were attributable to equipment, which is depreciated over ten years on a straight-line basis.

Required:

1. If Phyit uses the cost method of accounting for its investment in Sabil, how much dividend income will Phyit recognize in 2013 and 2014, and what will be the balance in the investment account at the end of each year?

2. If Phyit has significant influence and can justify using the equity method of accounting, how much net investee income will Phyit recognize for 2013 and 2014?

Answer: Requirement 1:

2013 dividend income = 10% × $18,000 of dividends = $1,800

2014 dividend income = 20% × $20,000 of dividends = $4,000

Investment account

Jan 1, 2013 purchase = $200,000

Dec 31, 2013 balance = $200,000

Jan 1, 2014 purchase = $200,000

Dec 31, 2014 balance = $400,000

Requirement 2

Calculation of Sabil's net assets at end of year:

Sabil net assets on January 1, 2013 $1,700,000

Plus: 2013 net income minus dividends ($480,000 - $18,000) 462,000

Sabil net assets at December 31, 2013 $2,162,000

Plus: 2014 net income minus dividends ($640,000 - $20,000) 620,000

Sabil net assets at December 31, 2014 $2,782,000

Phyit's adjusted fair value payments for equipment

Phyit's January 1, 2013 initial investment cost $200,000

Less: Phyit's share of Sabil net assets on this date = (10% × $1,700,000) = 170,000

Equals: fair value adjustment for equipment $30,000

Phyit's January 1, 2014 investment cost $ 200,000