Exam 2: Intercorporate Equity Investments: an Introduction

On January 1, 20X1, Belle Ltd. purchased 100% of the common shares of Dominique Corporation for $700,000. Dominique's net income was $30,000 for 20X1 and $50,000 for 20X2. Dominique paid dividends of $20,000 on its common shares during 20X1 and $100,000 during 20X2. As such, total dividends paid by Dominique exceeded income earned by Dominique since it was acquired by Belle. What is the balance in the investment in Dominique's account at the end of 20X2 under the cost and equity methods?

On January 1, 20X1, Best Décor Ltd. started Chic Styles Ltd. by contributing $500,000 and received 100% of the common shares of Chic Styles. Chic Styles reported net income of $50,000 in 20X1 and $75,000 in 20X2 and paid out 40% of its net income as dividends in each year. Under the equity method, what amount should be reported as Investment in Chic Styles and Investment Income on Best Décor's separate-entity 20X2 financial statements?

PCo owns 60% of ACo, 20% of BCo, and 10% of DCo. ACo owns 45% of DCo. Identify the basis that each company is required to use when reporting its equity investments (if any).

Hattrick Corp. is a wholly owned, parent-founded subsidiary of Bobby Inc. Both Bobby and Hattrick report under IFRS. The unconsolidated statements of comprehensive income and part of the statement of changes in equity-retained earnings for the two companies for the year ended December 31, 20X6, are as follows (in 000s): Statements of Comprehensive Income Year Ended December $31,20X6$ Bobby $\quad$$\quad$ Hattrick Revenues: Sales \ 265,000 \ 121,000 Interest, dividend, \& lease income Expenses: Cost of goods sold 133,000 63,000 Amortization expense 26,000 11,600 Administrative expense 39,000 13,000 Income tax expense 17,800 11,700 Other expenses 12,900 400 228,700 99,700 Net income 49,300 21,900 Statement of Changes in Equity - Retained Earnings Section Year Ended December $31,20X6$ Retained earnings, January 1,20X6 19,200 15,200 Net income 49,300 21,900 Dividends declared Retained earnings, December 31,20\times6 \ 55,200 \ 27,100 Additional information: • Bobby sells some of its output to Hattrick. During 20X6, intercompany sales amounted to $25,000,000, all of which had been sold by Hattrick to outside customers by year-end. Hattrick has accounts payable owing to Bobby of $200,000 at December 31, 20X6. • Bobby owns the land on which Hattrick's building is located. Bobby leases the land to Hattrick for $30,000 per month. • Bobby accounts for its investment in Hattrick under the cost method. Required: Prepare a consolidated statement of comprehensive income and consolidated statement of changes in equity-retained earnings section for Bobby Inc. for the year ended December 31, 20X6.

Under which method does the statement of comprehensive income show "Equity in earnings of Subsidiary"?

Under the equity method, the purchase price discrepancy (PPD)is ________.

On January 1, 20X2, Soho Co. purchased 4,000 shares, representing 12%, of Rico Inc., for $78,000. Soho is a publicly traded company. During the next two years, the following information was available for Rico. Net income (loss) Dividends declared Share price December 31 20X2 \ 65,000 \ 55,000 \ 22.20 20X3 \ 35,000 \ 10,000 \ 15.70 Soho sold all of its 4,000 shares in Rico on December 31, 20X3. Required: A)Assuming Soho classifies this investment as FVTPL, prepare the journal entries for the next two years related to this investment, and the carrying value of the investment at the end of 20X2 and 20X3. B)Assuming Soho classifies this investment as FVTOCI, prepare the journal entries for the next two years related to this investment, and the carrying value of the investment at the end of 20X2 and 20X3.

In 20X5, Bing created a wholly owned subsidiary called Bango Limited. Bing is a private company and reports under ASPE. Bing is currently using the cost method to record its investment in Bango, but is trying to decide if it should report using the equity method or the consolidation method. This is the only subsidiary that Bing has. Separate Statements of Earnings and Retained Earnings for Bing and Bango Year Ended December 31, 20X5. Bing Bango Sales of merchandise \ 6,000,000 \ 1,000,000 Other revenues 200,000 Total revenues \ 6,200,000 \ 1,020,000 Cost of goods sold \ 2,500,000 \ 400,000 Depreciation expense 500,000 80,000 Interest expense 400,000 20,000 Other expenses (including income tax) Total expenses \ 4,700,000 \ 690,000 Net income \ 1,500,000 \ 330,000 Retained earnings, Januar'y 1, 20X5 4,200,000 0 Dividends declared (50,000) Retained earnings, December 31, 20X5 \ 5,500,000 \ 280,000 Other Information During the year, the following transactions occurred between the two companies: 1. Bing sold merchandise to Bango for $560,000. At the end of the year, Bango still owed Bing $25,000 for this merchandise, although Bango had sold this entire inventory to outside customers. 2. Bango charged rent of $20,000 to Bing for office space. 3. Licensing fees were paid by Bango to Bing in the amount of $150,000. Required: (a)Prepare the statement of earnings and retained earnings for Bing using the equity method of reporting its investment in Bango. (b)Prepare the consolidated statement of earnings and retained earnings for Bing. (c)Compare the equity method and the consolidation method and discuss any similarities and differences. (d)If Bing had other subsidiary investments, what other factors would be considered in trying to decide if the consolidation or equity method should be used?

O'Reilly Ltd. incorporated O'Reilly R&D Co. to conduct research and development activities. O'Reilly R&D is a(n)________.

Hattrick Corp. is a wholly owned, parent-founded subsidiary of Bobby Inc. The unconsolidated statements of income and the statement of changes of retained earnings for the two companies for the year ended December 31, 20X6, are as follows (in 000s): Statements of Income and Retained Earnings Year Ended December 31, 20X6 Bobby $\quad$$\quad$ Hattrick Revenues: Sales \2 65,000 \1 21,000 Interest, dividend, \& lease income 13,000 600 278,000 121,600 Expenses: Cost of goods sold 133,000 63,000 Amortization expense 26,000 11,600 Administrative expense 39,000 13,000 Income taxexpense 17,800 11,700 Other expenses 12,900 228,700 99,700 Net income 49,300 21,900 Retained earnings, January 1,20X6 19,200 15,200 Dividends declared (13,300) (10,000) Retained earnings, December 31,20X6 \5 5,200 \2 7,100 Additional information: • Bobby sells some of its output to Hattrick. During 20X6, intercompany sales amounted to $25,000,000, all of which had been sold by Hattrick to outside customers by year-end. Hattrick has accounts payable owing to Bobby for $200,000 at December 31, 20X6. • Bobby owns the land on which Hattrick's building is located. Bobby leases the land to Hattrick for $30,000 per month. • Bobby accounts for its investment in Hattrick under the cost method Assume that Bobby is a private corporation that reports under ASPE. Prepare the statement of income and retained earnings for Bobby for the year 20X6 using the equity method.

At the beginning of 20X1, Anwar Ltd. acquired 15% of the voting shares of Cruz Co. for $150,000. Anwar does not have any significant influence over Cruz. Anwar reports the investment using the cost method. In 20X1, Cruz earned net income of $70,000 and paid dividends of $40,000. In 20X2, Cruz earned net income of $80,000 and paid dividends of $100,000. At the end of 20X2, what is the balance of Anwar's "Investment in Cruz" account?

Bela Ltd. has invested in several domestic manufacturing corporations. Which of the following investments would most likely be accounted for under the equity method on Bela's financial statements?

Rasor Inc. reports under IFRS and recently invested $50,750 to obtain 40% ownership in Ivan. Tenor owns 60% of Ivan. However, all major strategic decisions require the unanimous consent of both Rasor and Tenor. The agreement stipulates that both Rasor and Tenor have rights over the net assets of Ivan. The balance of the Rasor's investment in Ivan was $50,750 at January 1, 20X3. During the next three years, Ivan reported the following net earnings (losses)and dividends paid. Net earnings (loss) Dividends paid \ \ 20X3 135,600 120,000 20X4 15,700 120,000 20X5 (103,400) 0 Required: A)Explain the two types of joint arrangements discussed in IFRS. How is each of these types of investments recognized in the accounts under IFRS? What type is Rasor's investment in Ivan and why? What accounting method is used by Rasor to recognize this investment? B)Calculate the balance of the Investment in Ivan account at December, 31 20X5.

At the beginning of 20X1, Anwar Ltd. acquired 15% of the voting shares of Cruz Co. for $150,000. Anwar does not have any significant influence over Cruz. Anwar reports the investment using the cost method. In 20X1, Cruz earned net income of $70,000 and paid dividends of $40,000. In 20X2, Cruz earned net income of $80,000 and paid dividends of $100,000. At the end of 20X2, what journal entry should Anwar make on its books to record the dividends from Cruz?

Bud Ltd. owns 100% of Calla Co. Calla owns 55% of Daisy Ltd., and Daisy owns 90% of Fern Ltd. Which of the following statements is true?

Townsend Ltd. has the following shareholders: Palermo Co.-60% Nix Ltd.-30% Riley Ltd.-10% Nix has two seats on Townsend's five-person board of directors. Which of the following statements is true?

Forest Ltd. reports its investment in Leeds Co. on an equity basis. During the year, Forest received $10,000 in dividends from Leeds. How should Forest report these dividends?

What is a structured entity? How is control determined in a structured entity? Give one example of how an entity might use a structured entity. How are SEs recognized?

What is securitization?

Jarrett Corporation uses the equity method to account for its 25% investment in Polo Corporation and receives $15,000 in dividends. How should Jarrett account for these dividends?