Exam 1: The Equity Method of Accounting for Investments

On January 1, 2011, Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000, which approximated book value. During 2011, Barney paid dividends of $30,000 and reported a net loss of $70,000. -Luffman Inc. owns 30% of Bruce Inc. and appropriately applies the equity method. During the current year, Bruce bought inventory costing $52,000 and then sold it to Luffman for $80,000. At year-end, all of the merchandise had been sold by Luffman to other customers. What amount of unrealized intercompany profit must be deferred by Luffman?

Which of the following results in an increase in the Equity in Investee Income account when applying the equity method?

On January 2, 2011, Heinreich Co. paid $500,000 for 25% of the voting common stock of Jones Corp. At the time of the investment, Jones had net assets with a book value and fair value of $1,800,000. During 2011, Jones incurred a net loss of $60,000 and paid dividends of $100,000. Any excess cost over book value is attributable to goodwill with an indefinite life. Required: 1) Prepare a schedule to show the amount of goodwill from Heinrich's investment in Jones. 2) Prepare a schedule to show the balance in Heinreich's investment account at December 31, 2011.

Which of the following results in a decrease in the Equity in Investee Income account when applying the equity method?

On January 1, 2011, Bangle Company purchased 30% of the voting common stock of Sleat Corp. for $1,000,000. Any excess of cost over book value was assigned to goodwill. During 2011, Sleat paid dividends of $24,000 and reported a net loss of $140,000. What is the balance in the investment account on December 31, 2011?

During January 2010, Wells, Inc. acquired 30% of the outstanding common stock of Wilton Co. for $1,400,000. This investment gave Wells the ability to exercise significant influence over Wilton. Wilton's assets on that date were recorded at $6,400,000 with liabilities of $3,000,000. Any excess of cost over book value of Wells' investment was attributed to unrecorded patents having a remaining useful life of ten years. In 2010, Wilton reported net income of $600,000. For 2011, Wilton reported net income of $750,000. Dividends of $200,000 were paid in each of these two years. What was the reported balance of Wells' Investment in Wilson Co. at December 31, 2011?

Steven Company owns 40% of the outstanding voting common stock of Nicole Corp. and has the ability to significantly influence the investee's operations. On January 3, 2011, the balance in the Investment in Nicole Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2011, Nicole earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2010, Nicole had sold inventory costing $35,000 to Steven for $50,000. All but 25% of that inventory had been sold to outsiders by Steven during 2010. Additional sales were made to Steven in 2011 at a transfer price of $75,000 that had cost Nicole $54,000. Only 10% of the 2011 purchases had not been sold to outsiders by the end of 2011. -What amount of unrealized intra-entity inventory profit should be deferred by Steven at December 31, 2010?

Tinker Co. owns 25% of the common stock of Harbor Co. and uses the equity method to account for the investment. During 2011, Harbor reported income of $120,000 and paid dividends of $40,000. Harbor owns a building with a useful life of twenty years which is undervalued by $80,000. Required: Prepare a schedule to show the equity income Tinker should recognize for 2011 related to this investment.

On January 4, 2010, Harley, Inc. acquired 40% of the outstanding common stock of Bike Co. for $2,400,000. This investment gave Harley the ability to exercise significant influence over Bike. Bike's assets on that date were recorded at $10,500,000 with liabilities of $4,500,000. There were no other differences between book and fair values. During 2010, Bike reported net income of $500,000. For 2011, Bike reported net income of $800,000. Dividends of $300,000 were paid in each of these two years. -What was the reported balance of Harley's Investment in Bike Co. at December 31, 2011?

Figure: Cayman Inc. bought 30% of Maya Company on January 1, 2011 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows: Year Cost to Maya Transfer Price Amount Held by Cayman at Year-End 2011 \ 30,000 \ 45,000 \ 9,000 2012 \ 48,000 \ 80,000 \ 20,000 Maya reported net income of $100,000 in 2011 and $120,000 in 2012 while paying $40,000 in dividends each year. -What is the amount of unrealized intra-entity inventory profit to be deferred on December 31, 2011?

Figure: On January 1, 2010, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. On January 1, 2011 Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2010, was $1,000,000. The book value of Cook on January 1, 2011, was $1,150,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over five years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years: Net Income Dividends 2010 \ 200,000 \ 50,000 2011 225,000 50,000 2012 250,000 60,000 On April 1, 2012, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. -What was the balance in the investment account at December 31, 2011?

On January 4, 2010, Trycker, Inc. acquired 40% of the outstanding common stock of Inkblot Co. for $2,400,000. This investment gave Trycker the ability to exercise significant influence over Inkblot. Inkblot's assets on that date were recorded at $8,000,000 with liabilities of $2,000,000. There were no other differences between book and fair values. During 2010, Inkblot reported net income of $500,000 and paid dividends of $300,000. The fair value of Inkblot at December 31, 2010 is $7,000,000. Trycker elects the fair value option for its investment in Inkblot. -At what amount will Inkblot be reflected in Trycker's December 31, 2010 balance sheet?

Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to account for the investment. During 2011, Dew reported income of $250,000 and paid dividends of $80,000. There is no amortization associated with the investment. During 2011, how much income should Yaro recognize related to this investment?

Wathan Inc. sold $180,000 in inventory to Miller Co. during 2010, for $270,000. Miller resold $108,000 of this merchandise in 2010 with the remainder to be disposed of during 2011. Required: Assuming Wathan owns 25% of Miller and applies the equity method, prepare the journal entry Walthan should have recorded at the end of 2010 to defer the unrealized intra-entity inventory profit.

Steven Company owns 40% of the outstanding voting common stock of Nicole Corp. and has the ability to significantly influence the investee's operations. On January 3, 2011, the balance in the Investment in Nicole Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2011, Nicole earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2010, Nicole had sold inventory costing $35,000 to Steven for $50,000. All but 25% of that inventory had been sold to outsiders by Steven during 2010. Additional sales were made to Steven in 2011 at a transfer price of $75,000 that had cost Nicole $54,000. Only 10% of the 2011 purchases had not been sold to outsiders by the end of 2011. -What amount of unrealized intra-entity profit should be deferred by Steven at December 31, 2011?

Which adjustment would be made to change from the fair-value method to the equity method?

Pursley, Inc. acquires 10% of Ritz Corporation on January 3, 2010, for $80,000 when the book value of Ritz was $ 800,000. During 2010 Ritz reported net income of $125,000 and paid dividends of $30,000. On January 1, 2011, Pursley purchased an additional 20% of Ritz for $325,000, giving Pursley the ability to significantly influence the operating policies of Ritz. Any excess of cost over book value is attributable to goodwill with an indefinite life. What journal entry(ies) is(are) required on January 1, 2011?

Figure: Acker Inc. bought 40% of Howell Co. on January 1, 2010 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows: Year Cost to Acker Transfer Price Amount Held by Howell at Year-End 2010 \ 55,000 \ 75,000 \ 15,000 2011 \ 70,000 \ 110,000 \ 55,000 Howell reported net income of $100,000 in 2010 and $120,000 in 2011 while paying $40,000 in dividends each year. -What is the amount of unrealized intra-entity inventory profit to be deferred on December 31, 2010?

Renfroe, Inc. acquires 10% of Stanley Corporation on January 1, 2010, for $90,000 when the book value of Stanley was $1,000,000. During 2010, Stanley reported net income of $215,000 and paid dividends of $50,000. On January 1, 2011, Renfroe purchased an additional 30% of Stanley for $325,000. Any excess of cost over book value is attributable to goodwill with an indefinite life. During 2011, Renfroe reported net income of $320,000 and paid dividends of $50,000. -What is the balance in the Investment in Stanley Corporation on December 31, 2011?

Figure: On January 4, 2011, Bailey Corp. purchased 40% of the voting common stock of Emery Co., paying $3,000,000. Bailey properly accounts for this investment using the equity method. At the time of the investment, Emery's total stockholders' equity was $5,000,000. Bailey gathered the following information about Emery's assets and liabilities whose book values and fair values differed: Book Value Fair Value Buildings (20-year life) \ 1,000,000 \ 1,800,000 Equipment (5 -year life) 1,500,000 2,000,000 Franchises (10-year life) 0 700,000 Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Emery Co. reported net income of $400,000 for 2011, and paid dividends of $200,000 during that year. -What is the amount of excess amortization expense for Bailey's investment in Emery for the first year?