Chapter 11 to 15 Accounting ACCT602 Lecture notes PDF

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139 CHAPTER 11 Problem 11-1 1. 2. 3. 4. 5.

A C C A D

6. 7. 8. 9. 10.

A C A D B

Problem 11-2

Problem 11-3

Problem 11-4

1. 2. 3. 4. 5.

1. 2. 3. 4. 5.

1. 2. 3. 4. 5.

B D B A C

D D C A C

B C D A A

Problem 11-5 Equity method 1. Investment in associate Cash

2,400,000 2,400,000

Acquisition cost Net assets acquired (20% x 8,000,000) Goodwill

2,400,000 1,600,000 800,000

2. Investment in associate Investment income (20% x 1,500,000)

300,000 300,000

3. Memo – Received 2,000 shares as 10% stock dividend on 20,000 original shares. Shares now held, 22,000. 4. Investment loss Investment in associate (20% x 300,000) 5. Cash (20% x 500,000) Investment in associate

60,000 60,000 100,000 100,000

6. Cash (5,500 x 200) Investment in associate Gain on sale of investment

1,100,000 635,000 465,000

Sales price Less: Cost of investment sold (5,500/22,000 x 2,540,000) Gain on sale

1,100,000 635,000 465,000

Cost method 1. Investment in equity securities Cash 2. No entry

2,400,000 2,400,000

140 3. Memo – Received 2,000 shares as 10% stock dividend. Shares now held, 22,000. 4. No entry 5. Cash Dividend income 6. Cash Investment in equity securities (5,500/22,000 x 2,400,000) Gain on sale of investment

100,000 100,000 1,100,000 600,000 500,000

Problem 11-6 1. Investment in equity securities Cash 2. Cash (15% x 4,000,000) Dividend income (15% x 3,000,000) Investment in equity securities (15% x 1,000,000)

6,000,000 6,000,000 600,000 450,000 150,000

Problem 11-7 2008

Investment in associate Cash Investment in associate Investment income (30% x 4,000,000 x 3/12) Cash (30% x 3,000,000) Investment in associate Investment income Investment in associate (200,000 x 3/12)

2009

Investment in associate Investment income (30% x 6,000,000)

5,000,000 5,000,000 300,000 300,000 900,000 900,000 50,000 50,000 1,800,000 1,800,000

Cash (30% x 5,000,000) Investment in associate

1,500,000

Investment income Investment in associate

200,000

1,500,000

200,000

141 Problem 11-8 2006 Jan. 1 Investment in equity securities Cash Dec. 31 Cash (15% x 300,000) Dividend income 2007 Dec. 31 Cash (15% x 400,000) Dividend income 2008 Jan. 1 Investment in associate Cash 1 Investment in associate Retained earnings

1,000,000 1,000,000 45,000 45,000

60,000 60,000

3,000,000 3,000,000 75,000 75,000

Investment income – Equity method (2006 and 2007) (15% x 500,000 + 700,000) Dividend income – Cost method (2006 and 2007) (45,000 + 60,000) Cumulative effect of change to equity 1 Investment in associate Investment in equity securities (Reclassification) Dec. 31 Investment in associate Investment income (40% x 900,000) 31 Cash (40% x 600,000) Investment in associate

180,000 105,000 75,000

1,000,000 1,000,000

360,000 360,000 240,000 240,000

Problem 11-9 2008 Jan. 1

Investment in associate Cash

Dec. 31 Investment in associate Investment income (30% x 5,000,000) 31 Cash (30% x 2,000,000) Investment in associate

8,000,000 8,000,000 1,500,000 1,500,000 600,000 600,000

142 2009 June 30 Investment in associate Investment income (30% x 6,000,000)

1,800,000

July

6,000,000

Oct.

1 Cash Investment in associate (10,700,000 x 1/2) Gain on sale of investment 1 Cash (2,500,000 x 15%) Dividend income 1

Dec. 31

Available for sale securities Investment in associate (Reclassification)

1,800,000

5,350,000 650,000 375,000 375,000 5,350,000 5,350,000

No entry is required for the share in net income because the investor is now using the fair value method by reason on the reduced 15% interest.

Problem 11-10 Requirement a 1. Investment in associate Cash

3,500,000

2. Investment in associate Investment income (40% x 4,000,000)

1,600,000

3,500,000

1,600,000

3. Cash (40% x 1,000,000) Investment in associate

400,000

4. Investment income Investment in associate (600,000 / 4)

150,000

400,000

150,000

Cost Book value of interest acquired (40% x 7,000,000) Excess of cost over book value Excess attributable to equipment (40% x 1,500,000) Excess attributable to inventory (40% x 500,000) Excess net fair value over cost

3,500,000 2,800,000 700,000 ( 600,000) ( 200,000) ( 100,000)

5. Investment income Investment in associate

200,000

6. Investment in associate Investment income

100,000

200,000

100,000

143 Requirement b Share in net income Amortization of excess attributable to equipment Amortization of excess attributable to inventory Excess net fair value over cost Net investment income

1,600,000 ( 150,000) ( 200,000) 100,000 1,350,000

Problem 11-11 1. Investment in associate Cash 2. Investment in associate Investment income (40% x 650,000) 3. Cash (40% x 150,000) Investment in associate 4. Investment in associate Revaluation surplus – investee (40% x 1,300,000)

1,700,000 1,700,000 260,000 260,000 60,000 60,000 520,000 520,000

Note: 1. Cost Interest acquired (40% x 4,000,000) Goodwill – not amortized

1,700,000 1,600,000 100,000

2. There is no need to adjust for the difference in depreciation method. If both entities a method that best reflects the flow of benefits as the assets are consumed, then there is no policy difference.

Problem 11-12 1. Journal entries a. Investment in associate Cash

6,000,000

b. Investment in associate Investment income

750,000

c. Cash Investment in associate

450,000

d. Investment income Investment in associate

200,000

6,000,000

750,000

450,000

200,000

144 2. Share in net income Amortization of patent (2,000,000 / 10) Investment income

750,000 (200,000) 550,000

3. Acquisition cost Share in net income (5,000,000 x 15%) Share in cash dividend (3,000,000 x 15%) Amortization of patent (2,000,000 / 10) Carrying value

6,000,000 750,000 ( 450,000) ( 200,000) 6,100,000

Interest acquired (30,000 / 200,000)

15%

Acquisition cost Book value of net assets acquired Excess of cost applicable to patent

6,000,000 4,000,000 2,000,000

Problem 11-13 1. Journal entries a. Investment in associate Cash

5,000,000

b. Investment in associate Investment income

1,200,000

5,000,000

1,200,000

c. Cash Investment in associate

300,000

d. Investment income Investment in associate

150,000

300,000

150,000

2. Share in net income Amortization of depreciable asset (750,000 / 5) Investment income

1,200,000 ( 150,000) 1,050,000

3. Acquisition cost Share in net income (30% x 4,000,000) Share in cash dividend (30% x 1,000,000) Amortization of depreciable asset (750,000 / 5) Carrying value of investment

5,000,000 1,200,000 ( 300,000) ( 150,000) 5,750,000

Acquisition cost Net assets acquired (30% x 12,000,000) Excess of cost Excess attributable to depreciable asset (30% x 2,500,000) Excess attributable to goodwill

5,000,000 3,600,000 1,400,000 750,000 650,000

145 Problem 11-14 1. Journal entries a. Investment in associate Cash

1,000,000

b. Investment in associate Investment income

175,000

1,000,000

175,000

c. Cash Investment in associate

75,000

d. Investment income Investment in associate

50,000

2. Share in net income Amortization of excess (25,000 + 25,000) Investment income 3. Acquisition cost Net assets acquired (25% x 3,000,000) Excess of cost Excess attributable to inventory (25% x 100,000) Excess attributable to equipment (25% x 500,000) Excess attributable to goodwill (25% x 400,000)

Acquisition cost Share in net income (25% x 700,000) Amortization of excess: Inventory Equipment (125,000 / 5) Cash dividend (25,000 x 3) Investment balance

75,000

50,000 175,000 ( 50,000) 125,000 1,000,000 750,000 250,000 25,000 125,000 100,000 250,000 1,000,000 175,000 ( 25,000) ( 25,000) ( 75,000) 1,050,000

Problem 11-15 1. Share in 2008 net income Amortization of excess (400,000 / 20) Investment income for 2008 Acquisition cost (20,000 x 120) Net assets acquired (25% x 8,000,000) Excess of cost

900,000 ( 20,000) 880,000 2,400,000 2,000,000 400,000

146 2. Share in 2008 net income Amortization of excess Investment income for 2009

975,000 ( 20,000) 955,000

3. Acquisition cost Share in net income: 2008 (25% x 3,600,000) 2009 (25% x 3,900,000) Share in cash dividend: 2008 (20,000 x 16) 2009 (20,000 x 20) Amortization of excess: 2008 (400,000 / 20) 2009 Investment balance – 12/31/2009

2,400,000 900,000 975,000 ( 320,000) ( 400,000) ( 20,000) ( 20,000) 3,515,000

Problem 11-16 Requirement a 1. Memo – Received 500 shares as 10% stock dividend on 5,000 original Dale ordinary shares. Shares now held, 5,500. 2. Cash (5,500 x 20) Dividend income

110,000

3. Stock rights (15/150 x 1,600,000) Investment in equity securities – Ever

160,000

Cash Stock rights Gain on sale of stock rights 4. Investment in associate Cash

Acquisition cost Net assets acquired: 10% x 16,000,000 20% x 20,000,000 Goodwill Income from Fox investment in 2007 (10% x 4,000,000) Less: Dividend income recorded in 2007 – cost method Understatement of income

110,000

160,000 200,000 160,000 40,000 5,000,000 5,000,000 1/1/2007 2,000,000

1/1/2008 5,000,000

1,600,000 ________ 400,000

4,000,000 1,000,000 400,000 -___ 400,000

147 5. Investment in associate Investment in equity securities (Reclassification) 6. Investment in associate Retained earnings

2,000,000 2,000,000

400,000 400,000

7. Investment in associate Investment income (30% x 6,000,000)

1,800,000

8. Cash (75,000 x 20) Investment in associate

1,500,000

1,800,000

1,500,000

Requirement b Noncurrent assets: Investment in equity securities (Note) Investment in associate – Fox Corporation

2,690,000 7,700,000

Note – Investment in equity securities Dale Corporation, 5,500 shares Ever Corporation, 10,000 shares Total cost

1,250,000 1,440,000 2,690,000

Problem 11-17 Answer D Problem 11-18 Answer D Problem 11-19 Answer B Investment in Lax Corporation

3,000,000

Problem 11-20 Answer C Total cash dividend Cumulative net income Liquidating dividend Cash (10% x 3,000,000) Dividend income (10% x 2,500,000) Investment in equity securities

3,000,000 2,500,000 500,000 300,000 250,000 50,000

Problem 11-21 Answer B Investment income (20% x 1,600,000)

320,000

148 Problem 11-22 Answer A Investment income (20% x 6,000,000)

1,200,000

Problem 11-23 Answer C Interest (30,000/100,000) Investment income (5,000,000 x 6/12 x 30%)

30% 750,000

Problem 11-24 Answer C Cost Less: Net assets acquired (40% x 8,000,000) Excess of cost or goodwill Share in net income from April 1 to December 31 (1,000,000 x 9/12 x 40%)

4,000,000 3,200,000 800,000 300,000

Problem 11-25 Answer B Acquisition cost Share in net income (20% x 1,800,000) Share in cash dividend (20% x 600,000) Amortization of excess (1,000,000/10) Carrying value

7,000,000 360,000 ( 120,000) ( 100,000) 7,140,000

Problem 11-26 Answer A Acquisition cost Share in net income (10% x 5,000,000) Share in cash dividend (10% x 1,500,000) Carrying value

4,000,000 500,000 ( 150,000) 4,350,000

Problem 11-27 Answer D Acquisition cost (squeeze) Share in net income (25% x 1,200,000) Share in cash dividend (25% x 480,000) Carrying value – December 31

1,720,000 300,000 ( 120,000) 1,900,000

Problem 11-28 Answer D Acquisition cost Less: Book value of net assets acquired (30% x 5,000,000) Excess of cost over book value Less: Amount attributable to undervaluation of land (30% x 2,000,000) Goodwill

2,500,000 1,500,000 1,000,000 600,000 400,000

149 Acquisition cost Add: Share in net income (30% x 1,000,000) Balance, December 31

2,500,000 300,000 2,800,000

The excess of cost attributable to the land is not amortized because the land is nondepreciable. The goodwill is not amortized.

Problem 11-29 Answer B Acquisition cost – January 1 Acquisition cost – December 31 Total cost Share in net income (10% x 8,000,000) Carrying value

1,000,000 3,000,000 4,000,000 800,000 4,800,000

Problem 11-30 Answer C Investment income in 2008 (30% x 6,500,000)

1,950,000

Investment income in 2007 (10% x 6,000,000) Less: Dividend income recorded in 2006 (10% x 2,000,000) Understatement of income Investment in associate Retained earnings

600,000 200,000 400,000 400,000 400,000

Problem 11-31 Answer A Acquisition cost Net assets acquired (30% x 11,800,000) Excess of cost Attributable to depreciable assets (30% x 2,600,000) Attributable to goodwill Acquisition cost Share in net income (30% x 3,600,000) Share in dividends (30% x 400,000) Amortization (780,000/4) Investment balance – December 31

5,160,000 3,540,000 1,620,000 780,000 840,000 5,160,000 1,080,000 ( 120,000) ( 195,000) 5,925,000

Problem 11-32 Answer B Acquisition cost Net assets acquired (40% x 5,000,000) Excess of cost

2,560,000 2,000,000 560,000

150 Attributable to equipment (40% x 800,000) Attributable to building (40% x 600,000)

320,000 240,000 560,000

Acquisition cost Net income (40% x 1,600,000) Cash dividend (40% x 1,000,000) Amortization of excess: Equipment (320,000 / 4) Building (240,000 / 12) Carrying value of investment – 12/31/2008

2,560,000 640,000 ( 400,000) ( (

80,000) 20,000) 2,700,000

Problem 11-33 Answer A Net income Less: Preference dividend (10% x 2,000,000) Net income to ordinary shares

5,000,000 200,000 4,800,000

Investment income (50% x 4,800,000)

2,400,000

Problem 11-34 Question 1 – Answer B Share in 2008 net income (30% x 800,000)

240,000

Question 2 – Answer B Acquisition cost Share in net income – 2008 Cash dividends – 2008 (30% x 500,000) Book value – December 31, 2008

2,000,000 240,000 ( 150,000) 2,090,000

Question 3 – Answer B Book value – December 31, 2008 Share in net income up to June 30, 2009 (30% x 1,000,000) Book value – June 30, 2009

2,090,000 300,000 2,390,000

Sales price Book value sold (2,390,000 x ½) Gain on sale

1,500,000 1,195,000 305,000

151 Problem 11-35 Answer C Acquisition cost (30,000 x 120) Deficit on January 1, 2008 (30% x 500,000) Carrying value of investment – 1/1/2008 Net income for 2008 (30% x 700,000) Net income for 2009 (30% x 800,000) Cash dividend on 12/31/2009 (30% x 400,000) Carrying value of investment – 12/31/2009

3,600,000 ( 150,000) 3,450,000 210,000 240,000 ( 120,000) 3,780,000

Another approach Acquisition cost Share in retained earnings – 12/31/2009 (30% x 600,000) Carrying value of investment – 12/31/2009

3,600,000 180,000 3,780,000

152 CHAPTER 12 Problem 12-1 1. 2. 3. 4. 5.

B B A A D

6. 7. 8. 9. 10.

C C B B C

Problem 12-2 Bonds held as trading 2008 April 1 Trading securities Cash

2,200,000 2,200,000

Oct. 1 Cash (2,000,000 x 12% x 6/12) Interest income Dec. 31 Accrued interest receivable Interest income (2,000,000 x 12% x 3/12) 31 Trading securities Unrealized gain – TS

120,000 120,000 60,000 60,000 100,000 100,000

2009 Jan. 1 Interest income Accrued interest receivable

60,000 60,000

April 1 Cash Interest income

120,000

Oct. 1 Cash Interest income

120,000

120,000

120,000

Dec. 31 Accrued interest receivable Interest income 31 Unrealized loss – TS Trading securities (2,300,000 – 1,960,000)

60,000 60,000 340,000 340,000

Bonds held to maturity 2008 April 1 Held to maturity securities Cash Oct. 1 Cash Interest income

2,200,000 2,200,000 120,000 120,000

153 2008 Dec. 31 Accrued interest receivable Interest income 31 Interest income (50,000 x 9/12) Held to maturity securities 2009 Jan. 1 Interest income Accrued interest receivable

60,000 60,000 37,500 37,500

60,000 60,000

April 1 Cash Interest income

120,000

Oct. 1 Cash Interest income

120,000

120,000

120,000

Dec. 31 Accrued interest receivable Interest income 31 Interest income (200,000/4) Held to maturity securities

60,000 60,000 50,000 50,000

Problem 12-3 Bonds held as trading Jan. 1 Trading securities Cash July

3,761,000 3,761,000

1 Cash Interest income (4,000,000 x 12%)

Dec. 31 Accrued interest receivable Interest income 31 Trading securities Unrealized gain – TS (4,200,000 – 3,761,000)

240,000 240,000 240,000 240,000 439,000 439,000

Bonds held as available for sale Jan. 1 Available for sale securities Cash July

1 Cash Interest income

3,761,000 3,761,000 240,000 240,000

154 July

1 Available for sale securities Interest income

23,270 23,270

Interest income (3,761,000 x 7%) Interest received Amortization of discount Dec. 31 Accrued interest receivable Interest income 31 Available for sale securities Interest income

263,270 240,000 23,270 240,000 240,000 24,899 24,899

Interest income (3,784,270 x 7%) Interest accrued Amortization of discount 31 Available for sale securities Unrealized gain – AFS

264,899 240,000 24,899 390,831 390,831

Market value (4,000,000 x 105) Book value Unrealized gain

4,200,000 3,809,169 390,831

Problem 12-4 Aug. 1 Trading securities (5,000,000 x 104) Interest income (5,000,000 x 12% x 3/12) Cash

5,200,000 150,000

31 Trading securities (2,000,000 x 98) Interest income (2,000,000 x 12% x 2/12) Cash

1,960,000 40,000

Nov. 1 Cash (5,000,000 x 12% x 6/12) Interest income Dec. 1 Cash (1,880,000 + 20,000) Loss on sale of trading securities Trading securities Interest income (2,000,000 x 12% x 1/12) Selling price (2,040,000 – 160,000) Less: Cost of bonds sold (2,000/5,000 x 5,200,000) Loss on sale

5,350,000

2,000,000 300,000 300,000 1,900,000 200,000 2,080,000 20,000 1,880,000 2,080,000 ( 200,000)

155 Dec. 31 Cash (2,000,000 x 12% x 6/12) Interest incom...