Tut 1- AFA

Questions
1. A company acquires a rather large investment in another corporation. What criteria determine
whether the investor should apply the equity method of accounting to this investment?

Criteria for Utilizing the Equity Method

Exercise Significant Influence (FASB ASC Topic 323):
 Representation on the investee’s board of directors.
 Participation in the investee’s policy-making process.
 Material intra-entity transactions.
 Interchange of managerial personnel.
 Technological dependency.
 Other investee ownership percentages.

2. What accounting treatments are appropriate for investments in equity securities without readily
determinable fair values?

ASC 321 allows the cost method for the investment asset.
Investment income is recognized for the investor's share of investee dividends declared.

Problems
8. Franklin purchases 40 percent of Johnson Company on January 1 for $500,000. Although Franklin
did not use it, this acquisition gave Franklin the ability to apply significant influence to Johnson’s
operating and financing policies. Johnson reports assets on that date of $1,400,000 with liabilities
of $500,000. One building with a seven-year remaining life is undervalued on Johnson’s books by
$140,000. Also, Johnson’s book value for its trademark (10-year remaining life) is undervalued by
$210,000. During the year, Johnson reports net income of $90,000 while declaring dividends of
$30,000. What is the Investment in Johnson Company balance (equity method) in Franklin’s financial
records as of December 31?
a. $504,000
b. $507,600
c. $513,900
d. $516,000

Payment by investor : 500,000

Percentage of book value accquiced ((1,400,000-500,000) *40%): 360,000

Payment in excess of book value: 140,000

Excess payment identified with specific assets:

Building (140,000 undervaluation *40%) 56,000

Trademark (210,000 undervaluation *40%) 84,000 140,000

Excess payment not identified with specific asset –goodwill 0

Account Cost assigned Useful life Annual amortization

Building 56,000 7 8,000
 Trademark 84,000 10 8,400
Goodwill indefinite 0
Annual expense 16,400

Cost of investment: 500,000

Add: Basic income accrual (90,000*40%): 36,000

Less: annual amortization: (16,400)

Less: Dividends declared (30,000*40%): (12,000)

Investment in Johnson Company : 507,600

13. On January 3, 2018, Matteson Corporation acquired 40 percent of the outstanding common stock of
O’Toole Company for $1,160,000. This acquisition gave Matteson the ability to exercise significant
influence over the investee. The book value of the acquired shares was $820,000. Any excess cost
over the underlying book value was assigned to a copyright that was undervalued on its balance
sheet. This copyright has a remaining useful life of 10 years. For the year ended December 31, 2018,
O’Toole reported net income of $260,000 and declared cash dividends of $50,000. At December 31,
2018, what should Matteson report as its investment in O’Toole under the equity method?

Payment by investor: 1,160,000

Book value accquiced shares : 820,000

Payment in excess of book value-copyright : 340,000

Amortization of excess (340,000/10ys) : 34,000

Cost of investment: 1,160,000

Add: Basic income accrual (260,000*40%): 104,000 Eqity in income

Less: annual amortization: (34,000)

Less: Dividends declared (50,000*40%): (20,000)

Investment in O’Toole Company : 1,210,000

15. On January 1, 2017, Ridge Road Company acquired 20 percent of the voting shares of Sauk Trail,
Inc., for $2,700,000 in cash. Both companies provide commercial Internet support services but
serve markets in different industries. Ridge Road made the investment to gain access to Sauk Trail’s
board of directors and thus facilitate future cooperative agreements between the two firms. Ridge
Road quickly obtained several seats on Sauk Trail’s board which gave it the ability to significantly
influence Sauk Trail’s operating and investing activities.
The January 1, 2017, carrying amounts and corresponding fair values for Sauk Trail’s assets and
liabilities follow:

Also as of January 1, 2017, Sauk Trail’s computing equipment had a seven-year remaining
estimated useful life. The patented technology was estimated to have a three-year remaining useful
life. The trademark’s useful life was considered indefinite. Ridge Road attributed to goodwill any
unidentified excess cost.
During the next two years, Sauk Trail reported the following net income and dividends:

Net Income Dividends Declared

2017 $1,800,000 $150,000

2018 1,985,000 160,000

a.How much of Ridge Road’s $2,700,000 payment for Sauk Trail is attributable to goodwill?

Payment by investor : $ 2,700,000

Percentage of book value accquiced ($5,175,000*× 20%) 1,035,000
Payment in excess of book value: 1,665,000

Excess payment identified with specific assets:

Computing equipment (700,000 undervaluation *20%) 140,000

Patented technology (3,900,000 undervaluation *20%) 780,000

Trademark (1,850,000 undervaluation *20%) 370,000 1,290,000

Excess payment not identified with specific asset –goodwill 370,000

*110,000+5,000,000+100,000+150,000-185,000=5,175,000

b. What amount should Ridge Road report for its equity in Sauk Trail’s earnings on its income
statements for 2017 and 2018?

Account Cost assigned Useful life Annual amortization

Computing 140,000 7 20,000
equipment
Patented technology 780,000 3 260,000
Trademark 370,000 indefinite 0
Goodwill 370,000 indefinite 0
Annual expense 280,000

Basic income accrual -2017 (1,800,000 *20%): 360,000

Less: annual amortization: (280,000)

Equity in 2017 earnings of Sauk Trail: 80,000

Basic income accrual -2018 (1,985,000 *20%): 397,000

Less: annual amortization: (280,000)

Equity in 2018 earnings of Sauk Trail: 117,000

c. What amount should Ridge Road report for its investment in Sauk Trail on its balance sheets
at the end of 2017 and 2018?

Cost of investment: $ 2,700,000

Add: Equity in 2017 earnings of Sauk Trail: 80,000
Less: Dividends declared-2017 ($150,000*20%): (30,000)

Investment in 2017 of Sauk Trail Company : 2,750,000

Cost of investment: $ 2,700,000

Add: Equity in 2018 earnings of Sauk Trail: 117,000
Less: Dividends declared-2018 ($160,000*20%): (32,000)

Investment in 2018 of Sauk Trail Company : 2,785,000

 16. On January 1, 2017, Alison, Inc., paid $60,000 for a 40 percent interest in Holister
Corporation’s
common stock. This investee had assets with a book value of $200,000 and liabilities of $75,000.
A patent held by Holister having a $5,000 book value was actually worth $20,000. This patent
had
a six-year remaining life. Any further excess cost associated with this acquisition was attributed
to goodwill. During 2017, Holister earned income of $30,000 and declared and paid dividends of
$10,000. In 2018, it had income of $50,000 and dividends of $15,000. During 2018, the fair value
of Allison’s investment in Holister had risen from $68,000 to $75,000.
a. Assuming Alison uses the equity method, what balance should appear in the Investment in
Holister account as of December 31, 2018?

Payment by investor : $ 60,000

Percentage of book value accquiced ((200k-75k)× 40%) 50,000
Payment in excess of book value: 10,000

Excess payment identified with specific assets:

Patented ((20,000-5,000)*40%) 6,000

Excess payment not identified with specific asset –goodwill 4,000

Account Cost assigned Useful life Annual amortization

Patented technology 6,000 6 1,000
Goodwill 4,000 indefinite 0
Annual expense 1,000

Cost of investment: 60,000

Add: Basic income accrual (30,000*40%): 12,000

Less: annual amortization: (1,000)

Less: Dividends declared (10,000*40%): (4,000)

Investment in Johnson Company in 2017 : 67,000

Investment in Johnson Company in 2017 : 67,000

Add: Basic income accrual (50,000*40%): 20,000

Less: annual amortization: (1,000)

Less: Dividends declared (15,000*40%): (6,000)

Investment in Johnson Company in 2018: 80,000

b. Assuming Alison uses fair-value accounting, what income from the investment in Holister
should be reported for 2018?

Dividend income in 2018: 15,000*40%=6,000

Change in FV: 75k-68k= 7,000
=>Carrying amt of investment=60,000+6000+7,000=73,000

21. On January 1, 2016, Halstead, Inc., purchased 75,000 shares of Sedgwick Company common

stock for $1,480,000, giving Halstead 25 percent ownership and the ability to apply significant

influence over Sedgwick. Any excess of cost over book value acquired was attributed solely to goodwill.

Sedgwick reports net income and dividends as follows. These amounts are assumed to have occurred
evenly throughout these years. Dividends are declared and paid in the same period.
Annual
Net Income Cash Dividends
(paid quarterly)
2016 $340,000 $120,000
2017 480,000 140,000
2018 600,000 160,000
On July 1, 2018, Halstead sells 12,000 shares of this investment for $25 per share, thus reducing
its interest from 25 to 21 percent, but maintaining its significant influence.
Determine the amounts that would appear on Halstead’s 2018 income statement relating to its
ownership and partial sale of its investment in Sedgwick’s common stock.

Gain on sale of 12,000 shares of this investment:

Cost of investment: $1,480,000

Add: Income accrual-2016(25%*$340,000) 85,000

Less: Dividends-2016(25%*$120,000) (30,000)

Add: Income accrual-2017(25%*$480,000) 120,000

Less: Dividends-2017(25%*$140,000) (35,000)

Add: Income accrual-1/2 year 2018(25%*$600,000/2) 75,000

Less: Dividends-1/2 year2018(25%*$160,000/2) (20,000)

Book value on July 1,2018 1,675,000

Cash proceeds of 12,000 shares sold: 12,000*$25: 300,000
Less: Book value of 12,000 shares sold: 1,675,000/75,000*12,000: 268,000)
Gain on sales: 32,000

Equity method income accrual for 2018

25% of income accrual for ½ year :25%*600,000: 150,000
21% of income accrual for ½ year :21%*600,000: 126,000
Total income accrual 276,000
Gain on sale 32,000
Total income statement effect-2018 308,000

27. Belden, Inc. acquires 30 percent of the outstanding voting shares of Sheffield, Inc. on January 1,
2017, for $312,000, which gives Belden the ability to significantly influence Sheffield. Sheffield
has a net book value of $800,000 at January 1, 2017. Sheffield’s asset and liability accounts showed
carrying amounts considered equal to fair values except for a copyright whose value accounted for
Belden’s excess cost over book value in its 30 percent purchase. The copyright had a remaining life
of 16 years at January 1, 2017. No goodwill resulted from Belden’s share purchase.
Sheffield reported net income of $180,000 in 2017 and $230,000 of net income during 2018.
Dividends of $70,000 and $80,000 are declared and paid in 2017 and 2018, respectively. Belden
uses the equity method.
a. On its 2018 comparative income statements, how much income would Belden report for 2017
and 2018 in connection with the company’s investment in Sheffield?

the journal entries used to record the investment in Sheffield Inc. are:

January 1, 2017

Dr Investment in Sheffield Inc. 312,000

    Cr Cash 312,000
the adjustments entries necessary for 2017 are:

December 31, 2017, dividends are distributed

Dr Cash 21,000 (= $70,000 x 30%)

    Cr Investment in Sheffield Inc. 21,000

December 31, 2017, net income is reported

Dr Investment in Sheffield Inc. 54,000 (= $180,000 x 30%)

    Cr Revenue from investment in Sheffield Inc. 54,000

the adjustments entries necessary for 2018 are:

December 31, 2018, dividends are distributed

Dr Cash 24,000 (= $80,000 x 30%)

    Cr Investment in Sheffield Inc. 24,000

December 31, 2018, net income is reported

Dr Investment in Sheffield Inc. 69,000 (= $230,000 x 30%)

    Cr Revenue from investment in Sheffield Inc. 69,000

 Income reported for 2017: 54,000

Income reported for 2018: 69,000

Total income: 123,000

b. If Belden sells its entire investment in Sheffield on January 1, 2019, for $400,000 cash, what is
the impact on Belden’s income?
c. Assume that Belden sells inventory to Sheffield during 2017 and 2018 as follows:
Cost to Price to Year-End Balance
Year
Belden Sheffield (at transfer price)
$20,000 (sold in following
2017 $30,000 $50,000
year)
2018 33,000 60,000 40,000 (sold in following
 year)
What amount of equity income should Belden recognize for the year 2018?

31. On January 1, 2017, Fisher Corporation purchased 40 percent (80,000 shares) of the common stock
of Bowden, Inc., for $982,000 in cash and began to use the equity method for the investment. The
price paid represented a $60,000 payment in excess of the book value of Fisher’s share of Bowden’s
underlying net assets. Fisher was willing to make this extra payment because of a recently developed
patent held by Bowden with a 15-year remaining life. All other assets were considered appropriately
valued on Bowden’s books.
Bowden declares and pays a $100,000 cash dividend to its stockholders each year on September 15.
Bowden reported net income of $400,000 in 2017 and $380,000 in 2018. Each income figure was
earned evenly throughout its respective years.
On July 1, 2018, Fisher sold 10 percent (20,000 shares) of Bowden’s outstanding shares for
$330,000 in cash. Although it sold this interest, Fisher maintained the ability to significantly influence
Bowden’s decision-making process.
Prepare the journal entries for Fisher for the years of 2017 and 2018

Date Particulars Debit Credit Calculation

($) ($)
Jan. 1, Investment in B 982,000
2017 Company
Cash 982,000
Sept. Cash 40,000 $100,000 * 40%
15, 2017
Investment in B 40,000
Company
Dec. 31, Investment in B 160,000 $400,000 * 40%
2017 Company
Equity in B 160,000
Company's Income
Dec. 31, Equity in B 4,000 $60,000/15
2017 Company's Income
Investment in B 4,000
Company
Jul. 1, Investment in B 76,000 $380,000 * 40% * 1/2
2018 Company
Equity in B 76,000
Company's Income
Jul. 1, Equity in B 2,000 $60,000/15 * 1/2
2018 Company's Income
Investment in B 2,000
Company
Jul. 1, Cash 330,000
2018
Investment in B 313,000 ($982,000 + $160,000+ $76,000 -
Company $40,000 - $4,000 - $2,000) *
 20,000/80,000
Gain on sale of 17,000 $330,000-313,000
investment
Sept. 1, Cash 30,000 $100,000 * 30%
2018
Investment in B 30,000
Company
Dec. 31, Investment in B 57,000 $380,000 * 30% * 1/2
2018 Company
Equity in B 57,000
Company's Income
Dec. 31, Equity in B 2,000 $60,000/15 * 1/2
2018 Company's Income
Investment in B 2,000
Company