99. What argument could be made against the equity method?
100. How would a change be made from the equity method to the fair value method
of accounting for investments?
101. How should an investor account for, and report, an investee’s extraordinary
income or loss?
102. When should an investor not use the equity method for an investment of 21% in
another corporation?
103. What is the primary objective of the fair value method of accounting for an
investment?
104. How would a change be made from the fair value method to the equity method
of accounting for investments?
105. When the fair value option is elected for application to an investment in which
the investor has significant influence over the investee, how would the investor reflect
the use of the fair value option in its balance sheet and in its income statement?
106. Charlie Co. owns 30% of the voting common stock of Turf Services Inc.
Charlie uses the equity method to account for its investment. On January 1, 2011, the
balance in the investment account was $624,000. During 2011, Turf Services reported
net income of $120,000 and paid dividends of $30,000.
What is the balance in the investment account as of December 31, 2011?
107. 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.
108. Aqua Corp. purchased 30% of the common stock of Marcus Co. by paying
$500,000. Of this amount, $50,000 is associated with goodwill.
Required:
Prepare the journal entry to record Aqua’s investment.
109. 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.
110. On January 3, 2011, Jenkins Corp. acquired 40% of the outstanding common
stock of Bolivar Co. for $1,200,000. This acquisition gave Jenkins the ability to
exercise significant influence over the investee. The book value of the acquired shares
was $950,000. Any excess cost over the underlying book value was assigned to a
patent that was undervalued on Bolivar’s balance sheet. This patent has a remaining
useful life of ten years. For the year ended December 31, 2011, Bolivar reported net
income of $312,000 and paid cash dividends of $96,000.
Required:
111. On January 1, 2011, Spark Corp. acquired a 40% interest in Cranston Inc. for
$250,000. On that date, Cranston’s balance sheet disclosed net assets of $430,000.
During 2011, Cranston reported net income of $100,000 and paid cash dividends of
$30,000. Spark sold inventory costing $40,000 to Cranston during 2011 for $50,000.
Cranston used all of this merchandise in its operations during 2011. Any excess cost
over fair value is attributable to an unamortized trademark with a 20 year remaining
life.
Required:
Prepare all of Spark’s journal entries for 2011 to apply the equity method to this
investment.
112. 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 Wathan should have recorded at the end of 2010 to defer the unrealized
intra-entity inventory profit.