Accounting Chapter 1 7 Determine the amount of Equity in Investee Income

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113. Jager Inc. holds 30% of the outstanding voting shares of Kinson Co. and

appropriately applies the equity method of accounting. Amortization associated with

this investment equals $11,000 per year. For 2011, Kinson reported earnings of

$100,000 and paid cash dividends of $40,000. During 2011, Kinson acquired

inventory for $62,400, which was then sold to Jager for $96,000. At the end of 2011,

Jager still held some of this inventory at its transfer price of $50,000.

Required:

Determine the amount of Equity in Investee Income that Jager should have reported

for 2011.

114. On January 2, 2010, Hull Corp. paid $516,000 for 24% (48,000 shares) of the

outstanding common stock of Oliver Co. Hull used the equity method to account for

the investment. At the end of 2010, the balance in the investment account was

$620,000. On January 2, 2011, Hull sold 12,000 shares of Oliver stock for $12 per

share. For 2011, Oliver reported income of $118,000 and paid dividends of $30,000.

Required:

(A.) Prepare the journal entry to record the sale of the 12,000 shares.

(B.) After the sale has been recorded, what is the balance in the investment account?

(C.) What percentage of Oliver Co. stock does Hull own after selling the 12,000

shares?

(D.) Because of the sale of stock, Hull can no longer exercise significant influence

over the operations of Oliver. What effect will this have on Hull’s accounting for the

investment?

(E.) Prepare Hull’s journal entries related to the investment for the rest of 2011.

115. On January 1, 2011, Jolley Corp. paid $250,000 for 25% of the voting common

stock of Tige Co. On that date, the book value of Tige was $850,000. A building with

a carrying value of $160,000 was actually worth $220,000. The building had a

remaining life of twenty years. Tige owned a trademark valued at $90,000 over cost

that was to be amortized over 20 years.

During 2011, Tige sold to Jolley inventory costing $60,000, at a markup of 50% on

cost. At the end of the year, Jolley still owned some of these goods with a transfer

price of $33,000. Jolly uses a perpetual inventory system.

Tige reported net income of $200,000 during 2011. This amount included an

extraordinary gain of $35,000. Tige paid dividends totaling $40,000.

Required:

Prepare all of Jolley’s journal entries for 2011 in relation to Tige Co. Assume the

equity method is appropriate for use.

116. On January 1, 2010, Pond Co. acquired 40% of the outstanding voting common

shares of Ramp Co. for $700,000. On that date, Ramp reported assets and liabilities

with book values of $2.2 million and $700,000, respectively. A building owned by

Ramp had an appraised value of $300,000, although it had a book value of only

$120,000. This building had a 12-year remaining life and no salvage value. It was

being depreciated on the straight-line basis.

Ramp generated net income of $300,000 in 2010 and a loss of $120,000 in 2011. In

each of these two years, Ramp paid a cash dividend of $70,000 to its stockholders.

During 2010, Ramp sold inventory to Pond that had an original cost of $60,000. The

merchandise was sold to Pond for $96,000. Of this balance, $72,000 was resold to

outsiders during 2010 and the remainder was sold during 2011. In 2011, Ramp sold

inventory to Pond for $180,000. This inventory had cost only $108,000. Pond resold

$120,000 of the inventory during 2011 and the rest during 2012.

Required:

For 2010 and then for 2011, calculate the equity income to be reported by Pond for

external reporting purposes.

117. 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?

118. 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?

119. Steven Company owns 40% of the outstanding voting common stock of Nicole