Special Income and Investment Reporting Issues ♦ 587
9. Discuss the various methods of combining businesses, including the parent subsidiary relationship,
and how consolidated financial statements are prepared.
10. Discuss the market-based financial measures from this chapter, including:
Price earnings ratio
Price-book ratio
Book value per share
588 ♦ Chapter 12
PROBLEM
1. A company has $100,000 in fixed asset impairment for the year. In other words, the fair value of
these long-term assets has fallen below the book value, and is not expected to recover. Record the
journal entry for the impairment. How will this impairment and subsequent journal entry affect
future depreciation for these assets?
General Journal
2. Brown & Associates, Inc. had net income for 2003 of $500,000. They also had 200,000 shares of
common stock outstanding, and 10,000 shares of $100, 10% preferred stock outstanding. What is
the earnings per share for common stock for 2003?
Loss on fixed asset impairment
Fixed assets
Special Income and Investment Reporting Issues ♦ 589
3. Assume that Brown & Associates had the following items on their income statement:
Income from continuing operations
$XXX
Gain on discontinued operations
XXX
Income before extraordinary items
$XXX
Extraordinary Loss
XXX
Cumulative effect of change in accounting principle
XXX
Net Income
XXX
Which EPS amounts are required to be shown on the face of the Income Statement? Which
amounts may be shown in footnotes?
4. Refer to Green Fields, Inc. Show the journal entries for Green Fields purchase, the subsequent
investment account changes, and the ending balance in the investment account.
General Journal
Investment Account Balance:
590 ♦ Chapter 12
5. Refer to Green Fields, Inc. Assume that Green Fields sells 100% of the Crowder stock on January
2, 2005. Record the journal entry if the sale was for $700,000. What if the sale was for $500,000?
$700,000 Sale
$500,000 Sale
Investment in Crowder stock
Cash
To record the purchase
Investment in Crowder stock
Revenue from investment
To record the 35% share of Crowder’s net income
Cash
Investment in Crowder stock
To record the 35% dividend
Beginning Balance
Add: Income
Less: Dividends
Ending Balance
Special Income and Investment Reporting Issues ♦ 591
6. Refer to Green Fields, Inc. Assume that instead of a 35% purchase, Green Fields percentage
ownership of Crowder only represented a 10% ownership. Prepare the journal entries in this
situation.
General Journal
Marketable securities
Cash
Cash
Dividend revenue
DEF
XYZ
Cash
Gain on sale of Investments
Investment in Crowder stock
Cash
Loss on sale of investments
Investment in Crowder stock
592 ♦ Chapter 12
7. Refer to Kozie, Inc. At what amount would these investments be shown on the Balance Sheet at
the end of the year? In the balance sheet provided, show a partial balance sheet for Kozie,
assuming a cash balance of $29,000 as a starting point. (Assume Kozie has no income taxes).
Kozie, Inc.
Balance Sheet – partial
December 31, 2003
Kozie, Inc.
Balance Sheet – partial
December 31, 2003
Assets
Current assets:
Cash
Available-for-sale securities at cost
Add: unrealized gain
Special Income and Investment Reporting Issues ♦ 593
8. Refer to Kozie, Inc. How do you account for the difference between the cost basis and market
value? How much is this difference? Where is this amount reported? If Kozie had net income for
the year of $175,000, show how and where on the financial statements this gain would appear. (In
other words show a partial financial statement and ignore income taxes.)
Kozie, Inc.
Statement of Income and Comprehensive Income —partial
For the Year Ended December 31, 2003
Net Income
Other comprehensive income:
Unrealized gain on available-for-sale securities
Comprehensive income
594 ♦ Chapter 12
9. Prepare the entries to record the following transactions:
a) Purchased for cash $500,000 of 6% bonds at 101 plus accrued interest of $3,500.
b) Received first semiannual interest.
c) Amortized $500 of bond premium at the end of the year.
d) Sold the bond investment at 103 plus accrued interest of $3,200. The bonds were carried at
$502,500 at the time of the sale.
General Journal
Investment in Bonds
Interest Revenue
Cash
b)
Cash (5,000,000 x 6% x 6/12)
Interest Revenue
Interest Revenue
Investment in Bonds
d)
Cash (500,000 x 1.03) + 3,200
Investment in Bonds
Interest Revenue
Gain on Sale of Investment
Special Income and Investment Reporting Issues ♦ 595
10. Prepare the entries to record the following transactions:
a) Purchased for cash $1,000,000 of 8% bonds at 98 plus accrued interest of $6,500.
b) Received first semiannual interest.
c) Amortized $1,500 of bond premium at the end of the year.
d) Sold the bond investment at 97 plus accrued interest of $5,800. The bonds were carried at
$990,000 at the time of the sale.
General Journal
Investment in Bonds
Interest Revenue
Cash
b)
Cash (1,000,000 x 8% x 6/12)
Interest Revenue
Interest Revenue
Investment in Bonds
d)
Cash (1,000,000 x .97) +5,800
Loss on Sale of Bonds
Investment in Bonds
Interest Revenue
596 ♦ Chapter 12
11. CSUC Co. stock has a market price of $104 at the end of the year. The total stockholders equity is
$3,600,000 with net income of $800,000. CSUC has 200,000 shares outstanding. Determine the
price-earnings, book value per share and price-book ratios.
Special Income and Investment Reporting Issues ♦ 597
CASE
PepsiCo’s Financial Statements
Answer the following question(s) using these selected portions of PepsiCo’s financial statements.