17. (10 minutes) (Equity entries for one year, includes intra-entity transfers but no
unearned gross profit)
Purchase price of Burks stock…………….………..………….…..….….… $210,000
Book value of Burks stock ($360,000 × 40%)……………………….….. (144 ,000)
No unearned intra-entity profit exists at year’s end because all of the transferred merchandise was
used during the period.
17. (continued)
Investment in Burks, Inc……………..………..…………….. 210,000
Cash (or a Liability)…………..………..………..………… 210,000
To record acquisition of a 40 percent interest in Burks.
Investment in Burks, Inc……………..………..…………….. 32,000
Equity in Investee Income…………..………………….. 32,000
To recognize 40 percent income earned during period by Burks, an equity
method investment.
18. (20 Minutes) (Equity entries for one year, includes conversion to equity
method)
The 2014 purchase must be restated to the equity method.
FIRST PURCHASE—JANUARY 1, 2014
Purchase price of McKenzie stock……………………..………….…..….… $210,000
Book value of McKenzie stock ($1,700,000 × 10%)……………………. (170 ,000)
Cost in excess of book value……………..………..………..…….…..….….. $40,000
Annual amortization…………..………..………..………………………..…..….. $ 3 ,000
BOOK VALUE—MCKENZIE—JANUARY 1, 2015 (before second purchase)
January 1, 2014 book value (given)………………..………..……….…..…. $1,700,000
2014 Net income………….………..…………………..…………….….…..….….. 240,000
18. (continued)
SECOND PURCHASE—JANUARY 1, 2015
Purchase price of McKenzie stock………………….…..….…..….….…. $600,000
Cost in excess of book value……………..………..……….…..….…..….. $45,000
Excess cost assigned to undervalued land
($120,000 × 30%)…………………..………..………..…………………….… (36 ,000)
Trademark……..………..………..………..…………………..………..…….….... $ 9,000
Journal Entries:
To record second acquisition of McKenzie stock.
Investment in McKenzie…………..………..………..………. 600,000
Cash……….………..………..…………….….…..….….….... 600,000
To restate reported figures for 2014 to the equity method. Reported income
Investment in McKenzie…………..………..………..………. 120,000
Equity Income—Investment in McKenzie………… 120,000
To record income for the year: 40% of the $300,000 reported income.
Dividend Receivable………………………….….…..….….... 44,000
Investment in McKenzie…………..…………….….…... 44,000
To record dividend declaration from McKenzie (40% of $110,000).
To record collection of dividend from investee.
Equity Income—Investment in McKenzie..…..….…... 4,000
Investment in McKenzie…………..…………….….…... 4,000
To record 2015 amortization: $3,000 for first purchase, $1,000 for second.
19. (7 minutes) (Deferral of unrealized gross profit)
Ending inventory ($225,000 – $105,000)…………….………..………..……… $120,000
Gross profit percentage (GP $75,000 ÷ Sales $225,000)….…............ × 33 %⅓
Entry to Defer Unrealized Gross Profit:
Equity Income from Schilling……………..………………..…. 10,000
Investment in Schilling…………..………..………………… 10,000
20. (10 minutes) (Reporting of equity income and transfers)
a. Equity in investee income:
Equity income accrual ($100,000 × 25%)……………..………..……. $25,000
Deferral of intra-entity unrealized gross profit:
Remaining inventory—end of year………………………..………. $32,000
Gross profit percentage (GP $30,000 ÷ Sales $80,000)...... × 37 ½ %
b. In 2015, the deferral of $3,000 will likely become realized by BuyCo’s
c. The direction (upstream versus downstream) of the intra-entity transfer
does not affect the above answers. However as discussed in Chapter
21. (25 minutes) (Conversion from fair-value method to equity method with a
subsequent sale of a portion of the investment)
Equity method income accrual for 2015
30 percent of $644,000 for ½ year = ……………..………..………. $ 96,600
24 percent of $644,000 for ½ year = ……………..………..………. 77 ,280
Gain on sale of 9,000 shares of Marion:
Cost of initial acquisition—2013…………….………..………..……………. $435,000
10% income accrual (conversion made to equity method)....... 35,900
10% of dividends…………..………..…………………..………..………….….… (10,700)
Cost of second acquisition—2014…………….……….….…..….…..…... 1,000,000
Cash proceeds from the sale: 9,000 shares × $40…………………… $360,000
Less: book value of shares sold: $1,645,000 × (9,000 ÷ 45,000). . 329 ,000
Gain on sale………..………..…………………..………..………..…….…..… $ 31 ,000
22. (25 minutes) (Verbal overview of equity method, includes conversion to
equity method)
a. In 2014, the fair-value method (available-for-sale security) was appropriate. Thus, the only
b. The assumption is that Collins’ level of ownership now provides the company with the ability to
22. (continued)
c. Despite holding 25 percent of Merton’s outstanding stock, application of
the equity method is inappropriate absent the ability to apply significant
d. The equity method attempts to reflect the relationship between the
investor and the investee in two ways. First, the investor recognizes
e. Criticisms of the equity method include
its emphasis on the 20-50% of voting stock in determining significant
influence vs. control
Relative to consolidation, the equity method will report smaller amounts
for assets, liabilities, revenues and expenses. However, income is typically
f. When an investor buys enough additional shares to gain the ability to
exert significant influence, accounting for any shares previously owned
g. The price paid for each purchase is first compared to the equivalent book
value on the date of acquisition. Any excess payment is then assigned to
22. (continued)
h. Investee dividends reduce its book value. Because the investor’s
Investment account tracks the investee’s book value, Collins records the
not through dividends as a distribution of the same earnings.
i. The Investment account will show the costs to obtain ownership of Merton.
In addition, an equity accrual equal to 10 percent of the investee’s income
23. (20 minutes) (Verbal overview of intra-entity transfers and their impact on
application of the equity method)
a. An upstream transfer goes from investee to investor whereas a
downstream transfer is made by the investor to the investee.
b. The direction of an intra-entity transfer has no impact on reporting when
c. To determine the intra-entity unrealized gross profit when applying the
equity method, the transferred inventory that remains at year’s end is
the investor.
d. Parrot, as the investor, will accrue 42 percent of the income reported by
Sunrise. However, this equity income will then be reduced by the amount
23. (continued)
e. In the second year, Parrot again records an equity accrual for 42 percent
of the income reported by Sunrise. The intra-entity portion of the
f. If none of the transferred merchandise remains at year-end, the intra-
g. The intra-entity transfers create no direct effects for Sunrise, the investee.
24. (15 minutes) (Verbal overview of the sale of a portion of an investment being
reported on the equity method and the accounting for any shares that remain)
a. The equity method must be applied up to the date of the sale. Therefore,
for the current year until August 1, Einstein records an equity accrual
recognizing 40 percent of Brooks’ reported income for that period. In
addition, Einstein records any dividends declared by Brooks as a
b. Subsequent accounting for the remaining shares depends on the influence
retained post-sale. If Einstein maintains the ability to apply significant
c. In this situation, three figures would be reported by Einstein. First, an
equity income balance is recorded that includes both the accrual and
24. (continued)
d. No, the ability to apply significant influence to the investee was present
25. (12 minutes) (Equity balances for one year includes intra-entity transfers)
a. Equity income accrual—2015 ($90,000 × 30%)…….….….…..…... $27,000
Amortization—2015 (given)…………….………..………..………..……… (9,000)
Intra-entity profit recognized on 2014 transfer*……….…………… 1,200
*Gross profit rate (GPR) on 2014 transfer ($16,000/$40,000). . . 40%
Unrealized gross profit:
Remaining inventory (40,000 × 25%)………………………..….…. $10,000
**GPR on 2015 transfer ($22,000/$50,000)…………………..….….… 44%
Unrealized gross profit:
Remaining inventory (50,000 × 40%)………………………..….…. $20,000
b. Investment in Lindman, 1/1/15………………………..………..…………. $335,000
Equity income—2015 (see [a] above)…………….….…..….….…..… 16,560
26. (20 Minutes) (Equity method balances after conversion to equity method.
Must determine investee’s book value)
Part a
1. Allocation and annual amortization—first purchase 1/1/2014
Purchase price of 15 percent interest……………..………..…………. $62,000
Net book value ($280,000 × 15%)…………….………..…………………. (42 ,000)
Allocation and annual amortization—second purchase 1/1/2015
Purchase price of 10 percent interest……………..………..…………. $43,800
Net book value $280,000 + $80,000 – $30,000 = $330,000.
($330,000 × 10%)…………………..………..…………..…..….….…..….….. (33 ,000)
Annual amortization…………..………..………..…………..…..….….. $ 1 ,200
Investment in Bellevue account
January 1, 2014 purchase…………………..……………..….…..….….… $62,000
2014 basic equity income accrual ($80,000 × 15%)……..….….… 12,000
2015 amortization on second purchase (above).….…..….......... (1,200)
2015 dividends ($40,000 × 25%)…………….…….…..….…..….….….. (10 ,000)
Investment in Bellevue—December 31, 2015..….…..….…..... $123 ,100
2. Equity Income—2015
2015 basic equity income accrual ($100,000 × 25%)…….…..….. $25,000
26. (continued)
3. The January 1, 2015 retrospective adjustments to convert the Investment
in Bellevue to the equity method is as follows:
Unrealized Holding Gain—Shareholders’ Equity 3,700
Fair Value Adjustment (Available-for-Sale Securities) 3,700
Retrospective adjustment to retained earnings to record 2014 equity method
Part b
1. Investment in Bellevue (25% × 468,000) $117 ,000
2. Dividend income (25% × 40,000) $10,000