27. (30 minutes) (Conversion to equity method, sale of investment, and
unrealized gross profit)
Part a
Allocation and annual amortization—first purchase
Purchase price of 10 percent interest……………..………..…………. $92,000
Net book value ($800,000 × 10%)…………….…………………..………. (80 ,000)
Annual Amortization…..………..…………………..………..………………….... $ 750
27. Part a (continued)
Allocation and annual amortization—second purchase
Purchase price of 20 percent interest……………..………..…………. $210,000
Net book value ($800,000 is increased by $180,000
income but decreased by $80,000 in dividends)
($900,000 × 20%) ………..………..…………………..………….…..…... (180 ,000)
Annual amortization…………..………..…………………..……………..…..….. $ 2 ,000
Equity income—2013 (after conversion to establish comparability)
2013 basic equity income accrual ($180,000 × 10%)..…..…..…....... $18,000
2013 amortization on first purchase (above)……………..……………... (750)
Equity income—2013……………………..………..………………….…..…. $17 ,250
Equity income 2014
2014 basic equity income accrual ($210,000 × 30%)…….…..….. $63,000
Part b
Investment in Barringer
Purchase price—January 1, 2013…………………………………..…..….... $92,000
Purchase price January 1, 2014…………..…………………..…………….... 210,000
2015 amortization on second purchase (above).…..…..…......... (2,000)
2015 dividends ($100,000 × 30%)……………..…..…..…..…..…..…... (30 ,000)
Investment in Barringer—12/31/15……………..……………..…..…..….... $377 ,750
27. Part b (continued)
Gain on sale of investment in Barringer
Sales price (given)…………..………..………..………….…..…..…..…..… $400,000
Gain on sale of investment……………..…………………..…………. $ 22 ,250
Part c
Deferral of 2014 unrealized gross profit into 2015
Ending inventory…………….………..………..…………………..………….. $20,000
Gross profit percentage ($15,000 ÷ $50,000)….………..…………… × 30%
Deferral of 2015 unrealized gross profit into 2016
Ending inventory…………….………..………..…………………..………….. $40,000
Gross profit percentage ($27,000 ÷ $60,000)….………..…………… × 45%
Unrealized gross profit………….………..…………..…..…..…..…... $18,000
Equity Income—2015
2015 equity income accrual ($230,000 × 30%)……..…..…..…..…. $69,000
2015 amortization on first purchase (above)….…..…..…..…..….. (750)
28. (40 Minutes) (Conversion to equity method and equity reporting after several
years)
a. Annual Amortization
October 1, 2013 purchase
Purchase price……………………………..………..….…..…..…..…..…..… $7,475
Book value, 10/1/13:
Acquired percentage……………………………..………... × 5% 5 ,450
Intangible assets…………………..…………..…..…..…... $2,025
Remaining life…………..………..………………………..…. 15 years
Annual amortization—first purchase……..…..….... $ 135
Equity increase 1/1/14 to 7/1/14
($30,000 income less $16,000 dividends = $14,000)
× ½ year………….………..….…..…..…..…..…..…. 7 ,000
Book value of Barker, second purchase date $119,000
Acquired percentage……………………………..………... × 10% 11 ,900
Annual amortization—second purchase..…......... $ 200
Equity increase 1/1/15 to 12/31/15
($24,000 income less $9,000 dividends)........... 15 ,000
Book value of Barker, third purchase $141,000
Acquired percentage……………………………..………... × 20% 28,200
28.a (continued)
Intangible assets…………..………..………..…..…..….... $6,000
Equity Income Reported by Smith
Reported for 2013 (3 months) after conversion
to equity method:
Accrual ($20,000 × ¼ year × 5%)………..…... $250.00
Reported for 2014 (5% for entire year and an additional 10%
for last 6 months) (after conversion to equity method):
Accrual—first purchase ($30,000 entire year × 5%)....... 1,500
Equity income—2014……………………..………..…………… $2 ,765
Reported for 2015 (15% for entire year; because final acquisition occurred
at year end, neither income nor amortization is recognized):
Basic equity accrual ($24,000 × 15%)……..…..…..…..….... $3,600
b. Investment in Barker
Cost—first purchase………….………..…………………..………..…….…. $ 7,475.00
Cost—second purchase……………………………..………..……….….... 14,900.00
2015…….…………………..………..…………………..…..…..…..…..…..… 3,265.00
28. b (continued)
Less: investee dividends
2013 ($8,000 × ¼ × 5%)……….…………………..……….…..…..…..… (100.00)
2015 ($9,000 × 15%)………….…………………..………..…..…..…..…. (1 ,350.00)
Balance………..………..…………………..………..…………………..………… $59 ,771.25
29. (25 Minutes) (Preparation of journal entries for two years, includes losses and
intra-entity transfers of inventory)
Journal Entries for Harper Co.
1/1/14 Investment in Kinman Co….......... 210,000
Cash….……………………………….. 210,000
(To record initial investment)
12/31/14 Equity in Kinman Income—Loss. 16,000
Other Comprehensive Loss of Kinman 8,000
Investment in Kinman Co…..… 24,000
of Kinman—see Schedule 1 below)
29. (continued)
12/31/14 Equity in Kinman Income-Loss.... 2,000
Investment in Kinman Co…..… 2,000
(To defer unrealized gross profit on intra-entity
sale see Schedule 2 below)
During Dividends Receivable….…............ 4,800
equity investee)
12/31/15 Equity in Kinman Income............. 3,300
Investment in Kinman Co…..… 3,300
(To record amortization relating to acquisition
of Kinman)
12/31/15 Investment in Kinman Co….......... 2,000
29. (continued)
Schedule 1—Allocation of Purchase Price and Related Amortization
Purchase price ……….………..………..……………………. $210,000
Percentage of book value acquired
($400,000 × 40%)…………………..…………………..…….. (160 ,000)
Payment in excess of book value…………….…..…..….. $50,000
Remaining Annual
Excess payment identified with specific assets: Life Amortization
Building ($40,000 × 40%) $16,000
Royalty agreement ($85,000 × 40%) 34,000
20 yrs. 1,700
Total annual amortization $3 ,300
Schedule 2—Deferral of Unrealized Gross Profit—2014
Inventory remaining at end of year……………..………..………………….. $15,000
Gross profit percentage ($30,000 ÷ $90,000)……………..………..….... × 33 ⅓ %
Gross profit remaining in inventory………………..…………………… $5,000
Schedule 3—Deferral of Unrealized Gross Profit—2015
Inventory remaining at end of year (30%)………………..…………….…. $24,000
Gross profit percentage ($30,000 ÷ $80,000)……………..………..….... × 37 ½ %
30. (35 Minutes) (Investment sale with equity method applied both before and
after. Includes other comprehensive loss and intra-entity inventory
transfer)
Income effects for year ending December 31, 2015
Equity income in Seacrest, Inc. (Schedule 1)…..…..…..…..…..… $116 ,000
Other comprehensive loss—Seacrest, Inc.
1/1/15 to 8/1/15 ($120,000 × 40% × 7/12 year)..….......... (28,000)
Schedule 1—Equity Income in Seacrest, Inc.
Investee income accrual—operations
$342,000 × 40% × 7/12 year………….…..…..…..…..… $79,800
$342,000 × 32% × 5/12 year………….…..…..…..…..… 45 ,600 $125,400
Amortization
shares): $12,000 × 80% × 5/12 year………….….. 4 ,000 (11,000)
Recognition of unrealized gross profit
Remaining inventory—12/31/14………………….….... $10,000
Gross profit percentage on original sale
($20,000 ÷ $50,000)……….………..………..…………. × 40%
30. (continued)
Schedule 2—Gain on Sale of Investment in Seacrest, Inc.
Book value—investment in Seacrest, Inc.—1/1/15 (given)………. $293,600
Investee income accrual—1/1/15 – 8/1/15 (Schedule 1)…………... 79,800
Recognition of deferred profit (Schedule 1)……….…..…..…..…..… 1 ,600
Investment in Seacrest book value 8/1/15…………..………..…….…. $340,000
Percentage of investment sold (8,000 ÷ 40,000 shares)…..…...... × 20 %
Gain on sale of 8,000 shares of Seacrest……………..…..…..….. $ 25 ,000
31. (30 Minutes) (Compute equity balances for three years. Includes
intra-entity inventory transfer)
Part a.
Equity Income 2013
Basic equity accrual ($598,000 × ½ year × 25%)…………………… $74,750
Amortization (½ year—see Schedule 1)……….…..…..…..…..….... (30 ,800)
Equity Income—2013……………………..…………..…..…..…..….... $43 ,950
Equity Income 2014
Basic equity accrual ($639,600 × 25%)……………..……………..…. $159,900
Equity Income—2014……………………..………..…………..…..….. $92 ,300
Equity Income 2015
Basic equity accrual ($692,400 × 25%)……………..……………..…. $173,100
Amortization (see Schedule 1)…………..…………………..…..…..…. (61,600)
31. (continued)
Schedule 1—Acquisition Price Allocation and Amortization
Acquisition price (88,000 shares × $13) $1,144,000
Remaining Annual
Excess payment identified with specific assets: Life Amortization
Equipment ($364,000 × 25%) $91,000 7 yrs. $13,000
Goodwill 78,600indefinite
-0-
Total annual amortization (full year) $61,600
Schedule 2—Deferral of Unrealized Intra-entity Gross Profit
Intra-entity Gross Profit Percentage:
Sales $152,000
Gross profit percentage: $60,800 ÷ $152,000 = 40%
Investor ownership percentage…………..………….…..…..…..…..…... × 25%
Unrealized intra-entity gross profit deferred from
2014 until 2015………..………..………..…………………..………….….... $ 6,000
Part b.
Investment in Shaun—December 31, 2015 balance
Acquisition price…………..………..………..…………………..………………. $1,144,000
2013 Equity income (above)……………………..………..…..…..…..….... 43,950
2013 Dividends declared during half year (88,000 shares × $1.00) (88,000)
2015 Dividends declared (88,000 shares × $1.00 × 2)…..…..…..... (176 ,000)
Investment in Shaun—12/31/15……………………..…..…..…..… $957 ,750