32. (65 Minutes) (Journal entries for several years. Includes conversion to
equity method and a sale of a portion of the investment)
1/1/13 Investment in Sumter…………..……… 192,000
Cash……….……….…….…..….….….. 192,000
(To record cost of 16,000 shares of Sumter
Company.)
day, a dividend receivable account is unnecessary.)
9/15/14 Cash……………..………..……….…………. 8,000
Dividend Income…………….….….. 8,000
(Annual dividends declared and received from Sumter
Company.)
Adjustment—Equity in Investee Income 36,800
(Retrospective adjustment necessitated by change
to equity method. Change in figures previously
reported for 2013 and 2014 are calculated as
follows.)
32. (continued)
2013 as reported
Income (dividends)….…...$8,000
Balance………..………..…………..- 0 –
2013—equity method (as restated)
Income (8% of $300,000
2014 as reported
Income (dividends)….…...$8,000
2014—equity method (as restated)
Income (8% of $360,000
reported income)……….…………………$28,800
2013 increase in reported income ($24,000 – $8,000)……..….…... $16,000
2014 increase in reported income ($28,800 – $8,000)……..….…... 20,800
Retrospective adjustment—income (above)..….…..….….…..….…. $36,800
Retrospective adjustment—Investment in Sumter (above)... $36,800
9/15/15 Cash……………..………..……….………..……….... 40,000
Investment in Sumter……………….….….. 40,000
(Annual dividend declared and received from Sumter
[40% × $100,000])
12/31/15 Investment in Sumter….….….…..….….….…. 160,000
Equity in Investee Income……..…......... 160,000
[indicated in problem] over 15 years)
32. (continued)
(To accrue ½ year income of 40% owner-
ship = $380,000 × ½ × 40%)
7/1/16 Equity in Investee Income…………..………… 1,685
Investment in Sumter……………….….….. 1,685
(To record ½ year amortization of patent
to establish correct book value for invest-
ment as of 7/1/16)
7/1/16 Cash ……………….………..………..……….………. 425,000
Investment in Sumter (rounded)…....... 346,374
Investment in Sumter and cost of shares sold:
1/1/13 Acquisition …….………..………..……….………..………….….… $ 192,000
1/1/15 Acquisition….………..………..……….………..……………….….. 965,750
1/1/15 Retrospective adjustment……………..…………….….…..…. 36,800
9/15/15 Dividends…………..………..………..………………….….….….. (40,000)
7/1/16 Amortization….……….………..………..……….………..………… (1,685)
Investment in Sumter—7/1/16 balance……………….….….…. $1,385,495
Because 20,000 of 80,000, or ¼, of shares are sold, the percentage retained is
¾ of 40% = 30%.
9/15/16 Cash……………..………..………………….….…... 30,000
(To record annual dividend declared and received)
32. (continued)
12/31/16 Equity in Sumter…………….………..……….….. 57,000
12/31/16 Equity in Investee Income……………..…..…. 1,264 (rounded)
Investment in Sumter……………….….….. 1,264
(To record ½ year of patent amortization—
computation presented below)
Annual patent amortization—original computation………..………. $3,370
Percentage of shares retained (60,000 ÷ 80,000)…………….………. × 75%
33. (25 Minutes) (Equity income balances for two years, includes intra-entity
transfers)
Equity Income 2014
Basic equity accrual ($250,000 × 30%)……………..………..……… $75,000
Deferral of unrealized gross profit (see Schedule 2)………….. (9 ,000)
Equity Income—2014…………………….………..………..……….... $48 ,000
Equity Income (Loss—2015)
Basic equity accrual ($100,000 [loss] × 30%)…………………….. $(30,000)
Amortization (see Schedule 1)…………..………..………..……..…... (18,000)
33. (continued)
Schedule 1
Purchase price…………………..…..….….…..….….…$770,000
Book value acquired ($1,200,000 × 30%)..….…. 360,000
Payment in excess of book value…….…...........$410,000
Remaining Annual
Excess payment identified with specific assets: Life Amortization
Schedule 2
Inventory remaining at December 31, 2014…….….…..….….….…... $80,000
Gross profit percentage ($60,000 ÷ $160,000)……..….….….…..….. × 37 ½ %
Total unrealized gross profit………….……….………..………..……….…. $30,000
Schedule 3
Total unrealized gross profit………….……….………..………..……….…. $15,000
Investor ownership percentage…………..………….….…..….….….….. × 30%
Unrealized intra-entity gross profit —12/31/15
(To be deferred until realized in 2016)…………………….…………. $ 4,500
Solutions to Develop Your Skills
Excel Assignment No. 1 (less difficult)—see textbook Website for the Excel file solution
Parts 1, 2 and 3
Growth rate in income 10%
Dividends $30,000
Cost $700,000 (given in problem)
Percentage owned 40%
2015 2016 2017 2018 2019
PHC reported income $74,000 $81,400 $89,540 $98,494 $108,343
Amortization 15 ,000 15 ,000 15 ,000 15 ,000 15 ,000
Equity earnings $59 ,000 $66 ,400 $74 ,540 $83 ,494 $93 ,343
ROI 8.43% 8.89% 9.30% 9.66% 9.98%
Average 9.25%
Part 3
Growth rate in income 10%
Dividends $30,000
Cost $639,794
(Determined through Solver
under Tools command)
PHC reported income $74,000 $81,400 $89,540 $98,494 $108,343
Amortization 15 ,000 15 ,000 15 ,000 15 ,000 15 ,000
Equity earnings $59 ,000 $66 ,400 $74 ,540 $83 ,494 $93 ,343
Beginning Balance $639,794 $686,794 $741,194 $803,734 $875,228
Equity earnings 59,000 66,400 74,540 83,494 93,343
Excel Assignment No. 2 (more difficult)—see textbook Website for the Excel file solution
Intergen’s ownership percentage of Ryan 40% Intra-entity Transfer Price = $1,025,000
Cell F4
Ryan’s Income Statement Intergen’s Income Statement
Sales $900,000 Sales $1,025,000
Beginning inventory $ -0- Cost of goods sold $ 850 ,000
Cost of goods sold $768,750
Net income $131,250 *(52,500 – (40% × 256,250 ×
175,000/1,025,000))
Income to Intergen—40% $ 52,500
Income to two equity partners—60% $ 78,750
Rate of Return Analysis
Investment Base Rate of Return
Intergen’s ownership percentage of Ryan = 40% Intra-entity Transfer Price = 1,050,000
Ryan’s Income Statement Intergen’s Income Statement
Inventory 25% Equity in Ryan’s earnings $ 25 ,000*
Use Goal Seek or
Solver under the
Tools command to
set Cell D20 to zero
by changing Cell F4
Ending inventory $ 262,500 Net income $ 225,000
Cost of goods sold $787,500
Income to two equity partners—60% $ 67,500
Rate of Return Analysis
Investment Base Rate of Return
Intergen $1,000,000 22.50%
Solution to Coca-Cola Company Analysis Case
1. In its 2012 10-K, Coca-Cola lists the following companies as significant equity
method investees:
Coca-Cola Hellenic Bottling Company S.A. (“Coca-Cola Hellenic”).
As part of strategic business alliances, each of these companies bottle, market, and
We make equity investments in selected bottling operations with the intention of
maximizing the strength and efficiency of the Coca-Cola system’s production,
2. From the Coca-Cola Company’s 2012 10-K report (page 85),
We use the equity method to account for investments in companies, if our
3. 2012 equity income = $819 million.
4. In general, the equity method provides cost-based values while fair values provide
exit-based values. The relevance of the equity method valuation derives from the
investment’s nature as a productive asset for the investor. Because of their business
of investee revenues and expenses as they are earned by the investor.
When possible, fair values are measured using market prices for the investor’s
shares of the investee. Although exit prices represent a “hypothetical” sale
RESEARCH AND ANALYSIS CASE—IMPAIRMENT
1. Paragraph 323-10-35-32 of the FASB ASC states that
A loss in value of an investment which is other than a temporary decline
shall be recognized. Evidence of a loss in value might include, but would
not necessarily be limited to, absence of an ability to recover the carrying
2. Given the facts in the case, a very good case can be made that the decline in value
3. No, according to FASB ASC para. 350-20-35-59, the equity method investment as a
Research Case Solution — Noncontrolling Shareholder Rights
1. Protective Rights (ASC Topic 810, Consolidation 810-10-25-10)
Noncontrolling rights (whether granted by contract or by law) that would allow the
noncontrolling shareholder to block corporate actions would be considered
protective rights and would not overcome the presumption of consolidation by the
investor with a majority voting interest in its investee. The following list is illustrative
of the protective rights that often are provided to the noncontrolling shareholder but
is not all-inclusive:
a. Amendments to articles of incorporation of the investee
e. Issuance or repurchase of equity interests.
2. Substantive Participating Rights (ASC Topic 810, Consolidation 810-10-25-11)
Noncontrolling rights (whether granted by contract or by law) that would allow the
noncontrolling shareholder to participate in determining certain financial and
in Clearwire.
3. (FASB ASC Topic 810, Consolidation 810-10-25-11)
Substantive participating rights would overcome the presumption that the investor
with a majority voting interest shall consolidate its investee. The following list is
illustrative of substantive participating rights, but is not necessarily all-inclusive:
4. Assessing Individual Noncontrolling Rights (FASB ASC Topic 810, Consolidation
810-10-55-1 b and c)
b. Existing facts and circumstances should be considered in assessing whether
the rights of the noncontrolling shareholder relating to an investee’s incurring
c. The rights of the noncontrolling shareholder relating to dividends or other
distributions may be protective or participating and should be assessed in light