Chapter 02 – Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with no Differential
5. d – Since these are liquidating dividends they would decrease the investment account under
the cost method and decrease the investment account under the equity method.
6. d – The amount of dividends not in excess would be considered dividend income.
(a) Incorrect. There would be at least some dividend income recorded.
E2-2 Multiple-Choice Questions on Intercorporate Investments
1. b – Equity method reporting is used when an investor gains significant influence over the
operating and financing decisions of the investee. Typically, this is satisfied by
maintaining 20% or more of the voting stock, but can also be obtained by other
2. c – Under the equity method, net income from the investee causes an increase to the
investment, while dividends declared by the investee causes a reduction.
(a) Incorrect. This simply represents the historical cost of the investment. It must be
E2-3 Multiple-Choice Questions on Applying Equity Method
1. d – $250,000 + ($100,000 x 0.30) – ($10,000 x 0.30) = $277,000
2. c – 20X9 investment income: $650,000 * 30% = $195,000, 20X8 adjustment: ($600,000 *
3. d – Because income is greater than the amount of dividends declared, the equity method
would have resulted in a higher balance in the investment account, net earnings, and
retained earnings than under the cost method.
4. d – Under the equity method, dividends by the investee are recorded with a credit to the
investment account, not to dividend revenue. By wrongly classifying this entry, the
investment is overstated, and retained earnings are also overstated.
E2-4 Cost versus Equity Reporting
a. Winston Corporation net income – cost method:
20X2
$100,000
+
.40($30,000)
$112,000
20X3
$ 60,000
+
.40($60,000)
84,000
20X4
$250,000
+
.40($20,000
+
$25,000)a
268,000
a Dividends paid from undistributed earnings of prior years
($70,000 + $40,000 – $30,000 – $60,000 = $20,000)
and $25,000 earnings of current period.
b. Winston Corporation net income – equity method:
20X2
+
.40($70,000)
$128,000
20X3
+
.40($40,000)
76,000
20X4
+
.40($25,000)
260,000
E2-5 Acquisition Price
Balance at date of acquisition:
a. Cost method $54,000 + $2,800 = $56,800
Change in Investment Account
Year
Net Income
Dividends
Cost Method
Equity Method
20X1
$ 8,000
$15,000
$(2,800)
$(2,800)
20X2
12,000
10,000
800
20X3
20,000
10,000
______
4,000
Change in account balance
$(2,800)
$ 2,000
E2-6 Investment Income
a. (1) Ravine Corporation net income under Cost Method:
20X6
$140,000
+
0.30($20,000)
=
$146,000
20X7
$ 80,000
+
0.30($40,000)
=
$ 92,000
20X8
$220,000
+
0.30($20,000 + $10,000)a
=
$229,000
20X9
$160,000
+
0.30($20,000)
=
$166,000
a Dividends paid from undistributed earnings of prior years
($30,000 + $50,000 – $20,000 – $40,000= $20,000) and $10,000
earnings of current period.
(2) Ravine Corporation net income under Equity Method:
20X6
$140,000
+
0.30($30,000)
=
$149,000
20X7
$ 80,000
+
0.30($50,000)
=
$ 95,000
20X8
$220,000
+
0.30($10,000)
=
$223,000
20X9
$160,000
+
0.30($40,000)
=
$172,000
b. Journal entries recorded by Ravine Corporation in 20X8:
(1) Cost method:
Cash
12,000
Dividend Income
9,000
Investment in Valley Stock
3,000
(2) Equity method:
Cash
12,000
Investment in Valley Stock
12,000
Investment in Valley Stock
3,000
Income from Valley
3,000
E2-7 Investment Value
The following amounts would be reported as the carrying value of Port’s investment in Sund:
20X2
$184,500
=
$180,000
+
($40,000 x 0.30)
–
($25,000 x 0.30)
20X3
$193,500
=
$184,500
+
($30,000 x 0.30)
20X4
$195,000
=
$193,500 + ($5,000 x 0.30)
E2-8A Income Reporting
Journal entry recorded by Grandview Company:
Investment in Spinet Corporation Stock
36,000
Income from Spinet Corporation
24,000
Extraordinary Gain (from Spinet Corporation)
12,000
E2-9 Fair Value Method
a. Cost method:
Operating income reported by Mock
$90,000
Dividend income from Small ($15,000 x 0.20)
3,000
Net income reported by Mock
$93,000
Operating income reported by Mock
$90,000
Income from investee ($40,000 x 0.20)
8,000
Net income reported by Mock
$98,000
Operating income reported by Mock
$90,000
Unrealized gain on increase in value of Small stock
16,000
Dividend income from Small ($15,000 x 0.20)
3,000
Net income reported by Mock
$ 109,000
E2-10 Fair Value Recognition
(1)
Investment in Lomm Company Stock
140,000
Cash
140,000
Record purchase of Lomm Company stock.
(2)
Cash
7,000
Investment in Lomm Company Stock
7,000
Record dividends from Lomm Company: $20,000 x 0.35
(3)
Investment in Lomm Company Stock
28,000
Income from Lomm Company
28,000
Record equity-method income: $80,000 x 0.35
(1)
Investment in Lomm Company Stock
140,000
Cash
140,000
Record purchase of Lomm Company stock.
(2)
Cash
7,000
Dividend Income
7,000
Record dividends from Lomm Company: $20,000 x 0.35
(3)
Investment in Lomm Company Stock
34,000
Unrealized Gain on Increase in Value of Lomm Stock
34,000
Record increase in value of Lomm stock: $174,000 – $140,000
E2–11A Investee with Preferred Stock Outstanding
(1)
Investment in Montgomery Co. Stock
288,000
Cash
288,000
Record purchase of Montgomery Co. stock.
(2)
Cash
6,750
Investment in Montgomery Co. Stock
6,750
Record dividend from Montgomery Co.: [$40,000 – ($250,000 x .10)] x 0.45
(3)
Investment in Montgomery Co. Stock
31,500
Income from Montgomery Co.
31,500
Record equity-method income: [$95,000 – ($250,000 x .10)] x 0.45
E2–12A Other Comprehensive Income Reported by Investee
(1)
Investment in Thinbill Co. Stock
380,000
Cash
380,000
Record purchase of Thinbill Company
(2)
Cash
3,600
Investment in Thinbill Co. Stock
3,600
Record dividend from Thinbill: $9,000 x 0.40
(3)
Investment in Thinbill Co. Stock
18,000
Income from Thinbill Co.
18,000
Record equity-method income: $18,000 = $45,000 x 0.40
(4)
Investment in Thinbill Co. Stock
8,000
Unrealized Gain on Investments of Investee (OCI)
8,000
Record share of OCI reported by Thinbill: $8,000 = $20,000 x 0.40
Closing entries recorded at December 31, 20X9:
(5)
Income from Thinbill Co.
18,000
Retained Earnings
18,000
(6)
Unrealized Gain on Investments of Investee (OCI)
8,000
Accumulated Other Comprehensive Income from
Investee-Unrealized Gain on Investments
8,000
E2–13A Other Comprehensive Income Reported by Investee
Investment account balance reported by Baldwin Corp.
$67,000
Add decrease in account recorded in 20X8:
Equity-method loss ($20,000 x .25)
$ (5,000)
Dividend received ($10,000 x .25)
(2,500)
7,500
Deduct increase in account recorded in 20X9:
Equity-method income ($68,000 x .25)
$17,000
Dividend received ($16,000 x .25)
(4,000)
Other comprehensive income reported by Gwin
Company ($12,000 x .25)
3,000
(16,000)
Purchase price
$58,500
E2-14 Basic Consolidation Entry
Common Stock – Broadway Corporation
200,000
Additional Paid-In Capital
300,000
Retained Earnings
100,000
Investment in Broadway Common Stock
600,000
E2-15 Balance Sheet Worksheet
a.
Equity Method Entries on Blank’s Books:
Investment in Faith
150,000
Cash
150,000
Record the initial investment in Faith
12/31/X2
Goodwill = 0
Identifiable
excess = 0
$150,000
Initial
investment in
Faith
Book value =
CS + RE =
150,000
Book Value Calculations:
Total
Book Value
=
Common
Stock
+
Retained
Earnings
Ending book value
150,000
60,000
90,000
Basic Consolidation Entry
Common stock
60,000
Retained earnings
90,000
Investment in Faith
150,000
Optional accumulated depreciation consolidation entry
Accumulated depreciation
30,000
Buildings & equipment
30,000
(Since the buildings and equipment are reported net of accumulated depreciation on the
balance sheet, this entry will not affect the worksheet. However, if sufficient information had
been given, this entry would have made a difference in the worksheet balances for Buildings
and Equipment and Accumulated Depreciation. Additionally, this entry would impact any
footnote disclosure of the details of Buildings and Equipment.)
E2-15 (continued)
b.
Blank
Faith
Consolidation
Entries
DR
CR
Consolidated
Balance Sheet
Cash
65,000
18,000
83,000
Accounts Receivable
87,000
37,000
124,000
Inventory
110,000
60,000
170,000
Buildings & Equipment (net)
220,000
150,000
30,000
30,000
370,000
Investment in Faith
150,000
150,000
0
Total Assets
632,000
265,000
30,000
180,000
747,000
Accounts Payable
92,000
35,000
127,000
Bonds Payable
150,000
80,000
230,000
Common Stock
100,000
60,000
60,000
100,000
Retained Earnings
290,000
90,000
90,000
290,000
Total Liabilities & Equity
632,000
265,000
150,000
0
747,000
E2-16 Consolidation Entries for Wholly Owned Subsidiary
a.
Equity Method Entries on Trim Corp.’s Books:
Investment in Round Corp.
400,000
Cash
400,000
Record the initial investment in Round Corp.
Investment in Round Corp.
80,000
Income from Round Corp.
80,000
Record Trim Corp.’s 100% share of Round Corp.’s 20X2 income
Cash
25,000
Investment in Round Corp.
25,000
Record Trim Corp.’s 100% share of Round Corp.’s 20X2 dividend
Book Value Calculations:
Total
Book Value
=
Common
Stock
+
Retained
Earnings
Beginning book
value
400,000
120,000
280,000
+ Net Income
80,000
80,000
– Dividends
(25,000)
(25,000)
Ending book value
455,000
120,000
335,000
1/1/X2
Goodwill = 0
Identifiable
excess = 0
$400,000
Initial
investment
in Round
Corp.
Book value =
CS + RE =
400,000
12/31/X2
Goodwill = 0
Identifiable
excess = 0
$455,000
Net
investment
in Round
Corp.
Book value =
CS + RE =
455,000