ANSWERS TO GROUP A PROBLEMS
PAD–1
Req. 1
July 12, 2014
Available-for-Sale Securities ……………………………….………..
30,000
Cash ……………………………………………………………………..
30,000
Dec. 31, 2014
Available-for-Sale Securities ……………………………….………..
3,000
Net Unrealized Losses/Gains …………………………..
3,000
May 1, 2015
Cash ……………………………………………………………….………..
2,000
Dividend Revenue …………………………..…………….………..
2,000
Dec. 31, 2015
Net Unrealized Losses/Gains ……………………………..………..
5,000
Available-for-Sale Securities …………………………..………..
5,000
May 1, 2016
Cash ……………………………………………………………….………..
2,000
Dividend Revenue …………………………..…………….………..
2,000
Dec. 31, 2016
Net Unrealized Losses/Gains ……………………………..………..
8,000
Available-for-Sale Securities …………………………..………..
8,000
Computations for Year-End Adjustments to Fair Value:
Year Fair Value − Investment = Adjustment
2014 $33,000 $30,000 +$3,000
2015 28,000 33,000 − 5,000
2016 20,000 28,000 − 8,000
PAD–1 (continued)
Req. 2
July 12, 2014
Trading Securities ……………………………………………………….
30,000
Cash ………………………………………………….……
30,000
Dec. 31, 2014
Trading Securities ……………………………………………………….
3,000
Net Unrealized Losses/Gains ………………..…………
3,000
May 1, 2015
Cash ……………………………………………………….
2,000
Dividend Revenue ……………………………….………………….
2,000
Dec. 31, 2015
Net Unrealized Losses/Gains …………………….…….
5,000
Trading Securities ………………………………..………………….
5,000
May 1, 2016
Cash ……………………………………………………….
2,000
Dividend Revenue ……………………………….………………….
2,000
Dec. 31, 2016
Net Unrealized Losses/Gains …………………….…….
8,000
Trading Securities ………………………………..………………….
8,000
Computations for Year-End Adjustments to Fair Value:
Year Fair Value − Investment = Adjustment
2014 $33,000 $30,000 +$3,000
2015 28,000 33,000 − 5,000
2016 20,000 28,000 − 8,000
PAD–1 (continued)
Req. 3
July 12, 2014
Investment in Affiliates …………………………………………………
30,000
Cash ……………………………………………………………………..
30,000
Dec. 31, 2014
Investment in Affiliates …………………………………………………
15,000
Equity in Affiliate Earnings ………………………………………..
15,000
(30% x $50,000)
Cash ………………………………………………………………………….
2,000
Investment in Affiliates ……………………………………………..
2,000
Dec. 31, 2015
Investment in Affiliates …………………………………………………
15,000
Equity in Affiliate Earnings ………………………………………..
15,000
(30% x $50,000)
Cash ………………………………………………………………………….
2,000
Investment in Affiliates ……………………………………………..
2,000
Dec. 31, 2016
Investment in Affiliates …………………………………………………
15,000
Equity in Affiliate Earnings ………………………………………..
15,000
(30% x $50,000)
PAD–2
Req. 1
Case A
The fair value method must be used by Marg Company because it owns 10%
(10,000 ÷ 100,000) of the total shares of the outstanding common stock of Lisa
Company. The fair value method must be used when less than 20% of the
outstanding stock is owned because the investor cannot exercise either
significant influence or control.
Case B
The equity method must be used by Marg Company because it owns 40%
(40,000 ÷ 100,000) of the total shares of the outstanding common stock of Lisa
Company. The equity method must be used when at least 20% but not more
than 50% of the outstanding stock is owned, because the investor can
exercise significant influence, but not control, over the operating and financing
policies of the other company.
Req. 2
Case A-10%
Case B-40%
a.
Jan. 10, 2015 stock acquisition:
Available-for-Sale Securities …………
200,000
Cash ……………………………………
200,000
(10,000 shares x $20)
Investment in Affiliates …………………
800,000
Cash …………………………………..
800,000
(40,000 shares x $20)
b.
Net income of Lisa Company:
Investment in Affiliates …………………
No entry
120,000
Equity in Affiliate Earnings …………
120,000
($300,000 x 40%)
c.
Dividends paid by Lisa Company:
Cash ………………………………………….
6,000
Dividend Revenue …………………..
6,000
(10,000 shares x $.60)
Cash ………………………………………….
24,000
Investment in Affiliates ……………..
24,000
(40,000 shares x $.60)
Net Unrealized Losses/Gains …………
PAD–2 (continued)
Req. 3
Case A
Case B
Balance Sheet:
Long-term Assets:
Available-for-Sale Securities ………………………………………
$180,000
Investment in Affiliates ………………………………………………
$896,000
*
Stockholders’ Equity
Net Unrealized Gains (Losses)…………………………..
(20,000
)
Income Statement:
Dividend Revenue ………………………………………….………..
6,000
Equity in Affiliate Earnings ……………………………….………..
120,000
* Cost $800,000 + % Affiliate’s net income $120,000 – % Affiliate’s dividends $24,000 =
$896,000 reported on the balance sheet
Req. 4
The amounts reported in Requirement 3 are different because (1) different approaches
are used to recognize dividend revenue, and (2) adjustments for changes in fair value
are made only under the fair value method.