13-1 Solutions
CHAPTER 13
INTERCORPORATE INVESTMENTS IN COMMON STOCK
Questions, Exercises, and Problems: Answers and Solutions
13.2 Control is present when one entity has sufficient ownership interest or
contractual rights to make both strategic and operating decisions for another
entity. Significant influence is present when one entity has sufficient
13.3 Dividends represent revenues under the fair-value method, or a return of
13.4 Firms use over time the service potential of assets with a limited life. The
13.5 When control is present, a parent and a subsidiary operate as a single
economic entity. Eliminating intercompany profit and loss in these cases
Solutions 13-2
13-3 Solutions
13.6 The Investment account changes under the equity method with all changes in
13.7 Under the equity method, the change each period in the net assets, or
shareholders’ equity, of the subsidiary appears on the one line, Investment in
13.8 When the investor uses the equity method, total assets include the Investment
in Subsidiary account. The investment account reflects the parent’s interest in
13.9 If Company A owns less than, or equal to, 50% of Company B’s voting stock, it
is a minority investor in Company B. If Company A owns more than 50% of
13.10 An economic entity is a group of companies that operates under the control of
a parent company instead of as separate companies. The parent company
Solutions 13-4
13.11 Failing to eliminate the Investment in Subsidiary account will result in double
13-5 Solutions
13.12 The noncontrolling interest in net income is an income statement account that
shows the claim of the noncontrolling shareholders on the net income of the
consolidated group of companies. The noncontrolling interest in net assets is
13.13 One can envision scenarios where the equity method or proportionate
consolidation better reflects the relation between the joint owners and the joint
venture. For example, assume a joint venture in which one of the joint owners
13.14 Contracts or other agreements might shift control of the entity from its owners
13.15 (Hanna Company; equity method entries.)
Investment in Stock of Denver Company …………………… 550,000
Cash ……………………………………………………………….. 550,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+550,000
–550,000
To record acquisition of common stock.
Solutions 13-6
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+120,000
+120,000
IncSt → RE
To accrue 100% share of Denver Company’s earnings.
13-7 Solutions
13.15 continued.
Cash or Dividends Receivable …………………………………. 30,000
Investment in Stock of Denver Company ……………… 30,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+30,000
–30,000
To accrue dividends received or receivable.
13.16 (Weber Corporation; equity method entries.) (Amounts in Millions)
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+100
–100
To record acquisition of shares of common stock.
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+20
+20
IncSt → RE
To accrue Weber Computer’s earnings for the year.
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+6
–6
To record dividends received or receivable.
Solutions 13-8
13-9 Solutions
13.16 continued.
Amortization Expense …………………………………………….. 1.6
Investment in Stock of Weber Computer ………………. 1.6
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+1.6
–1.6
IncSt → RE
To amortize patent; $1.6 = [.20 X ($500 – $420)10].
Investment is now $112.4 = $100 + $20 – $6 – $1.6.
13.17 (Wood Corporation; journal entries to apply the equity method of accounting
for investments in securities.)
January 2
Investment in Securities (Knox) ……………………………….. 350,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+350,000
+196,000
+100,000
–646,000
December 31
Investment in Securities (Knox) ……………………………….. 35,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+35,000
+42,200
IncSt → RE
+12,000
–4,800
(.50 X $70,000) + (.30 X $40,000) – (.20 X $24,000) = $42,200.
Solutions 13–10
13.17 continued.
December 31
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+19,500
–15,000
–4,500
(.50 X $30,000) + (.30 X $15,000) = $19,500.
13.18 (Stebbins Corporation; journal entries to apply the equity method of accounting
for investments in securities.)
a. January 1, 2008
Investment in Securities (R) ……………………………….. 250,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+250,000
+325,000
+475,000
–1,050,000
December 31, 2008
Investment in Securities (R) ……………………………….. 50,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+50,000
+23,000
IncSt → RE
+48,000
–75,000
13–11 Solutions
Solutions 13–12
13.18 a. continued.
December 31, 2008
Cash ……………………………………………………………….. 63,250
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+63,250
–31,250
–32,000
(.25 X $125,000) + (.40 X $80,000) = $63,250.
December 31, 2008
Depreciation Expense ……………………………………….. 4,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–4,000
–4,000
IncSt → RE
The cost of the investment in Company R exceeds the carrying value of
remaining excess to goodwill, which it need not depreciate.
this excess to goodwill. The acquisition cost of the investment in Security
T equals the carrying value of the net assets acquired.
December 31, 2009
Investment in Securities (R) ……………………………….. 56,250
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+56,250
+111,250
IncSt → RE
13–13 Solutions
+30,000
+25,000
(.25 X $225,000) + (.40 X $75,000) + (.50 X $50,000) =
$111,250.
Solutions 13–14
13.18 a. continued.
December 31, 2009
Cash ……………………………………………………………….. 64,500
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+64,500
–32,500
–32,000
December 31, 2009
Depreciation Expense ……………………………………….. 4,000
Investment in Securities (R) ……………………………. 4,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–4,000
–4,000
IncSt → RE
b. January 1, 2010
Cash ……………………………………………………………….. 275,000
Loss on Sale of Investments ………………………………. 9,500
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+275,000
–9,500
IncSt → RE
–284,500
13.19 (Laesch Company; working backwards to consolidation relations.)
a. $70,000 = ($156,000 – $100,000)/.80.
13–15 Solutions
13.20 Dealco Corporation; working backwards from consolidated income
statements.) (Amounts in Millions)
a. $56/$140 = 40%.
13.21 (CAR Corporation; consolidation policy and principal consolidation concepts.)
a. CAR Corporation should consolidate Alexandre du France Software
b. Charles Electronics ……………………………… (.75 X $120,000) = $ 90,000
c. Noncontrolling Interest shown under accounting assumed in problem:
Charles Electronics ……………………………… (.25 X $120,000) = $ 30,000
d. Charles Electronics, no increase because already consolidated.
Alexandre du France Software Systems increase by 80% of net income
less dividends:
Solutions 13–16
e. Noncontrolling Interest shown if CAR Corporation consolidated all
companies:
Charles Electronics …………………………….. (.25 X $120,000) = $ 30,000
13–17 Solutions
13.22 (Joyce Company and Vogel Company; equity method entries.)
Joyce Company’s Books
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+420,000
–420,000
To record acquisition of common stock.
(2) Accounts Receivable …………………………………………. 29,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+29,000
+29,000
IncSt → RE
To record intercompany sales on account.
(2) Cost of Goods Sold …………………………………………… 29,000
Inventories …………………………………………………… 29,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–29,000
–29,000
IncSt → RE
To record cost of intercompany sales.
(3) Advance to Vogel Company ……………………………….. 6,000
Cash ……………………………………………………………. 6,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+6,000
–6,000
To record advance to Vogel Company.
Solutions 13–18
13.22 continued.
(4) Cash ……………………………………………………………….. 16,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+16,000
–16,000
To record collections on account from Vogel Company.
(5) Cash ……………………………………………………………….. 4,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+4,000
–4,000
To record collection of advance from Vogel Company.
(6) Cash ……………………………………………………………….. 20,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+20,000
–20,000
To record dividend from Vogel Company.
(7) Investment in Stock of Vogel Company ……………….. 30,000
Assets
=
Liabilities
+
Shareholders‘
Equity
(Class.)
+30,000
+30,000
IncSt → RE
To accrue 100% share of Vogel Company’s net income.
13–19 Solutions
13.22 continued.
(8) Amortization Expense ……………………………………….. 4,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–4,000
–4,000
IncSt → RE
To record amortization of patent; $4,000 = ($20,000 –
$380,000)/10.
Vogel Company’s Books
(1) No entry.
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+29,000
+29,000
To record intercompany purchase of materials on
account.
(3) Cash ……………………………………………………………….. 6,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+6,000
+6,000
To record advance from Joyce Company.
(4) Accounts Payable …………………………………………….. 16,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–16,000
–16,000
To record payment for purchases on account.
Solutions 13–20