CHAPTER
14
INTERCORPORATE INVESTMENTS IN COMMON
STOCK
Questions, Exercises, and Problems: Answers and
S
ol
u
tio
ns
14.1 See the text or the glossary at the end of the book.
14.2 Control is present when one entity has the ability to make both
14.3 Dividends represent revenues under the fair-value method, or
14.4 Firms use over time the service potential of assets with a definite
14.5 When control is present, a parent and a subsidiary operate as
a single economic entity. Eliminating intercompany profit and
14.6 The Investment account changes under the equity method with
14.7 Under the equity method, the change each period in the net
assets, or shareholders’ equity, of the subsidiary appears on the
14.8 When the investor uses the equity method, total assets include
14.9 A minority investor in an investee owns less than a controlling
Solutions14-2
14.10 An economic entity is a group of companies under the control of
14.11 Failing to eliminate the Investment in Subsidiary account will
14.12 The noncontrolling interest in net income is an income
14.13 Eliminating transactions between afiliated companies ensures
14.14 Contracts or other agreements might shift control of the entity
from its owners to some other entity. For example, a court might
14-3Solutions
14.15 (Cayman Company; equity method entries.) (amounts in US$)
Assets = Liabilities +
Shareholders’
Equity (Class.)
stock.
Assets = Liabilities +
Shareholders’
Equity (Class.)
Assets = Liabilities +
Shareholders’
Equity (Class.)
14.16 (Weber Corporation; equity method entries.) (amounts in millions
Assets = Liabilities +
Shareholders’
Equity (Class.)
Solutions14-4
Investment in Stock of Albee Computer …………………. 20
Equity in Earnings of Albee
Computer
……………… 2
Assets = Liabilities +
Shareholders’
Equity (Class.)
year.
Cash (or Dividends R
ecei
vab
l
e) ………………………………6
Investment in Stock of Albee
Computer
……………..
6
Assets = Liabilities +
Shareholders’
Equity (Class.)
Assets = Liabilities +
Shareholders’
Equity (Class.)
+1.6 –1.6
IncSt ïƒ
RE
14.17 (Wood Corporation; journal entries to apply the equity
method of accounting for investments in securities.) (amounts in
US$)
January 2
Investment in Securities
(Knox)
……………………………..
0
Assets = Liabilities +
Shareholders’
Equity (Class.)
14-5Solutio
December 31
Investment in Securities
(Knox)
……………………………..
Investment in Securities
Investment in Securities
0
Equity in Earnings of Afiliates
…………………………
0
Assets = Liabilities +
Shareholders’
Equity (Class.)
+35,000 +42,200
IncSt ïƒ
RE
+12,000
–4,800
(0.50 X $70,000) + (0.30 X $40,000) – (0.20 X $24,000)
=
$42,200.
December 31
Cash
………………………………………………………………
…….
19,500
Investment in Securities
(Knox)…………………………
0
Investment in Securities (Vachi)
……………………….
4,50
0
Assets = Liabilities +
Shareholders’
Equity (Class.)
14.18 (Stebbins Corporation; journal entries to apply the equity
method of accounting for investments in securities.) (amounts in
US$)
a. January 1, 2013
Assets = Liabilities +
Shareholders’
Equity (Class.)
–1,050,000
Solutions14-6
December 31, 2013
Investment in Securities (R)
………………………………
Investment in Securities (S)
…………………………..
75,00
0
Equity in Earnings of
Afiliates
………………………
0
Assets = Liabilities +
Shareholders’
Equity (Class.)
+50,000 +23,000
IncSt ïƒ
RE
+48,000
–75,000
December 31, 2013
Ca
sh
…………………………………………………………
……..
63,250
…………………………..
31,25
0
…………………………..
32,00
0
Assets = Liabilities +
Shareholders’
Equity (Class.)
December 31, 2013
Assets = Liabilities +
Shareholders’
Equity (Class.)
–4,000 –4,000
14-7Solutions
The cost of the investment in Company S exceeds its
December 31, 2014
Assets = Liabilities +
Shareholders’
Equity (Class.)
+56,250 +111,250
IncSt ïƒ
RE
+30,000
+25,000
December 31, 2014
Ca
sh
……………………………………………………………….. 64,50
0
Assets = Liabilities +
Shareholders’
Equity (Class.)
$80,000).
December 31, 2014
Assets = Liabilities +
Shareholders’
Equity (Class.)
–4,000 –4,000
IncSt ïƒ
RE
Solutions14-8
b. January 1, 2015
Ca
275,00
Loss on Sale of Investments
Assets = Liabilities +
Shareholders’
Equity (Class.)
$284,500.
14.19 (Laesch Company; working backward to consolidation relations.)
(amounts in US$)
a. $70,000 = ($156,000 – $100,000)/0.80.
14.20 (Dealco Corporation; working backward from consolidated incom
e
statements.) (amounts in millions of US$)
14.21 (CAR Corporation; consolidation policy and principal consolidati
on concepts.) (amounts in US$)
7
,60
0
14-9Solutions
c. Noncontrolling Interest shown under accounting assumed in
problem:
or
p
0
,
0
CAR Corporation subtracts the noncontrolling interest in computing net
income.
d. Charles Electronics, no increase because already consolidated.
e)
.
e. Noncontrolling Interest shown if CAR Corporation
96,000) =
19,20
0
R Credit Corporation …………………………. (0.10 X
144,000) =
1
4
, 40
0
6
3
, 60
0
Solutions14-10
14.22 (Joyce Company and Vogel Company; equity method entries.)
(amounts
in
US$)
Joyce Company’s Books
(1) Investment in Stock of Vogel Company……………….420,000
Ca
sh
…………………………………………………………….420,000
Assets = Liabilities +
Shareholders’
Equity (Class.)
(2) Accounts R
ecei
vab
l
e ………………………………………….29,000
Sales Revenue ………………………………………………29,000
Assets = Liabilities +
Shareholders’
Equity (Class.)
RE
To record intercompany sales on
account.
(2) Cost of Goods Sold…………………………………………….29,000
Inventories
……………………………………………………29,0
Assets = Liabilities +
Shareholders’
Equity (Class.)
(3) Advance to Vogel Company ……………………………….6,000
Ca
sh
14-11Solutions
(4) Ca
sh
………………………………………………………………..
16,000
Accounts R
ecei
vab
l
e ………………………………………16,000
Assets = Liabilities +
Shareholders’
Equity (Class.)
(5) Ca
sh
……………………………………………………………….. 4,000
Advance to Vogel Company ……………………………4,000
Assets = Liabilities +
Shareholders’
Equity (Class.)
(6) Ca
sh
………………………………………………………………..
20,000
Assets = Liabilities +
Shareholders’
Equity (Class.)
+30,000 +30,000
IncSt ïƒ
RE
To accrue 100% share of Vogel Company’s net
income.
14.6 The Investment account changes under the equity method with
14.7 Under the equity method, the change each period in the net
assets, or shareholders’ equity, of the subsidiary appears on the
14.8 When the investor uses the equity method, total assets include
14.9 A minority investor in an investee owns less than a controlling
Solutions14-2
14.10 An economic entity is a group of companies under the control of
14.11 Failing to eliminate the Investment in Subsidiary account will
14.12 The noncontrolling interest in net income is an income
14.13 Eliminating transactions between afiliated companies ensures
14.14 Contracts or other agreements might shift control of the entity
from its owners to some other entity. For example, a court might
14-3Solutions
14.15 (Cayman Company; equity method entries.) (amounts in US$)
Assets = Liabilities +
Shareholders’
Equity (Class.)
stock.
Assets = Liabilities +
Shareholders’
Equity (Class.)
Assets = Liabilities +
Shareholders’
Equity (Class.)
14.16 (Weber Corporation; equity method entries.) (amounts in millions
Assets = Liabilities +
Shareholders’
Equity (Class.)
Solutions14-4
Investment in Stock of Albee Computer …………………. 20
Equity in Earnings of Albee
Computer
……………… 2
Assets = Liabilities +
Shareholders’
Equity (Class.)
year.
Cash (or Dividends R
ecei
vab
l
e) ………………………………6
Investment in Stock of Albee
Computer
……………..
6
Assets = Liabilities +
Shareholders’
Equity (Class.)
Assets = Liabilities +
Shareholders’
Equity (Class.)
+1.6 –1.6
IncSt ïƒ
RE
14.17 (Wood Corporation; journal entries to apply the equity
method of accounting for investments in securities.) (amounts in
US$)
January 2
Investment in Securities
(Knox)
……………………………..
0
Assets = Liabilities +
Shareholders’
Equity (Class.)
14-5Solutio
December 31
Investment in Securities
(Knox)
……………………………..
Investment in Securities
Investment in Securities
0
Equity in Earnings of Afiliates
…………………………
0
Assets = Liabilities +
Shareholders’
Equity (Class.)
+35,000 +42,200
IncSt ïƒ
RE
+12,000
–4,800
(0.50 X $70,000) + (0.30 X $40,000) – (0.20 X $24,000)
=
$42,200.
December 31
Cash
………………………………………………………………
…….
19,500
Investment in Securities
(Knox)…………………………
0
Investment in Securities (Vachi)
……………………….
4,50
0
Assets = Liabilities +
Shareholders’
Equity (Class.)
14.18 (Stebbins Corporation; journal entries to apply the equity
method of accounting for investments in securities.) (amounts in
US$)
a. January 1, 2013
Assets = Liabilities +
Shareholders’
Equity (Class.)
–1,050,000
Solutions14-6
December 31, 2013
Investment in Securities (R)
………………………………
Investment in Securities (S)
…………………………..
75,00
0
Equity in Earnings of
Afiliates
………………………
0
Assets = Liabilities +
Shareholders’
Equity (Class.)
+50,000 +23,000
IncSt ïƒ
RE
+48,000
–75,000
December 31, 2013
Ca
sh
…………………………………………………………
……..
63,250
…………………………..
31,25
0
…………………………..
32,00
0
Assets = Liabilities +
Shareholders’
Equity (Class.)
December 31, 2013
Assets = Liabilities +
Shareholders’
Equity (Class.)
–4,000 –4,000
14-7Solutions
The cost of the investment in Company S exceeds its
December 31, 2014
Assets = Liabilities +
Shareholders’
Equity (Class.)
+56,250 +111,250
IncSt ïƒ
RE
+30,000
+25,000
December 31, 2014
Ca
sh
……………………………………………………………….. 64,50
0
Assets = Liabilities +
Shareholders’
Equity (Class.)
$80,000).
December 31, 2014
Assets = Liabilities +
Shareholders’
Equity (Class.)
–4,000 –4,000
IncSt ïƒ
RE
Solutions14-8
b. January 1, 2015
Ca
275,00
Loss on Sale of Investments
Assets = Liabilities +
Shareholders’
Equity (Class.)
$284,500.
14.19 (Laesch Company; working backward to consolidation relations.)
(amounts in US$)
a. $70,000 = ($156,000 – $100,000)/0.80.
14.20 (Dealco Corporation; working backward from consolidated incom
e
statements.) (amounts in millions of US$)
14.21 (CAR Corporation; consolidation policy and principal consolidati
on concepts.) (amounts in US$)
7
,60
0
14-9Solutions
c. Noncontrolling Interest shown under accounting assumed in
problem:
or
p
0
,
0
CAR Corporation subtracts the noncontrolling interest in computing net
income.
d. Charles Electronics, no increase because already consolidated.
e)
.
e. Noncontrolling Interest shown if CAR Corporation
96,000) =
19,20
0
R Credit Corporation …………………………. (0.10 X
144,000) =
1
4
, 40
0
6
3
, 60
0
Solutions14-10
14.22 (Joyce Company and Vogel Company; equity method entries.)
(amounts
in
US$)
Joyce Company’s Books
(1) Investment in Stock of Vogel Company……………….420,000
Ca
sh
…………………………………………………………….420,000
Assets = Liabilities +
Shareholders’
Equity (Class.)
(2) Accounts R
ecei
vab
l
e ………………………………………….29,000
Sales Revenue ………………………………………………29,000
Assets = Liabilities +
Shareholders’
Equity (Class.)
RE
To record intercompany sales on
account.
(2) Cost of Goods Sold…………………………………………….29,000
Inventories
……………………………………………………29,0
Assets = Liabilities +
Shareholders’
Equity (Class.)
(3) Advance to Vogel Company ……………………………….6,000
Ca
sh
14-11Solutions
(4) Ca
sh
………………………………………………………………..
16,000
Accounts R
ecei
vab
l
e ………………………………………16,000
Assets = Liabilities +
Shareholders’
Equity (Class.)
(5) Ca
sh
……………………………………………………………….. 4,000
Advance to Vogel Company ……………………………4,000
Assets = Liabilities +
Shareholders’
Equity (Class.)
(6) Ca
sh
………………………………………………………………..
20,000
Assets = Liabilities +
Shareholders’
Equity (Class.)
+30,000 +30,000
IncSt ïƒ
RE
To accrue 100% share of Vogel Company’s net
income.