Financial Reporting and Analysis (7th Ed.)
Chapter 16 Solutions
Intercorporate Investments
Exercises
Exercises
E16-1. Accounting for trading and available-for-sale securities
(AICPA adapted)
Requirement 1:
Only the unrealized holding gains/losses from trading securities are
fair value from 12/31/16 to 12/31/17 = $155,000 – $100,000 =
$55,000.
Requirement 2:
Any unrealized gain or loss for the year on Tyne’s available-for-sale
securities should be recorded as part of Other comprehensive income
$20,000 loss ($130,000 Beta Co. fair value – $150,000 original cost).
Note the distinction between OCI and AOCI. The “A” stands for
income and retained earnings. Retained earnings, which is presented
in the balance sheet, is the accumulation of retained net income.
E16-2. Accounting for minority-passive equity investments under
new rules
(AICPA Adapted)
Requirement 1:
Note that these facts are identical to those in E16-1. However, the
Alpha and Beta – is included in holding gain in 2020.
Requirement 2:
The issue here is how the transition from the old rules to the new ones
is handled. Although there is no additional OCI to accumulate under
reclassified to retained earnings. As a result, there is no AOCI related
to Tyne’s equity investments reported at December 31, 2020.
E16-3. Accounting for trading securities
Requirement 1:
Aggregate cost of trading portfolio at 12/31/17 $340,000
Aggregate fair value of trading portfolio on 12/31/17
$34,000
(This is the unrealized loss reported in the 2017 income statement.)
Requirement 2:
DR Unrealized loss—trading securities $34,000
CR Fair value adjustment—trading securities
$34,000
E16-4. Using the equity method
(AICPA adapted)
16-2
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E16-5. Using the equity method and fair value option
(AICPA adapted)
Requirement 1:
Requirement 2:
Sage’s initial investment in Adams $400,000
Sage’s investment income from Adams – 2017 42,000
400,000
Unrealized gain on investment in Adams
Total effect on Sage’s 2017 income $
78,000
E16-6. Determining business rationale and whether to
consolidate a VIE; Intra-entity sales
NOTE: The instructor may direct students to Papa John’s 10-K filing
Requirement 1:
According to the note disclosure, the purchasing arrangement through
restaurants’ ability to plan and budget for a major ingredient in their
products.
Requirement 2:
Papa John’s had to determine if it was the primary beneficiary of BIBP.
benefits that could be potentially significant to BIBP.
consolidated financial statements.
Requirement 3:
The intra-entity sales are eliminated in the consolidated financial
eliminated.
E16-7. Determining the value of goodwill
Acquisition cost of Shake’s stock $4,000,000 ($20 x 200,000)
Goodwill 700 ,000
$1 ,000,000
E16-8. Goodwill–acquisition method
(AICPA adapted)
*Identifiable net assets excludes goodwill.
E16-9. Preparing consolidated financial statements
(AICPA adapted)
Beginning retained earnings (Pitt Company) $500,000
Note that Saxe’s amounts need not be considered explicitly because
Pitt’s consolidated results include Saxe’s.
16-5
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E16-10. Determining consolidated retained earnings
Pack will report Retained Earnings of $780,000 in its December 31,
2017 consolidated balance sheet. Slam’s Retained Earnings balance
is eliminated during the consolidation process
16-6
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E16-11. Consolidated balances using the acquisition method
Following is Sea Company’s consolidation worksheet immediately after the acquisition of Island Company:
Sea Island
Eliminations Consolidated
Dr Cr Balance Sheet
Assets
Other assets $ 750,000
$
320,000 $15,000 B $1,095,000
10,000 C
Stockholders’ Equity
450,00
200,00
Noncontrolling
interest 100,000 A 120,000
20,000 C
Total Equity 680,000 250,000 800,000
16-7
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Total Liabilities
and Equity
16-8
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Requirement 1:
Imputed full fair value of the acquisition $300,000 ($180,000/.6)
Island’s acquisition date book value (250,000)
50,000
The consolidated total assets will be $1,120,000, as shown in the
consolidation worksheet. This amount consists of:
Requirement 2:
Under the acquisition method, noncontrolling interest is based on the
consolidated worksheet.
E16-12. Recording transaction foreign exchange gain/loss
(AICPA adapted)
Requirement 1:
2017:
12/31/17 balance of receivable in dollars
Requirement 2:
2018:
Dollar amount received on 2/1/18
Foreign currency gain in 2018 $12 ,500
E16-13. Accounting for available-for-sale securities
(AICPA adapted)
16-9
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Education.
Net unrealized losses at 12/31/17 ($26,000 – $4,000) $22,000
available-for-sale securities $20,500
CR Fair value adjustment–available-for-sale securities $20,500
E16-14. Fair value accounting for trading securities
Equity 12/31/18 Unrealized
Security Cost Fair Value gain/(loss)
($14 ,000)
Therefore, the Fair value adjustment account must have a $14,000 credit
31, 2017 balance must have been $18,000.
Fair Value Adjustment – trading securities
E16-15. Consolidating sales and cost of goods sold with intra-entity
transactions
Requirement 1:
Pate recorded $600,000 in sales revenue when it sold goods to Strange.
reported at $2,700,000 + $1,600,000 – $600,000 = $3,700,000.
16-10
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Education.
Requirement 2:
Pate recorded $400,000 in cost of sales when it sold to goods Strange.
would be reported at $1,800,000 + $900,000 – $600,000 = $2,100,000.
E16-16. Comparison of acquisition versus pooling method
Requirement 1 (Acquisition Method):
The investment is recorded at fair value under the acquisition method.
DR Investment in Stroker $500,000
CR Common Stock $500,000
Requirement 2 (Acquisition Method):
16-11
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Education.
Requirement 2 (continued):
Pushway Stroker
Eliminations Consolidated
Dr Cr Balance Sheet
Assets
Current assets $ 300,000
$
100,000 $ 400,000
Liabilities
Current liabilities
$
200,000 $ 50,000 $ 250,000
Long term liabilities 250,000 100,000 20,000 B 370,000
Total Liabilities
16-12
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and Equity
Note: Answers (a), (b), and (c) are keyed above.
16-13
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Requirement 3 (Pooling Method):
The acquisition journal entry under pooling would be at Stroker’s book
value:
Under the pooling method, the acquisition “cost” is the book value acquired
and therefore Stoker’s assets and liabilities are not stepped up to fair value.
+ $150,000 = $600,000), and (c) consolidated total equity is equal to the
parent company’s total equity ($800,000).
A consolidating worksheet was not required for this problem, but one is
investment account against the subsidiary’s equity accounts.
16-14
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