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 recognized as income.
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
$150,000 original cost).
Note the distinction between OCI and AOCI. The “A” stands for “accumulated.” So, while OCI
represents comprehensive income (changes in equity not due to transactions with owners) that are
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 date in this problem puts it
gain in 2020.
The gain during the year on Alpha was $155,000-$100,000 = $55,000 and the gain on Beta was
Requirement 2:
16-1
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
The issue here is how the transition from the old rules to the new ones is handled. Although there
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
Balance prior to adjustment 10 ,000 CR
Requirement 2:
DR Unrealized loss—trading securities $34,000
E16-4. Using the equity method
(AICPA adapted)
E16-5. Using the equity method and fair value option
(AICPA adapted)
16-2
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Requirement 1:
Requirement 2:
Sage’s initial investment in Adams $400,000
Requirement 3:
Fair value of Sage’s investment in Adams on 12/31/17 $470,000
Fair value of Sage’s investment in Adams on 1/2/2017 400,000
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 to read more about
the BIBP arrangement and its effect on consolidated financial statements.
Requirement 1:
According to the note disclosure, the purchasing arrangement through BIBP was designed
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. Under the FASB
potentially significant to BIBP.
16-3
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
In its 2012 10-K filing, Papa John’s indicated that it was the primary beneficiary of BIBP,
and therefore BIBP is included in Papa John’s consolidated financial statements.
Requirement 3:
included in Inventory must be eliminated.
E16-7. Determining the value of goodwill
Acquisition cost of Shake’s stock $4,000,000 ($20 x 200,000)
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
Ending retained earnings $650 ,000
Note that Saxe’s amounts need not be considered explicitly because Pitt’s consolidated results
include Saxe’s.
E16-10. Determining consolidated retained earnings
Pack will report Retained Earnings of $780,000 in its December 31, 2017 consolidated balance
16-4
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
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
Common stock
450,00
0
200,00
0 200,000 A 450,000
230,00
Requirement 1:
Imputed full fair value of the acquisition $300,000 ($180,000/.6)
Island’s acquisition date book value (250,000)
50,000
16-5
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
The consolidated total assets will be $1,120,000, as shown in the consolidation worksheet. This
amount consists of:
$750,000 of Sea Company assets other than the investment in Island Company
Requirement 2:
Under the acquisition method, noncontrolling interest is based on the $180,000/.6 = $300,000
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)
Journal entry:
DR OCI–unrealized loss in fair value on
available-for-sale securities $20,500
CR Fair value adjustment–available-for-sale securities $20,500
16-6
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
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 balance at December
31, 2018. The following analysis shows that given this ending balance and the activity in the
account in 2018, the December 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. Consolidated sales
be reported at $2,700,000 + $1,600,000 – $600,000 = $3,700,000.
Requirement 2:
Pate recorded $400,000 in cost of sales when it sold to goods Strange. Strange recorded
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.
16-7
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Requirement 2 (Acquisition Method):
16-8
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Requirement 2 (continued):
Pushway Stroker
Eliminations Consolidated
Dr Cr Balance Sheet
Assets
Current assets $ 300,000 $ 100,000 $ 400,000
Long term liabilities 250,000 100,000 20,000 B 370,000
Total liabilities 450,000 150,000 620,000 (b)
Note: Answers (a), (b), and (c) are keyed above.
16-9
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Requirement 3 (Pooling Method):
The acquisition journal entry under pooling would be at Stroker’s book value:
DR Investment in Stroker $350,000
CR Common Stock $350,000
Under the pooling method, the acquisition “cost” is the book value acquired and
equal to the parent company’s total equity ($800,000).
A consolidating worksheet was not required for this problem, but one is provided so you
eliminating entry is the investment account against the subsidiary’s equity accounts.
Requirement 3 (continued):
Pushway Stroker
Eliminations Consolidated
Dr Cr Balance Sheet
Assets
Current assets $ 300,000 $ 100,000
Long term assets 600,000 400,000
Long term liabilities 250,000 100,000
Total liabilities 450,000 150,000
16-10
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
and Equity
Note: Answers (a), (b), and (c) are keyed above.
16-11
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.