# Accounting Appendix 1 Homework The investment balance is the cost of the investment plus

Type Homework Help
Pages 9
Words 1355
Authors Paul M. Fischer, Rita H. Cheng, William J. Tayler

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SA1–1
SPECIAL APPENDIX 1
UNDERSTANDING THE ISSUES
1. (a) Company E net income ......................... \$35,000
Parent’s share ....................................... × 30%
\$10,500
Less: Equipment amortization
2. (a) Fair value of investment, year-end, ....... \$220,000
Cost of investment ................................. 170,000
3. (a) Company E income ............................... \$ 50,000
Gain on sale of equipment..................... (20,000)
Realized gain (\$20,000 ÷ 5) .................. 4,000
\$ 34,000
4. (a) Investment income = \$10,000 dividends × 10% = \$1,000
5. Cost of investment ....................................... \$ 20,000
2010–2014 income (25% × \$200,000) ......... 50,000
SA1–3 Special Appendix 1—Exercises
EXERCISES
EXERCISE SA1-1
(a)
Investment in Lincoln ............................................................................. 4,250
Investment Income ........................................................................... 4,250
To record 2017 investment income.
Investment in Lincoln ............................................................................. 4,000
Dividends Receivable ............................................................................ 1,250
2017 2018
Lincoln Company income ................................................................. \$25,000 \$30,000
Adjustment for inventory profit (\$5,000 profit × 20%) ....................... (1,000)
Ownership percentage ..................................................................... × 25% × 25%
\$ 6,250 \$ 7,250
Less amortization of excess:
EXERCISE SA1-2
Determination and Distribution of Excess Schedule
Price paid for investment ........................ \$90,000
Less book value of interest acquired:
Common stock (\$10 par) ................... \$100,000
Paid-in capital in excess of par ......... 20,000
Exercise SA1-2, Concluded
Minnie Company Income Distribution
Profit in ending inventory Internally generated net
(40% × \$40,000) ...................... \$16,000 income .................................. \$60,000
Realized profit on beginning
inventory (40% × \$10,000) ... 4,000
Investment in Minnie ........................................................................ 13,650
Investment Income ..................................................................... 13,650
EXERCISE SA1-3
Werl Corporation Income Distribution
Profit in ending inventory Internally generated net
(30% × \$30,000) ...................... \$9,000 income ................................ \$90,000
Gain on sale of machine ............... 5,000 Realize 1/5 of machine
Investment in Werl ........................................................................... 21,700
Investment Income ..................................................................... 21,700
EXERCISE SA1-4
Determination and Distribution of Excess Schedule
10% purchase:
Price paid ................................................................. \$80,000
Less interest acquired:
(1) Investment in Novic .................................................................. 5,000
Retained Earnings .............................................................. 5,000
To record equity “catch-up” entry.
(2) Investment in Novic .................................................................. 10,000
Cash (50,000 shares × 25% × \$0.20 per share) ...................... 2,500
Investment Income ............................................................. 12,500
To record net share of subsidiary income and
Novic Company Income Distribution
Reported income ...................... \$40,000
Ownership interest .................... × 25%
Share of income ........................ \$10,000
EXERCISE SA1-5
Determination and Distribution of Excess Schedule
Price paid ................................................................. \$200,000
Equity interest purchased (30% × \$400,000) ........... 120,000
Excess of cost over book value (debit balance) ....... \$ 80,000
Calculation of investment account balance, January 2, 2019:
Original cost ............................................................. \$200,000
Share of income:
2017 ................................................................... \$50,000
2018 ................................................................... 45,000
\$95,000 × 30% 28,500
SA1–7 Special Appendix 1—Problems
PROBLEMS
PROBLEM SA1-1
Determination and Distribution of Excess Schedule
Price paid for investment in Fowler .......................... \$300,000
Less interest acquired:
Total stockholders’ equity ................................... \$1,000,000
Fowler Company Income Distribution (2016)
Reported net income ..................... \$52,000
2016 Entries:
Cash (\$10,000 × 25%) ............................................................... 2,500
Investment in Fowler (\$12,000 – \$2,500 dividends) .................. 9,500
Investment Income ............................................................... 12,000
Problem SA1-1, Concluded
Fowler Company Income Distribution (2017)
Profit in ending inventory Reported net income ................ \$60,000
(\$2,000 × 25%) ........................ \$500
Ownership interest ................... × 25%
2017 Entries:
Cash (\$10,000 × 25%) ............................................................... 2,500
Investment in Fowler (\$13,875 – \$2,500 dividends) .................. 11,375
Investment Income ............................................................... 13,875
Fowler Company Income Distribution (2018)
Profit in ending inventory Reported net income ................. \$65,000
(\$3,000 × 25%) ........................ \$750 Beginning inventory profit
(\$2,000 × 25%) .................... 500
2018 Entries:
Cash (\$10,000 × 25%) ............................................................... 2,500
Investment in Fowler (\$15,187 – \$2,500 dividends) .................. 12,687
PROBLEM SA1-2
2016 Entries:
Cash (\$10,000 × 25%) ............................................................... 2,500
Investment in Fowler (\$360,000 – \$300,000) ............................. 60,000
Dividend Income .................................................................. 2,500
Unrealized Gain on Investment ............................................ 60,000
Investment in Fowler ........................................................... 15,000
PROBLEM SA1-3
December 31, 2016:
Investment in Cramer Company ................................................ 8,500
Cash (for dividends) ................................................................... 1,250
Investment Income ............................................................... 9,750
Reported income of Cramer
(\$60,000 – \$18,000 tax) ............................... \$42,000
Ownership interest ............................................. × 25% \$10,500
Problem SA1-3, Continued
Provision for Income Tax (30% × 20%* × \$13,213) ......................... 793
Income Tax Payable (30% × 20%* × \$2,500) ............................ 150
Deferred Tax Liability ................................................................. 643
*100% – 80% dividend exclusion
Cramer Company Income Distribution (2017)
Gain on machine sale ................... \$5,000 Reported net income ................. \$80,000
Realized gain on machine* ....... 500
Income tax (30%) ...................... 22,650
Net income ................................ \$52,850
December 31, 2018:
Investment in Cramer Company ................................................ 14,425
Cash (for dividends) ................................................................... 2,500
Investment Income (See IDS, which follows) ....................... 16,925
Provision for Income Tax (30% × 20%* × \$17,675) income before
SA1–11 Special Appendix 1—Problems
Problem SA1-3, Concluded
Cramer Company Income Distribution (2018)
Reported net income ................. \$100,000
Realized gain on machine ......... 1,000