Accounting Appendix A The account is reduced by the proportional amount

Appendix A – Reporting and Interpreting Investments in Other Corporations

expense

8. Dividends Declared

will receive $20,000 ($0.50 × 40,000 shares)

dr Dividends receivable (+A)

cr Investments (–A)

Dividends Receivable (A) +20,000 + Investments (A)

During fiscal year 2018, Green Light declared and paid a

cash dividend of $0.50 per share to stockholders; Disney

B. Reporting Investments Under the Equity Method

1. The Investments account is reported on the balance sheet

as a long-term asset

a. The investment account does not reflect either cost or

fair value; instead, the following occurs:

i. The investment account is increased by the cost of

shares that were purchased and the proportional

share of the affiliates’ net income

C. Focus on Cash Flows: Investments

1. The cash resulting from the sale or purchase is reflected in

the Investing Activities section

2. In the Operating Activities section, there are a number of

adjustments to net income:

a. Any gain (loss) on the sale is subtracted from (added

to) net income

b. Any unrealized holding gain (loss) on trading securities

income

Appendix A – Reporting and Interpreting Investments in Other Corporations

App A – 13

LO A-4 – Analyze and report investments in controlling interests.

V. Controlling Interests: Mergers and Acquisitions

A. Reasons for Acquiring Control of Another Corporation

acquires another at a different level in the channels of

distribution

at the same level in the channels of distribution

3. Synergy: The operations of two companies together may

be more profitable than the combined profitability of the

1. Vertical integration: In this type of acquisition, a company

B. Recording a Merger

1. Merger––occurs when one company purchases all of the

assets and liabilities of another and the acquired company

goes out of existence

2. Acquisition method––records assets and liabilities

acquired in a merger or acquisition at their fair value on

the transaction date

a. Only method allowed by U.S. GAAP and IFRS for

recording a merger or acquisition

acquired be recorded by the acquiring company on its

assets acquired)––for accounting purposes, the

excess of the purchase price of a business over the

fair value of the acquired company’s assets and

liabilities

the text

d. Assume that Green Light owned two assets

(equipment and a patent) and had one liability (a note

payable). Disney followed the two steps and produced

the following:

dr Equipment (+A)

dr Patents (+A)

dr Goodwill (+A)

Appendix A – Reporting and Interpreting Investments in Other Corporations

App A – 14

cr Cash (–A)

1,000,000

e. In summary, when performing a purchase price

Assets = Liabilities + Stockholders’ Equity

C. Reporting for the Combined Companies

1. After the merger, the acquiring company will treat the

acquired assets and liabilities in the same manner as if

they were acquired individually

a. For example, the company will depreciate amounts

2. When a company acquires another, and both companies

continue their separate legal existence, consolidated

financial statements must be presented

Refer students to Pause for

a. The parent company is the company that gains control

into one in a simple merger (as discussed above)

IV. Appendix Supplement: Held-to-Maturity Bonds Purchased at Other than Par Value: Amortized

Cost Method

A. Bond Purchases

amount (at a discount), or for more than the maturity

amount (at a premium)

1. On the date of purchase, a bond may be acquired at the

commissions, is debited to the Held-to-Maturity

Investments account

2. The total cost of the bond, including all incidental

3. On October 1, 2018, Disney paid $92,278 cash for an 8%,

5-year $100,000 bond that paid interest semiannually (on

3/31 and 9/30); bond’s yield was 10%

Appendix A – Reporting and Interpreting Investments in Other Corporations

App A – 15

dr Investments (+A)

cr Cash (−A)

B. Interest Earned

1. The discount that needs to be amortized over the life of

the investment; using the effective interest amortization

method:

2. Receipt of interest on March 31, 2019

dr Cash (+A)

4,000

dr Investments(+A)

3. The amount reported on the balance sheet at March 31,

4. If the bond investment must be sold before maturity, any

difference between market value on the date of sale and

net book value would be reported as a gain or loss on sale

Appendix A – Reporting and Interpreting Investments in Other Corporations

Supplemental Enrichment Activities

Note: These activities would be suitable for individual or group activities.

1. Handout A-1

Use Handout A-1 for an in-class activity to review the accounting for a passive investment in equity

2. Handout A-2

Use Handout A-2 for an in-class activity to review the accounting for trading securities. The solution

3. Handout A-3

Use Handout A-3 for an in-class activity to review the equity method. The solution follows the

Appendix A – Reporting and Interpreting Investments in Other Corporations

App A – 17

HANDOUT A – 1

BELLOWS CORP.

1. Bellows Corp. had $100,000 in its Cash account on January 1, Year 1. On June 15, Year 1, Bellows

Corp. acquired 100 shares of Sonny, Inc. for $75 per share. Assume that Bellows considers the stock

a passive investment. Prepare the journal entry required to record this transaction and, after entering

the beginning Cash account balance, post it to the appropriate T-accounts:

2. On September 15, Year 1, Bellows Corp. received dividends from Sonny of $2 per share. Prepare the

journal entry required to record this transaction and update the appropriate T-accounts:

Sept. 15

3. At December 31, Year 1, the value of the stock was $120 per share. Prepare the journal entry required

to record this transaction and update the appropriate T-accounts:

Computation of amount:

Dec. 31

Appendix A – Reporting and Interpreting Investments in Other Corporations

App A – 18

HANDOUT A – 1, continued

4. On February 17, Year 2, Bellows sold the stock for $115 per share. Prepare the journal entries

required to record this transaction and update the appropriate T-accounts:

Feb. 17

Appendix A – Reporting and Interpreting Investments in Other Corporations

App A – 19

HANDOUT A – 1 Solution

BELLOWS CORP.

1. Bellows Corp. had $100,000 in its Cash account on January 1, Year 1. On June 15, Year 1, Bellows

Corp. acquired 100 shares of Sonny, Inc. for $75 per share. Assuming that Bellows considers the

stock a passive investment, prepare the journal entry required to record this transaction and post it to

the appropriate T-accounts:

Investments (+A)

Cash (–A)

June 15

Jan. 1

June 15

2. On September 15, Year 1, Bellows Corp. received dividends from Sonny of $2 per share. Prepare the

journal entry required to record this transaction and update the appropriate T-accounts:

Sept. 15

Cash (+A) (100 shares × $2 per share)

200

Dividend Revenue (+R, +SE)

200

Sep. 15

Jan. 1

Sept. 15

June 15

3. At December 31, Year 1, the value of the stock was $120 per share. Prepare the journal entry required

to record this transaction and update the appropriate T-accounts:

Year

Fair Value

–

Book Value before Adjustment

=

Amount for Adjusting Entry

1

$12,000 ($120 × 100)

–

7,500

=

4,500

Investments (+A)

Unrealized Gain (+R, +SE)

June 15

Dec. 31

Appendix A – Reporting and Interpreting Investments in Other Corporations

App A – 20

HANDOUT A – 1 Solution, continued

4. On February 17, Year 2, Bellows sold the stock for $115 per share. Prepare the journal entries

required to record this transaction and update the appropriate T-accounts:

Feb. 17

Unrealized Loss (+E, –SE)

500

Investments (–A)

500

+ Investments (A) –

Jan. 1

Feb. 17

Cash (+A) ($115 × 100)

Investments (–A)

Jan. 1

Feb. 17

Jan 1

Feb. 17

+ Unrealized Loss (E, SE) –

Appendix A – Reporting and Interpreting Investments in Other Corporations

App A – 21

HANDOUT A – 2

PARADE CORP.

1. Parade Corp. had $10,000,000 in its Cash account on January 1, Year 1. On January 2, Year 1, Parade

Corp. paid $5,000,000 cash to acquire 400,000 shares of stock in Band Corp. These shares represent

Jan. 2

Dec. 31

3. On December 31, Year 1, Band Corp. declared and paid $500,000 in dividends. Prepare the journal

entry required to record this transaction and update the appropriate T-accounts:

Appendix A – Reporting and Interpreting Investments in Other Corporations

App A – 22

HANDOUT A – 2 Solution

PARADE CORP.

1. Parade Corp. had $10,000,000 in its Cash account on January 1, Year 1. On January 2, Year 1, Parade

Corp. paid $5,000,000 cash to acquire 400,000 shares of stock in Band Corp. These shares represent

40% of Band Corp.’s total outstanding stock. Parade accounted for this acquisition using the equity

method. Prepare the journal entry required to record this transaction and, after entering the beginning

Investments (+A)

Cash (-A)

Jan. 1

10,000,000

2. For the year ended December 31, Year 1, Band Corp. earned $800,000 in net income. Prepare the

journal entry required to record this transaction and update the appropriate T-accounts:

Dec. 31

Investments (+A)

320,000

Equity in Investee Earnings (+R, +SE)

320,000

Jan. 1

Dec. 31

3. On December 31, Year 1, Band Corp. declared and paid $500,000 in dividends. Prepare the journal

entry required to record this transaction and update the appropriate T-accounts:

Dec. 31

Cash (+A)

200,000

Jan. 2

End Bal

Dec. 31

Jan. 2