Chapter 12 – Reporting and Interpreting Investments in Other Corporations
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AP12–3.
Req. 1
The fair value method of accounting for long-term investments must be used in this
situation because 6% of the outstanding voting stock of Square Corporation is owned
(12,000 shares ÷ 200,000 shares outstanding). The fair value method must be used
when less than 20% of the outstanding stock is owned because the investor company
cannot exercise significant influence or control.
Req. 2
a.
Acquisition:
2011
2012
Investments in SAS (+A) ……………….
300,000
Cash (– A) ……………………………….
300,000
(12,000 shares x $25 per share)
c.
Dividends received:
Cash (+A) ……………………………………
2011: $60,000 x 6% = $3,600
d.
Fair value effects:
Investments in SAS (+ A) ……………..
Net unrealized losses/gaines (–OCI,– SE)
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
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Computations for Year-End Adjustments to Market:
Year
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
2011
$336,000
−
$300,000
=
+$36,000
2012
−
=
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
AP12–3. (continued)
Req. 3
2011
2012
a.
Balance sheet:
Long-term Investments:
Investments in SAS (at fair value) ……………………………….
$336,000
$324,000
b.
Net unrealized losses/gains ……………………………………
c.
Income Statement:
Dividend revenue ……………………………………………………..
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
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AP12–4.
Req. 1
CASE A
The fair value method must be used by the company because it owns 15%
(30,000 ÷ 200,000) of the total shares. When ownership is less than 20% the
fair value method must be used because the investor cannot exercise either
significant influence or control.
Req. 2
Case A-15%
Case B-40%
January 10, 2012:
Investments in SAS (+A) ……………………..
360,000
(30,000 shares x $12)
Investments in affiliates (+A) ……………….
(80,000 shares x $12)
960,000
Cash (– A) …………………………………..
360,000
960,000
December 31, 2012:
Investments in affiliates (+A) ………………..
Equity in affiliate earnings (+R, +SE) ..
CASE B—$90,000 x 40% = $36,000
December 31, 2012:
Cash (+A) ………………………………………….
18,000
CASE A—30,000 x $.60 = $18,000
CASE B—80,000 x $.60 = $48,000
December 31, 2012:
Net unrealized losses/gains (–OCI, –SE)
90,000
None2
Investments in SAS (–A) ………………….
90,000
CASE A—30,000 shares x ($9 fair value –
$12 cost) = $90,000 unrealized loss
(80,000 ÷ 200,000) of the total shares. When ownership is at least 20% but not
more than 50%, the equity method must be used because the investor can
exercise significant influence, but not control, over the operating and financing
policies of the other company.
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
AP12–4. (continued)
Req. 3
Case A
Case B
December 31, 2012:
Balance sheet (partial):
Investments:
Investments in SAS …………………………………………………
$270,000
Investments in affiliates* ………………………………………….
$948,000
Stockholders’ Equity:
Other comprehensive income:
Net unrealized losses/gains …………………………………
(90,000
)
None
Income Statement (partial):
Dividend revenue ………………………………………………………
Equity in earnings of affiliate ……………………………………….
AP12–5.
On the Statement of Cash Flows:
Case A
Case B
Operating Activities:
Net income
$ xxx,xxx
$xxx,xxx
Adjusted for:
Equity in earnings of affiliates (no cash received)
(36,000)
Dividends received (cash received)
Investing Activities:
Purchase of investments
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
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AP12–6.
Req. 1
Purchase price for the net assets $140,000
Req. 2
Inventory (+A) ……………………………………………………………..
12,000
Property and equipment (+A) …………………………………………
Goodwill (+A) ………………………………………………………………
82,000
Cash (–A) ……………………………………………………….……….
140,000
AP12–7.
Req. 1
2012
Dividends + Change in Fair Value
$696 + $39*
Beginning Fair Value of Investments
$8,903
Economic return from investing
=
0.0826 (or 8.26%)
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
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CASES AND PROJECTS
ANNUAL REPORT CASES
CP12-1
Req. 1
Note 2, under the heading “Cash and Cash Equivalents, Short-term Investments and
Long-term Investments,” summarizes the types of securities that American Eagle
Req. 2
A balance of $10,706,000 was reported for goodwill on the January 31, 2009, balance
sheet. The change in goodwill during fiscal 2008 was negative. Since goodwill can
CP12–2.
Req. 1
On its balance sheet as of January 31, 2009, Urban Outfitters reported $49,948,000
Req. 2
The company purchased marketable securities for $809,039,000 during the most
recent year, as disclosed on its statement of cash flows under investing activities.
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
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FINANCIAL REPORTING AND ANALYSIS CASES
CP12–3.
Req. 1
Under the equity method, the investment amount (i.e., $660,000) was increased by
the proportionate share in income reported by the affiliate corporation and decreased
by the proportionate share of the dividends declared by the affiliate corporation. Thus,
the increase in the investment account was caused by an excess of investment
income over dividends received.
Req. 2
Req. 4
The fair value of Maryn stock increased during 2012; therefore, the amount of the
investment account balance would be $750,000.
CP12–4.
Under the purchase method of accounting in both the U.S. and under IFRS,
identifiable intangible assets acquired in a business combination are initially valued at
2001. In England, prior to 2006, the recorded amount of goodwill was subtracted from
retained earnings and not recorded as an asset. The financial statements of both U.S.
and U.K. companies were not restated for the acquisitions accounted for under the old
rules. So the older and newer acquisitions are accounted for in the current statements
using different methods.
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
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CRITICAL THINKING CASES
CP12–5.
This case deals with inside information. The plan to acquire 80% of another company
CP12-6.
The assets, liabilities, revenues and expenses of the two companies will be added
together. It is unlikely that the two companies have significant intercompany
FINANCIAL REPORTING AND ANALYSIS TEAM PROJECT
CP12–7.
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
12–45
Chapter 12 Supplement A (on the Web)
ANSWERS TO QUESTIONS
1. A parent-subsidiary relationship exists when one company owns a sufficient
number of voting shares of the capital stock of another company to exercise
control over it. The number of shares usually required to establish a parent-
2. The basic concept underlying consolidated statements is that, when there is a
parent-subsidiary relationship (the parent company owns more than 50 percent of
the voting stock of the other corporation and there is economic compatibility), it
3. In combining the separate financial statements of a parent and a subsidiary in the
consolidation process, each item on the financial statements of each company is
added on a line-by-line basis to obtain the consolidated amount. However, before
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
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MULTIPLE CHOICE
1. d
EXERCISES
E12A–1.
Consolidation is an accounting process that brings together financial information from
two or more companies to make it appear as if there is a single economic entity.
E12A–2.
Req. 1
Investment in Sub Co. (100%) (+A) …………………………………
85,000
Cash (–A) ………………………………………………………….
85,000
Purchase price for 100% interest in Sub Co. ………………………………………….
Goodwill purchased ……………………………………………………………………………
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
12–47
E12A–2. (continued)
Req. 3
ACQUIRE CO. AND SUBSIDIARY (100% OWNED)
Consolidated Balance Sheet
January 1, 2011 (immediately after acquisition)
Separate Balance Sheets
Acquire Co.
Sub Co.
Eliminations
Consolidated
Balance Sheet
Assets:
Cash…………………………….
$ 11,500
$17,500
$ 29,000
Liabilities:
Liabilities ………………………
$ 41,000
$13,000
$ 54,000
Stockholders’ Equity:
Common stock, Acquire ….
82,000
82,000
Common stock, Sub ……….
Retained earnings, Acquire ..
Retained earnings, Sub…..
8,500
8,500
Totals ………………………..
$59,000
E12A–3.
Goodwill calculation:
Purchase price $100,000
Fair value of net assets 93,000
Goodwill $ 7,000
Revenues ($460,000 + $80,000)
Expenses ($340,000 + $60,000 + $2,000)
Investment in Sub (at cost)
85,000
Property and equipment (net)
31,000
Goodwill ……………………….
Totals ………………………..
$59,000
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
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PROBLEM
P12-1A
Req. 1
January 4, 2011:
Investment in Small Co. (8,000 shares) (+A) ……………………
96,000
96,000
Purchase price for 100% interest in Small Co. ………………………………………
85,000
Goodwill purchased ……………………………………………………………………………
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
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Req. 4
BIG COMPANY AND SUBSIDIARY
Consolidated Balance Sheet
January 4, 2011 (immediately after acquisition)
Separate
Balance Sheets
Big
Company
Small
Company
Eliminations
Consolidated
Balance Sheet
Assets:
Cash …………………………….
$ 22,000
$23,000
$ 45,000
Investment in Small Co.
96,000
–
96,000
Property & equipment (net) ..
132,000
65,000
+
9,000
206,000
Goodwill ……………………….
+
11,000
Totals ………………………..
$88,000
$262,000
Liabilities:
Liabilities ………………………
$ 27,000
$12,000
$ 39,000
Common stock, Big ………..
120,000
120,000
Common stock, Small …….
40,000
40,000
Retained earnings, Big ……
103,000
103,000
Retained earnings, Small ..
36,000
36,000
Totals ………………………..
$88,000
$262,000