02 Chapter - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
The operations of the boatyard appear to be distinct from the other operations of the parent
company and its losses appear to be sufficient to establish it as a reportable segment [FASB
131, Par. 10 and 18; ASC 280-10-50]. While the operating losses of the boatyard may not be
evident in analyzing the consolidated income statement, a review of the notes to the
consolidated statements should provide adequate disclosure of its operations as a reportable
segment. The financial statements for the current period should contain these disclosures and if
prior period statements have not included the boatyard as a reportable segment it may be
necessary to restate those statements.
Failure of the president of Amazing Chemical to receive approval by the board of directors for
the purchase of the boatyard and his subsequent actions to keep information about its
operations from the board members appears to be a serious breach of ethics. These actions by
the president should immediately be brought to the attention of the board of directors for
appropriate action by the board.
Primary citations:
ARB 51, Par. 1; ASC 810-10-10-1
FASB 94, Par. 9 ; ASC 810
FASB 131, Par. 10 and 18; ASCO 280-10-50
FASB 160; ASC 810-10-65-1
SOLUTIONS TO EXERCISES
E2-1 Multiple-Choice Questions on Use of Cost and Equity Methods
[AICPA Adapted]
1. a
2. a
3. d
4. a
5. b
6. d
7. d
E2-2 Multiple-Choice Questions on Intercorporate Investments
1. b
2. c
2-8
Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
E2-3 Multiple-Choice Questions on Applying Equity Method
[AICPA Adapted]
1. c (Preferred stock is not accounted for under the equity method, thus dividends are income.)
2. d $250,000 + ($100,000 x 0.30) ($10,000 x 0.30)
3. c
4. d
5. d
E2-4 Cost versus Equity Reporting
a. Winston Corporation net income cost method:
20X2
20X3
20X4
a
$100,000
$ 60,000
$250,000
+
+
+
.40($30,000)
.40($60,000)
.40($20,000
+
$25,000)
a
$112,000
84,000
268,000
Dividends paid from undistributed earnings of prior years
($70,000 + $40,000 - $30,000 - $60,000 = $20,000)
and $25,000 earnings of current period.
b. Winston Corporation net income equity method:
20X2
$100,000 + .40($70,000)
20X3
$ 60,000 + .40($40,000)
20X4
$250,000 + .40($25,000)
$128,000
76,000
260,000
E2-5 Acquisition Price
Balance at date of acquisition:
a. Cost method
$54,000 + $2,800 = $56,800
b. Equity method
$54,000 - $2,000 = $52,000
Year
Net Income
20X1
$ 8,000
20X2
12,000
20X3
20,000
Change in account balance
Dividends
$15,000
10,000
10,000
2-9
Change in Investment Account
Cost Method
Equity Method
$(2,800)
$(2,800)
800
______
4,000
$(2,800)
$ 2,000
Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
E2-6 Investment Income
a. (1) Ravine Corporation net income under Cost Method:
a
20X6
20X7
20X8
20X9
$140,000
$ 80,000
$220,000
$160,000
+
+
+
+
0.30($20,000)
0.30($40,000)
a
0.30($20,000 + $10,000)
0.30($20,000)
=
=
=
=
$146,000
$ 92,000
$229,000
$166,000
Dividends paid from undistributed earnings of prior years
($30,000 + $50,000 - $20,000 - $40,000= $20,000) and $10,000
earnings of current period.
(2) Ravine Corporation net income under Equity Method:
20X6
20X7
20X8
20X9
$140,000
$ 80,000
$220,000
$160,000
+
+
+
+
0.30($30,000)
0.30($50,000)
0.30($10,000)
0.30($40,000)
=
=
=
=
$149,000
$ 95,000
$223,000
$172,000
b. Journal entries recorded by Ravine Corporation in 20X8:
(1) Cost method:
Cash
Dividend Income
Investment in Valley Stock
12,000
9,000
3,000
(2) Equity method:
Cash
Investment in Valley Stock
12,000
12,000
Investment in Valley Stock
Income from Valley
3,000
3,000
E2-7 Investment Value
The following amounts would be reported as the carrying value of Ports investment in Sund:
20X2
20X3
20X4
$184,500
$193,500
$195,000
=
=
=
$180,000
$184,500
$193,500
+ ($40,000 x 0.30)
+ ($30,000 x 0.30)
+ ($5,000 x 0.30)
2-10
-
($25,000 x 0.30)
Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
E2-8* Income Reporting
Journal entry recorded by Grandview Company:
Investment in Spinet Corporation Stock
Income from Spinet Corporation
Extraordinary Gain (from Spinet Corporation)
36,000
24,000
12,000
E2-9 Fair Value Method
a. Cost method:
Operating income reported by Mock
Dividend income from Small ($15,000 x 0.20)
Net income reported by Mock
$90,000
3,000
$93,000
b. Equity method:
Operating income reported by Mock
Income from investee ($40,000 x 0.20)
Net income reported by Mock
$90,000
8,000
$98,000
b. Fair value method:
Operating income reported by Mock
Unrealized gain on increase in value of Small stock
Dividend income from Small ($15,000 x 0.20)
Net income reported by Mock
$90,000
16,000
3,000
$ 109,000
E2-10 Fair Value Recognition
a. Journal entries under the equity method:
(1) Investment in Lomm Company Stock
Cash
Record purchase of Lomm Company stock.
(2) Cash
Investment in Lomm Company Stock
Record dividends from Lomm Company: $20,000 x 0.35
(3) Investment in Lomm Company Stock
Income from Lomm Company
Record equity-method income: $80,000 x 0.35
2-11
140,000
140,000
7,000
7,000
28,000
28,000
Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
b.
Journal entries under fair value method:
(1) Investment in Lomm Company Stock
Cash
Record purchase of Lomm Company stock.
(2) Cash
Dividend Income
Record dividends from Lomm Company: $20,000 x 0.35
140,000
140,000
7,000
7,000
(3) Investment in Lomm Company Stock
34,000
Urealized Gain on Increase in Value of Lomm Stock
Record increase in value of Lomm stock: $174,000 - $140,000
34,000
E2-11* Investee with Preferred Stock Outstanding
Journal entries recorded by Reden Corporation:
(1) Investment in Montgomery Co. Stock
Cash
Record purchase of Montgomery Co. stock.
288,000
288,000
(2) Cash
6,750
Investment in Montgomery Co. Stock
6,750
Record dividend from Montgomery Co.: [$40,000 - ($250,000 x .10)] x 0.45
(3) Investment in Montgomery Co. Stock
31,500
Income from Montgomery Co.
31,500
Record equity-method income: [$95,000 - ($250,000 x .10)] x 0.45
2-12
Chapter - 02 Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
E2-12* Other Comprehensive Income Reported by Investee
Journal entries recorded by Callas Corp. during 20X9:
(1) Investment in Thinbill Co. Stock
Cash
Record purchase of Thinbill Company
380,000
380,000
(2) Cash
Investment in Thinbill Co. Stock
Record dividend from Thinbill: $9,000 x 0.40
3,600
3,600
(3) Investment in Thinbill Co. Stock
22,000
Income from Thinbill Co.
22,000
Record equity-method income: $22,000 = ($45,000 + $10,000) x 0.40
(4) Investment in Thinbill Co. Stock
8,000
Unrealized Gain on Investments of Investee (OCI)
Record share of OCI reported by Thinbill: $8,000 = $20,000 x 0.40
8,000
Closing entries recorded at December 31, 20X9:
(5) Income from Thinbill Co.
Retained Earnings
22,000
22,000
(6) Unrealized Gain on Investments of Investee (OCI)
Accumulated Other Comprehensive Income from
Investee-Unrealized Gain on Investments
8,000
8,000
E2-13* Other Comprehensive Income Reported by Investee
Investment account balance reported by Baldwin Corp.
Add decrease in account recorded in 20X8:
Equity-method loss ($20,000 x .25)
Dividend received ($10,000 x .25)
$67,000
$ (5,000)
(2,500)
Deduct increase in account recorded in 20X9:
Equity-method income ($68,000 x .25)
Dividend received ($16,000 x .25)
Other comprehensive income reported by Gwin
Company ($12,000 x .25)
Purchase price
7,500
$17,000
(4,000)
3,000
(16,000)
$58,500
E2-14 Basic Elimination Entry
Common Stock Broadway Corporation
Additional Paid-In Capital
Retained Earnings
Investment in Broadway Common Stock
2-13
200,000
300,000
100,000
600,000
Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
E2-15 Balance Sheet Worksheet
a.
Equity Method Entries on Blank's Books:
Investment in Faith
150,000
Cash
Record the initial investment in Faith
150,000
12/31/X2
Goodwill = 0
Identifiable
excess = 0
$150,000
Initial
investment in
Faith
Book value =
CS + RE =
150,000
Book Value Calculations:
Total
Book Value
Ending book value
150,000
=
Common
Stock
+
60,000
Retained
Earnings
90,000
Basic Elimination Entry
Common stock
Retained earnings
Investment in Faith
60,000
90,000
150,000
Optional accumulated depreciation elimination entry
Accumulated depreciation
Building & equipment
30,000
30,000
(Since the buildings and equipment are reported net of accumulated depreciation on the
balance sheet, this entry will not affect the worksheet. However, if sufficient information had
been given, this entry would have made a difference in the worksheet balances for Buildings
and Equipment and Accumulated Depreciation.)
2-14
Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
E2-15 (continued)
b.
Elimination Entries
Blank
Faith
DR
CR
Consolidated
Balance Sheet
Cash
65,000
18,000
83,000
Accounts Receivable
87,000
37,000
124,000
Inventory
110,000
60,000
170,000
Buildings & Equipment (net)
220,000
150,000
370,000
Investment in Faith
150,000
Total Assets
632,000
265,000
92,000
35,000
127,000
Bonds Payable
150,000
80,000
230,000
Common Stock
100,000
60,000
60,000
100,000
Retained Earnings
290,000
90,000
90,000
290,000
Total Liabilities & Equity
632,000
265,000
150,000
Accounts Payable
150,000
2-15
0
0
150,000
747,000
0
747,000
Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
E2-16 Consolidation Entries for Wholly Owned Subsidiary
a.
Equity Method Entries on Trim Corp.'s Books:
Investment in Round Corp.
Cash
400,000
400,000
Record the initial investment in Round Corp.
Investment in Round Corp.
Income from Round Corp.
80,000
80,000
Record Trim Corp.'s 100% share of Round Corp.'s 20X2 income
Cash
Investment in Round Corp.
25,000
25,000
Record Trim Corp.'s 100% share of Round Corp.'s 20X2 dividend
b.
Book Value Calculations:
Total
Book Value
=
Common
Stock
+
Retained
Earnings
Original book
value
+ Net Income
- Dividends
400,000
80,000
(25,000)
120,000
280,000
80,000
(25,000)
Ending book value
455,000
120,000
335,000
1/1/X2
12/31/X2
Goodwill = 0
Goodwill = 0
Identifiable
excess = 0
Book value =
CS + RE =
400,000
Excess = 0
$400,000
Initial
investment
in Round
Corp.
Book value =
CS + RE =
455,000
2-16
$455,000
Net
investment
in Round
Corp.
Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
E2-16 (continued)
Basic Elimination Entry
Common stock
Retained earnings
Income from Round Corp.
Dividends declared
Investment in Round Corp.
120,000
280,000
80,000
25,000
455,000
E2-17 Basic Consolidation Entries for Fully Owned Subsidiary
a.
Equity Method Entries on Purple Co.'s Books:
Investment in Amber Corp.
Cash
500,000
500,000
Record the initial investment in Amber Corp.
Investment in Amber Corp.
Income from Amber Corp.
50,000
50,000
Record Purple Co.'s 100% share of Amber Corp.'s 20X7 income
Cash
Investment in Amber Corp.
20,000
20,000
Record Purple Co.'s 100% share of Amber Corp.'s 20X7 dividend
b.
Book Value Calculations:
Total
Book Value
=
Common
Stock
+
Retained
Earnings
Original book
value
+ Net Income
- Dividends
500,000
50,000
(20,000)
300,000
200,000
50,000
(20,000)
Ending book value
530,000
300,000
230,000
2-17
Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
1/1/X7
12/31/X7
Goodwill = 0
Goodwill = 0
Identifiable
excess = 0
Book value =
CS + RE =
500,000
Excess = 0
$500,000
Initial
investment
in Amber
Corp.
Book value =
CS + RE =
530,000
2-18
$530,000
Net
investment
in Amber
Corp.
Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
E2-17 (continued)
Basic Elimination Entry
Common stock
Retained earnings
Income from Amber Corp.
Dividends declared
Investment in Amber Corp.
300,000
200,000
50,000
20,000
530,000
Investment in
Amber Corp.
Acquisition
Price
Net Income
500,000
50,000
50,000
Basic
50,000
0
0
2-19
Ending Balance
Dividends
530,000
530,000
Net Income
50,000
20,000
Ending Balance
Income from
Amber Corp.