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Chapter 2 Homework Solutions

# Chapter 2 Homework Solutions - 1 2 3 4 5 6 7 E2-1 a a(1 d a...

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E2-1 E2-2 E2-3 1 a b c (4) (1) Stock dividends, and cash dividends from equity method investments are not 2 a (1) c d (5) treated as dividend income. 3 d d c (6) (2) While an increase in current ratio is theoretically possible, b is the best available 4 a a (3) d answer as this scenario will always increase net income. 5 b (2) a d (3) Full consolidation brings the entire subsidiary onto the balance sheet, and reflects 6 d the part that the parent doesn't own as a minority interest in the equity section. 7 d (4) The preferred stock is nonvoting. It does not give Green, or contribute to Green's influence over Axel. It should be reported via the cost method. (5) 30% of net income is \$30,000. 30% of the differential is \$60,000; \$4,000 per year for 15 years. \$250,000 + \$30,000 - \$4,000 = \$276,000. (6) It's a change in accounting principle, requiring a switch from the 10% x \$200,000 income reported to the 10% x \$600,000 they would have reported under the equity method. 20X9's investment income would include only the 30% of Penny's 20X9 earnings (\$195,000). E2-4 Cost method 1/1/X5 Investment in Steam Co. 70,000 Cash 70,000 20X5 Cash 1,000 Remember, Roller is a 20% owner Dividend income 1,000 20X6 Cash 3,000 Dividend income 3,000 20X7 Cash 7,000 Dividend income 7,000 Equity method 1/1/X5 Investment in Steam Co. 70,000 Cash 70,000 20X5 Cash 1,000 The dividend decreases the investment. Investment in Steam Co. 1,000 Investment in Steam Co. 4,000 Income increases it (again, at 20%). Investment income 4,000 Investment income 3,000 And the differential (\$200k x 20% = \$40k Investment in Steam Co. 3,000 and \$70k - \$40k = \$30k) is amortized over 10 years 20X6 Cash 3,000 Investment in Steam Co.

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