Chapter 1 and 2 - Question & answers

Chapter 1 and 2 - Question & answers - Chapter 1...

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Chapter 1 Question #7 In January 2010, Wilkinson, Inc., acquired 20 percent of the outstanding common stock of Bremm, Inc., for $700,000. This investment gave Wilkinson the ability to exercise significant influence over Bremm. Bremm’s assets on that date were recorded at $3,900,000 with liabilities of $900,000. Any excess of cost over book value of the investment was attributed to a patent having a remaining useful life of 10 years. In 2010, Bremm reported net income of $170,000. In 2011, Bremm reported net income of $210,000. Dividends of $70,000 were paid in each of these two years. What is the equity method balance of Wilkinson’s Investment in Bremm, Inc., at December 31, 2011? $728,000. $776,000. $756,000. $748,000. Acquisitio n price $ 700,000 Income accruals: 2010— $170,000 × 20% 34,000 2011 —$210,000 × 20% 42,000 Amortizati on (see below): 2010 (10,000) Amortizati on: 2011 (10,000) Dividends: 2010— $70,000 × 20% (14,000) 2011— $70,000 × 20% (14,000) Investment in Bremm, December 31, 2011 $ 728,000 Acquisition price $ 700,000 Bremm’s net assets acquired ($3,000,000 × (600,000)
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20%) Excess cost to patent $ 100,000 Annual amortization (10 year life) $ 10,000 Multiple Choice Learning Objective: 01-03 Prepare basic equity method journal entries for an investor and describe the financial reporting for equity method investments. Learning Objective: 01-05 Allocate the cost of an equity method investment and compute amortization expense to match revenues recognized from the investment to the excess of investor cost over investee book value. Question #12 Alex, Inc., buys 40 percent of Steinbart Company on January 1, 2010, for $530,000. The equity method of accounting is to be used. Steinbart’s net assets on that date were $1.2 million. Any excess of cost over book value is attributable to a trade name with a 20-year remaining life. Steinbart immediately begins supplying inventory to Alex as follows: Year Cost to Steinbart Transfer Price Amount Held by Alex at Year-End (at Transfer Price) 2010 $70,000 $100,000 $25,000 2011 96,000 150,000 45,000 Inventory held at the end of one year by Alex is sold at the beginning of the next. Steinbart reports net income of $80,000 in 2010 and $110,000 in 2011 while paying $30,000 in dividends each year. What is the equity income in Steinbart to be reported by Alex in 2011? $34,050. $38,020. $46,230. $51,450. Purchase price of Steinbart shares $ 530,000
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Book value of Steinbart shares ($1,200,000 × 40%) (480,000 ) Trade name $ 50,000 Life of trade name 20 years Annual amortization $ 2,500 2010 Gross profit rate = $30,000 ÷ $100,000 = 30% 2011 Gross profit rate = $54,000 ÷ $150,000 = 36% 2011—Equity income in Steinbart:
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Income accrual ($110,000 × 40%) $ 44,000 Amortization (above) (2,500 ) Recognition of 2010 unrealized gain ($25,000 × 30% GPR × 40% ownership) 3,000 Deferral of 2011 unrealized gain ($45,000 × 36% GPR × 40% ownership) (6,480 ) Equity income in Steinbart—2011 $ 38,020
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This note was uploaded on 07/27/2011 for the course ACCT 102 taught by Professor Huxhold during the Spring '11 term at UCSD.

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Chapter 1 and 2 - Question & answers - Chapter 1...

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