(Test Bank) Advanced Accounting

978-1618532619, Hamlen, 4

Business

Test Bank

4th Edition

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Test Bank for Advanced Accounting, The downloadable file consists of 705 pages, and the total size of the file is 5.18 MB. Purchase now only for highly discounted price.

Author(s): Hamlen

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7. b Reported net income; 35% x $7,000,000 = $ 2,450,000 Less unconfirmed profit on ending inventory 35% x [$6,000,000 – ($6,000,000/1.25)] = (420,000) Equity in net income for 20 20 $ 2,030,000 Less dividends ; 35% x $2,000,000 (700,000) Plus beginning investment balance 50,000,000 Ending investment balance $51,330,000 8. d Fizzy’s entry to record the acquisition is: Current assets 25,000 Property 2,500,000 Goodwill 25,475,000 Liabilities 3,000,000 Cash 25,000,000 9. b 10. a EXERCISES E1.1 Investment in Trading Securities (in millions) a. $384 – 39 = $345 b. Unrealized gains and losses on trading securities are reported in income. c. Investment in trading securities 345 Cash 345 Investment in trading securities 39 Gain on trading securities (income) 39 d. Cash 370 Loss on trading securities (income) 14 Investment in trading securities 384 E1.2 Investment in Trading and Available -for-Sale Securities a. 2019 entrie s Investment in trading securities 500,000 Cash 500,000 Investment in trading securities 20,000 Gains on trading securities (income) 20,000 2020 entries Cash 525,000 Investment in trading securities 520,000 Gains on trading securities (income) 5,000 Investment in trading securities 700,000 Cash 700,000 Losses on trading securities (income) 100,000 Investment in trading securities 100,000 b. (1) 2019 entrie s Investment in AFS securities 500,000 Cash 500,000 Investment in AFS securities 20,000 Gains on AFS securities (OCI) 20,000 2020 entries Cash 525,000 Reclassification of gains on AFS securities (OCI) 20,000 Investment in AFS securities 520,000 Gains on AFS securities (income) 25,000 Investment in AFS securities 700,000 Cash 700,000 Losses on AFS securities ( income ) 100,000 Investment in AFS securities 100,000 (2) 2019 entries are the same as in (1). 2020 entries Cash 525,000 Reclassification of gains on AFS securities (OCI) 20,000 Investment in AFS securities 520,000 Gains on AFS securities (income) 25,000 Investment in AFS securities 700,000 Cash 700,000 Losses on AFS securities (income) 100,000 Allowance for credit losses on AFS securities (contra to investment account) 100,000 (3) 2019 entries are the same as in (1). 2020 entries Cash 525,000 Reclassification of gains on AFS securities (OCI) 20,000 Investment in AFS securities 520,000 Gains on AFS securities (income) 25,000 Investment in AFS securities 700,000 Cash 700,000 Losses on AFS securities (OCI) 100,000 Investment in AFS securities 100,000 E1.3 Held -to-Maturity Investments Amortization schedule (supports numbers in entries below) Interest Income (4% x B eginning investment balance) Amortization ($250,000 – Interest income) Investment Balance (Beginning balance – amortization) 1/1/201 9 $5,222,591 12/31/201 9 $208,904 $41,096 5,181,495 12/31/20 20 207,260 42,740 5,138,755 12/31/20 21 205,550 44,450 5,094,305 12/31/20 22 203,772 46,228 5,048,077 12/31/20 23 201,923 48,077 5,000,000 January 1, 201 9 Investment in HTM securities 5,222,591 Cash 5,222,591 December 31, 201 9 Cash 250,000 Interest income 208,904 Investment in HTM securities 41,096 December 31, 20 20 Cash 250,000 Interest income 207,260 Investment in HTM securities 42,740 December 31, 20 21 Cash 250,000 Interest income 205,550 Investment in HTM securities 44,450 December 31, 20 22 Cash 250,000 Interest income 203,772 Investment in HTM securities 46,228 December 31, 20 23 Cash 250,000 Interest income 201,923 Investment in HTM securities 48,077 Cash 5,000,000 Investment in HTM securities 5,000,000 E1.4 Investment in Equity Securities with No Significant Influence a. December 31, 2018 Investment in Becker Corporation $ 380,000 Investment in Corey Corporation 640,000 Total $1,020,000 December 31, 2019 Investment in Corey Corporation $ 510,000 b. 2018 Gain on investment in Allen Corporatio n= $210,000 - $200,000 = $ 10,000 Loss on investment in Becker Corporation = $380,000 - $400,000 = (20,000) Gain on investment in Corey Corporation = $640,000 - $600,000 = 40,000 Net gain $30,000 2019 Gain on investment in Becker Corporation = $405,000 - $380,000 = $ 25,000 Loss on investment in Corey Corp oration = $510,000 - $640,000 = (130,000) Net loss $(105,000) 2020 Loss on investment in Corey Corporation = $500,000 - $510,000 = $ (10,000) E1.5 Financial Statement Display of AFS Debt Securities a. The loss is a direct reduction in the investment balance, and is reported in income. Investment in AFS securities………………………………………….. $160,000 b. (1) The loss is reported in an allowance account, and is reported in income. Investment in AFS securities $200,000 Less: Allowance for expected credit losses ( 40,000) Net investment in AFS securities…………………… … $160,000 (2) The credit -related loss is reported in an allowance account, and is reported in income. The market -related loss is a direct reduction in the investment bala nce, and is reported in OCI. Investment in AFS securities ($200,000 - $5,000) $195,000 Less: Allowance for expected credit losses ( 35,000) Net investment in AFS securities……………………… $160,000 E1.6 Investment in AFS Securities a. $460,000 - $65,000 = $ 395,000. Historical cost = fair value less unrealized gains . b. Cash received = $ 85,000, derived by reconstructing the summary entry to record sales of AFS securities: Cash 85,000 Reclassification of unrealized gains on AFS securities (OCI) 10,000 Gain on sale of AFS securities (income) 20,000 Investment in AFS securities 75,000 The credit to investment in AFS securities is $ 75,000, because the investment balance declined by $ 60,000 in 2020, but $15,000 in unrealized gains was recorded in OCI. $520,000 + $15,000 – X = $460,000; X = $ 75,000. The amount of cash received is the number that balances the entry. The other numbers are given in the exercise. E1.7 Equity Method Inv estment with Intercompany Sal es Calculation of 201 9 equity in Coca -Cola FEMSA ’s net income: Coca -Cola’s share of Coca -Cola FEMSA ’s reported income (28% x $ 5 million) $ 1,400,000 + Realized profit on intercompany sales [28% x ($1,350,000 – ($1,350,000/1. 35))] 98,000 - Unrealized profit on intercompany sales [28% x ($ 1,215,000 – ($1,215,000/1. 35))] (88,200) Equity in net income of Coca -Cola FEMSA $ 1,409,800 Entry to record equity in Coca -Cola FEMSA ’s net income: Investment in Coca -Cola FEMSA 1,409,800 Equity in net income of Coca -Cola FEMSA (income) 1,409,800 E1.8 Equity Method Investment with Cost in Excess of Book Value Analysis of acquisition cost (not required): Acquisition cost $ 15,000,000 40% x book value (40% x $6,000,000) $ 2,400,000 Excess of fair value over book value: Patents (40% x $ 1,000,000) 400,000 Technology (40% x $ 2,000,000) 800,000 3,600 ,000 Goodwill $ 11,400,000 Calculation of 201 9 equity in Ronco’s net income: Revco’s share of Ronco’s reported income (40% x $900,000) $ 360,000 - Amortization of patent undervaluation ($ 400,000/10) (40,000) - Amortization of unreported technology ($ 800,000/5) (160,000) Equity in net income of Ronco $ 160,000 Revco’s entries for 201 9: January 1, 201 9 Investment in Ronco 15,000,000 Cash 15,000,000 During 201 9 Cash 100,000 Investment in Ronco 100,000 $250,000 x 40% = $100,000 December 31, 201 9 Investment in Ronco 160,000 Equity in net income of Ronco (income) 160,000 December 31, 201 9 investment balance: $15,000,000 – $100,000 + $160,000 = $15,060,000 E1.9 Equity Method and Other Comprehensive Income Journal entries for 20 20: Investment in Turner 10,000,000 Cash 10,000,000 To record investment in 30% of Turner’s stock. Investment in Turner 300,000 Equity in net income of Turner (income) 300,000 To record Mitchell’s share of Turner’s net income for 2020; 30% x $1,000,000 = $300,000. Cash 75,000 Investment in Turner 75,000 To record receipt of dividends from Turner; $75,000 = $250,000 x 30%. Losses on AFS investments (OCI) 24,000 Investment in Turner 24,000 To record Mitchell’s share of Turner’ s OCI for 2020; $80,000 x 30% = $24,000. E1.10 Equity Method Investment Cost Computation Changes in the investment balance in 201 8, 2019, and 20 20: 2018 2019 2020 40% reported net income $ 480,000 $ 600,000 $ 560,000 Amortization of unreported intangibles (40% x $4,000,000/5) (320,000) (320,000) (320,000) Equity in net income $ 160,000 $ 280,000 $ 240,000 Less 40% dividends (80,000) (100,000) (92,000) Change in investment balance $ 80,000 $ 180,000 $ 148,000 *Total increase in investment balance = $80,000 + $180,000 + $148,000 = $408,000 Investment balance December 31, 2020 $14,608,000 Less: 2018 - 2020 increase in investment balance – $ 408,000 * January 2, 201 8 investment cost = $14,200,00 0 E1.1 1 Change in Reporting for Equity Investment Entries made by Stream (not required): January 1, 2020 Investment in Topsia 2,000,000 Cash 2,000,000 To record investment in 10% of Topsia’s stock. December 31, 2020 Cash 20,000 Dividend income (income) 20,000 To record receipt of cash dividends; $20,000 = 10% x $200,000. Investment in Topsia 100,000 Gain on investment (income) 100,000 To record unrealized gain on Topsia investment; $100,000 = $2,100,000 - $2,000,000. January 1 , 202 1 Investment in Topsia 8,000,000 Cash 8,000,000 To record additional investment in 30% of Topsia’s stock. Going forward, the investment is reported prospectively using the equity method. December 31, 202 1 Cash 120,000 Investment in Topsia 120,000 To record receipt of cash dividends; $120,000 = 40% x $300,000. Investment in Topsia 160,000 Equity in net income of Topsia (income) 160,000 To record equity in Topsia’s net income; $160,000 = 40% x $400,000 Account balances are as follows: a. Investment in Topsia, December 31, 2020: $ 2,100,000 = ($2,000,000 + $100,000) Investment in Topsia, December 31, 2021: $10,140,000 = ($2,100,000 + $8,000,000 - $120,000 + $160,000) b. Dividend income, 2020 $ 20,000 Dividend income, 2021 -- c. Unrealized gain on investment, 2020 $ 100,000 Unrealized gain on investment, 2021 -- d. Equity in net income of Topsia, 2020 $ -- Equity in net income of Topsia, 2021 $ 160,000 E1.12 Joint Venture (in millions) Each investor reports the investment on its December 31, 20 20 balance sheet at $2,800,000 [= $2, 500,000 + (50% x $ 600,000 )] Each investor reports equity in the joint venture’s net income at $ 300,000 on its 20 20 income statement. The individual assets and liabilities of the joint venture are not reported separately by the investors . E1.1 3 Equity Method Investment with Basis Differences Several Years Later Calculation of 201 9 equity in Taylor’s net income: Saxton’s share of Taylor’s reported income ( 30% x $ 325,000) $ 97,500 + Correction of d epreciation of plant and equipment (30% x $ 2,000 ,000/1 0) 60,000 Equity in net income of Taylor $ 157,500 Note: There is no amortization of the customer data base because its life is over. Saxton’s entries for 201 9: During 201 9 Cash 45,000 Investment in Taylor 45,000 To record receipt of dividends from Taylor; $45,000 = 30% x $150,000. December 31, 201 9 Investment in Taylor 157,500 Equity in net income of Taylor (income) 157,500 To record equity in net income of Taylor . E1.1 4 Merger and Stock Investment (see related E1.1 3) a. Current assets 10,000,000 Plant and equipment 68,000,000 Customer database 700,000 Goodwill 10,300,000 Current liabilities 16,000,000 Long -term debt 58,000,000 Cash 15,000,000 b. Investment in Taylor 15,000,000 Cash 15,000,000 E1.1 5 Merger (in millions ) Current assets 10 Plant and equipment 20 Intangible assets 15 Goodwill 105 Current liabilities 12 Long -term debt 38 Cash 100 To record the merger. Note that the amount of recorded goodwill exceeds the acquisition cost. This is a common occurrence in practice, as the fair value of the acquired company’s identifiable net assets is often less than zero. E1.16 Change from Significant Influence to Control (see related E1.15) (in millions ) Investment in Healthy Snax 15 Gain on equity method investment (income) 15 To revalue the equity method investment to fair value Current assets 10 Plant and equipment 20 Intangible assets 15 Goodwill 105 Current liabilities 12 Long -term debt 38 Cash 60 Investment in Healthy Snax 40 To record acquisition of the remaining shares of Healthy Snax. E1.1 7 Consequences of Investment Reporting Choices (amounts in millions) a. Investment in Bubbly 950 Cash 950 b. Tangible assets 1,000 Goodwill 850 Liabilities 900 Cash 950 c. Significant influence investment: $20,000/$80,000 = 25% Merger: ($20,000 + $900)/($80,000 + $1,000 + $850 - $950) = 25.8% d. Use of the equity method prevents Bubbly’s high leverage from affecting Coca - Cola’s balance sheet. Evaluation is based on whether or not the investor actually controls the investee. An auditor should review factors that determine the extent of control, such as government regulations, agreements between the investor and investee regarding shareholder rights, and inability to obtain represen tation on the investee ’s board. Because in many cases the company benefits from classifying its investment as a significant influence investment instead of a controlling investment, the auditor should investigate questionable choices carefully. PROBLEMS P1.1 Investments in Trading and AFS Securities a. 3/5/1 9 Investment in trading security A 350,000 Cash 350,000 6/3/1 9 Cash 325,000 Loss on trading securities (income) 25,000 Investment in trading security A 350,000 7/14/1 9 Investment in trading security B 225,000 Cash 225,000 8/2/1 9 Investment in AFS security D 175,000 Cash 175,000 11/20/1 9 Investment in AFS security E 300,000 Cash 300,000 12/31/1 9 Investment in trading security B 27,000 Gain on trading securities (income) 27,000 $27,000 = $252,000 - $225,000. Investment in AFS security D 15,000 Gain on AFS securities (OCI) 15,000 $15,000 = $190,000 - $175,000. Loss on AFS security E (income ) 50,000 Allowance for credit losses 50,000 $50,000 = $250,000 - $300,000. 1/15/ 20 Cash 235,000 Loss on trading securities (income) 17,000 Investment in trading security B 252,000