(Solution Manual) Advanced Accounting

Hamlen, 4

Business

Solution Manual

4th Edition

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Solution Manual for Advanced Accounting, The downloadable file consists of 704 pages, and the total size of the file is 4.89 MB. Purchase now only for highly discounted price.

Author(s): Hamlen

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Solutions Manual for Advanced Accounting 4e Hamlen, Huefner, Largay CHAPTER 1 SOLUTIONS TO MULTIPLE CHOICE QUESTIONS, EXERCISES AND PROBLEMS MULTIPLE CHOICE QUESTIONS 1. c $180,000 - $160,000 = $20,000 $125,000 - $100,000 = 25,000 Total gain $45,000 2. a $29,000 – $26,000 = $3,000 3. a $207,544 – [(6% x $200,000) – (4% x $207,544)] = $203,846 4. d Reclassification of unrealiz ed loss on AFS securities sold $1,000 credit Unrealized gain on AF S securities held at year-end 6,000 credit (1) Total amount reported in OCI $7,000 credit (1) $81,000 – ($100,000 – $25,000) = $6,000 unrealized gain 5. d $5,000,000 + [40% x ($600,000 – $200,000) ] = $5,160,000 6. b 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 4/2/20 Cash 213,000 Reclassification of gain on AFS securities (OCI) 15,000 Investment in AFS security D 190,000 Gain on AFS securities (income) 38,000 4/6/20 Investment in AFS security F 710,000 Cash 710,000 9/1/20 Investment in trading security C 400,000 Cash 400,000 12/31/ 20 Investment in trading security C 10,000 Gain on trading securities (income) 10,000 $10,000 = $410,000 - $400,000. Loss on AFS securit y E (income) 35,000 Allowance for credit losses 35,000 $35,000 = $215,000 - $250,000. Investment in AFS security F 25,000 Gain on AFS securities (OCI) 25,000 $25,000 = $735,000 - $710,000. b. 2019 Financial Statement s Balance Sheet, 12/31/1 9 Assets: Investment in trading securitie s $ 252,000 Investment in AFS securities ($190,000 + $300,000) $490,000 Less: Allowance for credit losses (50,000) 440,000 Equity: AOCI gains 15,000 Income Statement, 201 9 Gains (losses) on trading securities ( -$25,000 + $27,000) $ 2,000 Credit losses on AFS securities 50,000 Statement of Comprehensive Income, 201 9 Gains on AFS securities 15,000 2020 Financial Statements Balance Sheet, 12/31/ 20 Assets: Investment in trading securities $ 410,000 Investment in AFS securities ($300,000 + $7 35,000) $1,035,000 Less: Allowance for credit losses (85,000) 950,000 Equity: AOCI gains ($15,000 – $15,000 + $ 25,000) 25,000 Income Statement, 20 20 Gains (losses) on trading securities ( -$17,000 + $ 10,000) (7,000) Realized gains on AFS securities 38,000 Credit loss on AFS securities (35,000) Statement of Comprehensive Income, 20 20 Gains on AFS securities 25,000 Reclassifications of (gains) on AFS securities (15,000 ) P1.2 Available -for-Sale Debt Investment Impairment The securities are impaired in both years because their fair value is less than cost. The credit loss is reported in income, as the difference between cost and the present value of expected cash flows. The remaining market -related loss is reported in OCI . December 31, 2020 Credit losses on AFS securities (income) 15,000 Loss on AFS securities (OCI) 5,000 Allowance for credit losses 15,000 Investment in AFS securities 5,000 To record credit -related and noncredit -related losses on AFS debt securities. $15,000 = $85,000 - $100,000 and $5,000 = $8 0,000 - $85,000. December 31, 2021 Allowance for credit losses 4,000 Loss on AFS securities (OCI) 1,000 Credit losses on AFS securities (income) 4,000 Investment in AFS securities 1,000 To record credit -related and noncredit -related losses on AFS debt securities. $4,000 = $89,000 - $85,000; the total increase in value is ($83,000 - $80,000) = $3,000 and the credit -related gain is $4,000, so the market -related loss is $ 1,000. P1.3 Held -to-Maturity Intercorporate Debt Investments a. Bond #1 pays $60,000 annually in interest and $1,000,000 at maturity. Cash flow Present value calculation Present value $60,000 $60,000/1.05 $ 57,143 $60,000 $60,000/(1.05)2 54,422 $60,000 $60,000/(1.05)3 51,830 $60,000 $60,000/(1.05)4 49,362 $1,060,000 $1,060,000/(1.05)5 830,538 Total price $1,043,295 Bond #2 pays $20,000 annually in interest and $500,000 at maturity. Cash flow Present value calculation Present value $20,000 $20,000/1.05 $ 19,048 $20,000 $20,000/(1.05)2 18,141 $20,000 $20,000/(1.05)3 17,277 $520,000 $520,000/(1.05)4 427,805 Total price $ 482,271 Amortization tables to support answers to requirements b, c and d: Bond #1 Interest Income (5% x B eginning investment balance) Amortization ($60,000 – Interest income) Investment B alance (Beginning balance – amortization) 1/1/201 9 $1,043,295 12/31/201 9 $52,165 $7,835 1,035,460 12/31/20 20 51,773 8,227 1,027,233 12/31/20 21 51,362 8,638 1,018,595 12/31/20 22 50,930 9,070 1,009,525 12/31/20 23 50,47 6 9,525 * 1,000,000 *Includes a rounding adjustment of $1 Bond #2 Interest I ncome (5% x B eginning investment balance) Amortization (Interest income – $20,000) Investment B alance (Beginning balance + amortization) 1/1/201 9 $482,271 12/31/201 9 $24,114 $4,114 $486,385 12/31/20 20 24,319 4,319 490,704 12/31/20 21 24,535 4,535 495,239 12/31/20 22 24,76 2 4,761 * 500,000 *Includes a rounding adjustment of - $1 b. 2019 2020 Bond #1 $ 52,165 $ 51,773 Bond #2 24,114 24,319 Total interest income $ 76,279 $ 76,092 c. $1,018,595 + $495,239 = $ 1,513,834 d. Expected credit losses occur because it is improbable that the bond issuer will be able to make the remaining interest and principal payments per the bond agreement. Factors indicating impairment loss relate to the financial health of the bo nd issuer, such as failure to make payments on other debts and a significant decline in credit rating. Estimates are made using the CECL model, which forecasts payments over the life of the bond. Changes in expected credit losses are reported in income. In this case, a credit loss of $500,000 is reported in income, and an allowance is set up to reduce the investment account by the amount of the expected credit loss. P1.4 Trading and AFS Securities in Financial Statements a. Given information: Change in trading investments account: $8,500 - $11,000 = $( 2,500) Cash received from sale s of trading investments: $4,000 Purchases of trading investments: $1,000 Therefore journal entries were: Investment in trading securities 1,000 Cash 1,000 To record purchases of trading securities. Cash 4,000 Investment in trading securities 3,500 Net gains on trading securities 500 To record net change in value of trading securities held and sold. Net gains on trading securities reported in 2019 income = $500 b. Given information: Change in AFS investments account: $1,000 Cash received from sales of AFS investments: $6,000 Purchases of AFS investments: $3,600 Net change in unrealized gains on AFS securities held at year -end: $2,000 Reclassification of net unrealized gains included in net income on AFS securities sold: $2,100 Therefore journal entries were: Investment in AFS securities 3,600 Cash 3,600 To record purchase of AFS securities. Investment in AFS securities 2,000 Unrealized gains on AFS securities (OCI) 2,000 To record unrealized gains on AFS securities held at year -end. Cash 6,000 Reclassification of net gains on AFS securities 2,100 Investment in AFS securities 4,600 Gain on sale of AFS securities (income) 3,500 To record sale of AFS securities. Gain on sale of AFS investments, included in income = $3,500 c. Reported value of AFS securities sold $4,600 Less previously reported gains (2,100) Original cost of AFS securities sold $2,500 P1.5 Trading, AFS, and Equity Investments Cash 43,000 Investment in trading securities 40,000 Gain on sale of trading securities (income) 3,000 To record sale of trading securities. Cash 20,000 Investment in trading securities 16,000 Gain on sale of trading securities (income) 4,000 To record sale of trading securities; $16,000 = $56,000 - $40,000. Investment in trading securities 60,000 Cash 60,000 To record investment in trading securities. Loss on trading securities (income) 8,000 Investment in trading securities 8,000 To record unrealized loss on trading securities; $8,000 = $52,000 - $60,000. Cash 55,000 Reclassification of gains on AFS securities (OCI) 5,000 Investment in AFS securities 50,000 Gain on sale of AFS securities (income) 10,000 To record sale of AFS securities. Investment in AFS securities 40,000 Cash 40,000 To record purchase of AFS securities. Impairment loss on AFS securities (income) 6,000 Allowance for credit losses on AFS securities 6,000 To record credit loss on AFS securities held at year -end; $6,000 = $34,000 - $40,000. Cash 50,000 Investment in equity securities 45,000 Gain on equity securities (income) 5,000 To record purchase of equity securities. Investment in equity securities 8,000 Gains on equity securities (income) 8,000 To record increase in value of equity securities held at year -end; $ 8,000 = $ 63,000 – ($100,000 - $45,000). Balance Sheet, December 31, 2020 Investment in trading securities ($56,000 - $40,000 - $16,000+$60,000 - $8,000) $52,000 Investment in AFS securities ($50,000 - $50,000 + $40,000) $40,000 Less allowance for credit losses (6,000) Net investment in AFS securities………. …………………………. 34,000 Investment in equity securities ($100,000 - $45,000 + $8,000) ……….. 63,000 AOCI (unrealized gains (losses) on AFS securities………………………… 0 Income Statement for 2020 Net losses on trading securities ($3,000 + $4,000 - $8,000) ……… ………. $ (1,000) Net gains on AFS securities ($10,000 - $6,000) ………………………… … 4,000 Net gains on equity securities ($5,000 + $8,000) ……………………… ….. 13,000 Net gains on trading, AFS, and equity securities………………… ………... $ 16,000 Statement of Comprehensive Income for 2020 Reclassification of gains on AFS securities sold……………………………. (5,000) P1.6 Investment in AFS Securities (in millions) a. Cash 11,540 Losses on AFS securities (income) 51 Reclassification of gains on AFS securities (OCI) 100 Gains on AFS securities (income) 152 Investment in AFS securities 11,539 Note: The credit to investment in AFS securities is a plug number. The other amounts are given. b. Losses on AFS securities (OCI) 282 Investment in AFS securities 282 The net change in OCI from AFS investments is a loss of $ 382. Entry a. reduces OCI by $100. Therefore unrealized losses for AFS securities on hand at year-end must be $282. c. Investment in AFS securities 9,628 Cash 9,628 $8,606 + X - $11,539 - $282 = $6,413 ; X = $ 9,628 . P1.7 Equity Method Investment Several Years After Acquisition Note to instructor: This problem provides an introduction to calculating a parent’s investment balance in years subsequent to acquisition , covered in Chapter 4. a. Calculation of 20 20 equity in net income Better Bottlers’ net income (45% x $2,500,000) $ 1,125,000 – Amortization of patents and trademarks revaluation [45% x (($160,000,000 - $150,000) /10)] (450,000) – Amortization of brand names [45% x ($9,000,000/15) ] (270,000) Equity in net income of Better Bottlers $ 405,000 Best Beverages’ journal entries for 20 20: Investment in Better Bottlers 405,000 Equity in net income of Better Bottlers (income) 405,000 Cash (45% x $650,000 dividends ) 292,500 Investment in Better Bottlers 292,500 b. Investment balance, January 2, 20 17 $ 30,000,000 + 45% x 20 17 to 2020 change in Retained Earnings (reported income less dividends ): [45% x ($25,000,000 – $13,000,000) ] 5,400,000 – 4 years of revaluation write -offs: $450,000 x 4 (1,800,000) $270,000 x 4 (1,080,000) Investment balance, December 31, 20 20 $ 32,520,000 P1.8 Equity Method Investment Several Years After Acquisition Note to instructor: This problem can be used to prepare students for equity method calculations of investment balance in Chapters 4 and 6. a. (Calculation of equity in net income for 201 8-2019 provided in addition to 20 20’s calculation, for use in requirement c.) Equity in net income calculation 2018-2019 2020 30% x Seaway’s net income : 2018 -2019: (30% x $14,000,000); 2020: (30% x $4,000,000) $ 4,200,000 $ 1,200,000 Write -off of P&E revaluation (30% x $4,000,000/10 each year) 240,000 120,000 Amortization of undervalued intangibles (30% x $6,000,000/2 for 201 8 and 201 9 only) (1,800,000) -- 2019 ending inventory profit, upstream [30% x ($925,000 – $925,000/1.25) ] (55,500) 55,500 2019 ending inventory profit, downstream [30% x ($420,000 – $420,000/1.2) ] (21,000) 21,000 2020 ending inventory profit, upstream [30% x ($625,000 – $625,000/1.25) ] -- (37,500) 2020 ending inventory profit, downstream [30% x ($696,000 – $696,000/1.2) ] -- (34,800) Equity in net income $ 2,563,500 $ 1,324,200 b. Investment in Seaway 1,324,200 Equity in net income of Seaway 1,324,200 Losses on AFS securities (OCI) 240,000 Investment in Seaway 240,000 Cash 450,000 Investment in Seaway 450,000 c. Investment, January 2, 201 8 $ 10,000,000 + Equity in net income, 201 8-2019 2,563,500 + Unrealized gains on AFS securities, 201 8-2019 (30% x $1 million) 300,000 – Dividends, 201 8-2019 (30% x $5 million) (1,500,000) + Equity in net income, 20 20 1,324,200 – Unrealized losses on AFS securities, 20 20 (30% x $800,000) (240,000) – Dividends, 20 20 (30% x $1.5 million) (450,000) Investment, December 31, 20 20 $ 11,997,700 P1.9 Equity Method Investment with Basis Differences a. Manchester has $ 600,000/$ 2 = 300,000 shares outstanding 30% x 300,000 = 90,000 shares acquired b. Calculation of 201 9 equity in net income (in thousands) Manchester’s net income ( 30% x $1, 500) $ 450 Adjusted for Bristol’s share of revaluation write -offs: + Reduction in cost of goods sold ( 30% x $ 500) (note 1) 150 + Depreciation on revaluation of P&E ( 30% x $ 1,800/20) (note 2) 27 – Amortization of franchises ( 30% x ($1, 000/5)) (60) Equity in Manchester net income $ 567 Note 1: Because Manchester uses FIFO, the beginning in ventory is completely sold during the year. Note 2: Revaluation of P&E = $1, 800 decline [= ( $4,000 – $1,500) – $700] P1.10 Equity Method Investment, Intercompany Sales Note to instructor: This problem provides an introduction to elimination of unconfirmed intercompany profits in consolidation, covered in Chapter 6. (in thousands) a. Jackson’s repor ted net income must be adjusted for unconfirmed profits in ending inventory. Calculation of 20 20 equity in net income: Jackson’s net income (40% x $ 10,000) $ 4,000 – Unconfirmed profit on downstream ending inventory [$26,000 – ($26,000/1.3) ] x 40% (2,400 ) – Unconfirmed profit on upstream ending inventory [$12,000 – ($12,000/1. 2)] x 40% (800) Equity in Jackson’s net income $ 800 b. $40,000 + $800 – (40% x $1,000) = $40,400