Solution
Robert answered on
Dec 23 2021
E8-15A (Learning Objective 3: Account for transactions using the equity method)
McCloud Corporation owns equity-method investments in several companies.
Suppose McCloud paid $1,800,000 to acquire a 40% investment in Simpson
Software Company. Simpson Software reported net income of $660,000 for the first
year and declared and paid cash dividends of $460,000.
â–º Requirements
1, Record the following in McCloud's journal: (a) purchase of the investment, (b)
McCloud's proportion of Simpson Softwares net income, and (c) receipt of the cash
dividends, /hat is the ending balance in McCloud's investment account?
E8-16A.(Learning Objective 3: Analyze gains or losses on equity-method investments)
Without making journal entries, record the transactions of Exercise 8-15A directly
in the McGoud account Long-Term Investment in Simpson Software.
Assume that after all the noted transactions took place, McCloud sold its entire
investment in Simpson Software for cash of $2,900,000. How much is McCloud's
gain or loss an the sale of the investment?
Solution
Long Term Investments in Simpson Software
DATE ITEM POST
REF
DEBIT CREDIT BALANCE
DEBIT CREDIT
1 Purchase $1,800,000 $1,800,000
Dec 31
Net
Income $264,000 $2,064,000
31 Dividends $184,000 $1,880,000
Sale price $2,900,000
Less Ca
ying amount 1,880,000
Gain $1,020,000
========
E8-17A
Learning Objective 3: Apply the appropriate accounting method for a 35% investment)
Conroy Financial paid $510,000 for a 35% investment in the common stock of
Timberwolf, Inc. For the first year, Timberwolf reported net income of $210,000
and at year-end declared and paid cash dividends of $135,000. On the balance-sheet
date, the fair value of Conroy's investment in Timberwolf stock was $400,000.
â–º Requirements
1. Which method is appropriate for Conroy Financial to use in accounting for its
investment in Timberwolf? Why?
2. Show everything that Conroy would report for the investment and any
investment revenue in its year-end financial statements.
Solution
1. Since the stockholding is between 20% and 50% of the investee’s voting stock, it
has significant influence over the investee. Hence the method of recording
investment should be Equity Method.
2. The Investment account to be prepared is as follows:
Long Term Investments in Timberwolf
DATE ITEM POST
REF
DEBIT CREDIT BALANCE
DEBIT CREDIT
1 Purchase $510,000 $510,000
Dec 31
Net
Income $73,500 $583,500
31 Dividends $47,250 $536,250
The above data will be shown in financial statements as follows:
Balance Sheet (Partial)
Assets
Long Term Investments at Equity $536,250
Income Statement (Partial)
Other revenue
Equity method investment revenue $ 73,500
E8-18A (Learning Objective 4: Prepare a consolidated balance sheet) Zeta, Inc.,
owns Juliet Corp. The two companies' individual balance sheets follow:
â–º Requirements
1. Prepare a consolidated balance sheet of Zeta, Inc. It is sufficient to complete
the consolidation work sheet. Use Exhibit 8-7 as a model.
2. What is the amount of stockholders' equity for the consolidated entity?
Solution
Elimination
Zeta Inc.
Juliet
Corp
Debit Credit
Cash 54000 20000
Accounts receivable - net 75000 52000
Note receivable from Zeta 38000 38000
Inventory 56000 80000
Investment in Juliet 113000 113000
Plant assets, net 283000 97000
Other assets 29000 13000
Total 610000 300000
Accounts payable 49000 22000
Notes payable 148000 33000 38000
Other liabilities 78000 132000
Common Stock 112000 80000 80000
Retained Earnings 223000 33000 33000
Total 610000 300000 151000 151000
Consolidated Balance Sheet
Cash 74000
Accounts receivable - net 127000
Inventory 136000
Plant assets, net 380000
Other assets 42000
Total 759000
Accounts payable 71000
Notes payable 143000
Other liabilities 210000
Common Stock 112000
Retained Earnings 223000
Total 759000
The Shareholder’s equity for the consolidated entity is
Common Stock $112,000
Retained Earnings $223,000
Total $335,000
...