Accounting 3

Posted on Feb 5, 2024 in Economy

1. Gaw Company owns 15% of the common stock of Trace Corporation And used the fair-value method to account for this invesment. Trace reported Net income of $110,000 for 2018 and paid dividends of $60,000 on October 1, 2018. How much income should Gaw recognize on this investment in 2018?

B)  $  9,000

2. Yaro Company owns 30% of the common stock of Dew Co. And uses The equity method to account for the investment. During 2018, Dew reported Income of $250,000 and paid dividends of $80,000. There is no amortization Associated with the investment. During 2018, how much income should Yaro Recognize related to this investment?

B)  $75,000

3. On January 1, 2018, Pacer Company paid $1,920,000 for 60,000 Shares of Lennon Co.’s voting common stock which represents a 45% investment. No allocation to goodwill or other specific account was necessary. Significant Influence over Lennon was achieved by this acquisition. Lennon distributed a Dividend of $2.50 per share during 2018 and reported net income of $670,000. What Was the balance in the Investment in Lennon Co. account found in the Financial records of Pacer as of December 31, 2018?

E)  $2,071,500

4. An investor should always use the equity method to Account for an investment if:

A) It has The ability to exercise significant influence over the operating policies of The investee

5. On January 1, 2016, Dermot Company purchased 15% of the voting Common stock of Horne Corp. On January 1, 2018, Dermot purchased 28% of Horne’s Voting common stock. If Dermot achieves significant influence with this new Investment, how must Dermot account for the change to the equity method?

A) It must Use the equity method for 2018 but should make no changes in its financial Statements for 2017 and

6. During January 2017, Wells, Inc. Acquired 30% of the Outstanding common stock of Wilton Co. For $1,400,000. This investment gave Wells the ability to exercise significant influence over Wilton. Wilton’s Assets on that date were recorded at $6,400,000 with liabilities of $3,000,000. Any excess of cost over book value of Wells’ investment was attributed to Unrecorded patents having a remaining useful life of ten years.

In 2017, Wilton reported Net income of $600,000. For 2018, Wilton reported net income of $750,000. Dividends of $200,000 were paid in each of these two years. What was the Reported balance of Wells’ Investment in Wilson Co. at December 31, 2018?

A)  $1,609,000

7. On January 1, 2018, Bangle Company purchased 30% of the voting Common stock of Sleat Corp. For $1,000,000. Any excess of cost over book value Was assigned to goodwill. During 2018, Sleat paid dividends of $24,000 and Reported a net loss of $140,000. What is the balance in the investment account On December 31, 2018?

A)  $950,800

8. On January 1, 2018, Jordan Inc. Acquired 30% of Nico Corp. Jordan used the equity method to account for the investment. On January 1, 2019, Jordan sold two-thirds of its investment in Nico. It no longer had the Ability to exercise significant influence over the operations of Nico. How Should Jordan account for this change?

E) Jordan Should use the fair-value method for 2019 and future years, but should not make A retrospective adjustment to the investment account.

9. Tower Inc. Owns 30% of Yale Co. And applies the equity method. During the current year, Tower bought inventory costing $66,000 and then sold It to Yale for $120,000. At year-end, only $24,000 of merchandise was still Being held by Yale. What amount of intra-entity gross profit must be deferred By Tower?

B)  $  3,240

10. On January 4, 2018, Watts Co. Purchased 40,000 shares (40%) of The common stock of Adams Corp., paying $800,000. There was no goodwill or Other cost allocation associated with the investment. Watts has significant Influence over Adams. During 2018, Adams reported income of $200,000 and paid Dividends of $80,000. On January 2, 2019, Watts sold 5,000 shares for $125,000. What was the balance in the investment account after the shares had been sold?

B)  $742,000

11. What is the amount of goodwill associated with the investment?

D)  $300,000

12. For 2018, what is the total amount of excess amortization for Austin’s 25% investment in Gainsville?

C)  $  30,000

13. Club Co. Appropriately uses the equity method to account for its investment in Chip Corp. As of the end of 2018, Chip’s common stock had suffered a significant Decline in fair value, which is expected to recover over the next several Months. How should Club account for the decline in value?

B) No Accounting because the decline in fair value is temporary

14. An upstream sale of inventory is a sale:

E) Made by The investee to the investor

15. What amount of equity income would Atlarge have Recognized in 2018 from its ownership interest in Ticker?

C)  $22,672

16. What was the balance in the Investment in Ticker Co. Account at the end of 2018?

B)  $413,872

17. On Deuce’s December 31, 2019 balance sheet, what balance was Reported for the Investment in Wiz Co. Account?

C)  $152,000

18. What amount of equity income should Deuce have reported For 2019?

A)  $30,000

19. In a situation where the investor exercises significant Influence over the investee, which of the following entries is not Actually posted to the books of the investor?

(I) Debit To the Investment account, and a Credit to the Equity in Investee Income Account.

(II) Debit To Cash (for dividends received from the investee), and a Credit to Investment Income account .

(III) Debit to Cash (for dividends received from the investee), and a Credit to the Dividend Receivable.

D) Entry II only

20. All of the following would require use of The equity method for investments except:

C) Valuation at fair value

21. All of the following statements regarding the investment Account using the equity method are true except:

B) Dividends received are reported as revenue

22. A company has been using the fair-value method to account for Its investment. The company now has the ability to significantly influence the Investee and the equity method has been deemed appropriate. Which of the Following statements is true?

B) A Prospective change in accounting principle must occur

23. A company has been using the equity method to account for its Investment. The company sells shares and does not continue to have significant Influence. Which of the following statements is true?

B) A Prospective change in accounting principle must occur

24. When an investor appropriately applies the equity method, how Should it account for any investee Other Comprehensive Income (OCI)? 

C) The OCI Would increase the investment

25. How should a permanent loss in value of an investment using The equity method be treated?

B) A loss Is reported in the same manner as a loss in value of other long-term assets

26. Under the equity method, when the company’s share of Cumulative losses equals its investment and the company has no obligation or Intention to fund such additional losses, which of the following statements is True?

C) The Investor should suspend applying the equity method and not record any equity in Income of investee until its share of future profits is sufficient to recover Losses that have not previously been recorded.

27. When an investor sells shares of its investee company, which Of the following statements is true?

C) A Recognized gain or loss is reported as the difference between selling price and Carrying value

28. When applying the equity method, how is the excess of cost Over book value calculated and accounted for?

C) The Excess is allocated to the difference between fair value and book value multiplied By the percent ownership of net assets.

29. After allocating cost in excess of book value, which asset or Liability would not be amortized over a useful life?

D) Goodwill

30. Which Statement is true concerning unrecognized profits in intra-entity inventory Sales when an investor uses the equity method?

C) The Investor must defer downstream ending inventory profits

31. Which statement is true concerning unrecognized profits in Intra-entity inventory sales when an investor uses the equity method?

B) The Same adjustments are made for upstream and downstream sales

32. The amount allocated to goodwill at January 1, 2017, is

D)  $16,000

33. The equity in income of Sacco for 2017, is

B)  $13,500

34. The equity in income of Sacco for 2018, is

B)  $21,000

35. The balance in the Investment in Sacco account at December 31, 2017, is

D)  $107,500

36. The balance in the Investment in Sacco account at December 31, 2018, is

A)  $119,500

37. The income reported by Dodge for 2017 with regard to the Gates Investment is

A)  $    7,500

38. The income reported by Dodge for 2018 with regard to the Gates Investment is

A)  $80,000

39. Which of the following is true regarding the change from the Fair-value method to the equity method?

D) Dodge Must record a debit of $200,000 to the Gates Investment Account

40. The balance in the investment account at December 31, 2018, is

B)  $355,000

41. What journal entry will be recorded at the end of 2018 to Defer the recognition of the investor’s share of the intra-entity gross Profits?

C) Entry C

42. What journal entry will be recorded in 2019 to recognize its Share of the intra-entity gross profit that was deferred in 2018?

D) Entry D

43. What is the balance in the investment account for the 15% Ownership interest, at January 1,  2018?

A)  $150,000

44. How much income did Mehan report from Cook during 2017?

C)  $  7,500

45. How much income did Mehan report from Cook during 2018?

D)  $87,500

46. What was the balance in the investment account at December 31, 2018?

A)  $517,500

47. What was the balance in the investment account at April 1, 2019 just before the sale of shares?

C)  $535,875

48. How much of Cook’s net income did Mehan report for the year 2019?

B)  $81,250

49. How much income did Harley report from Bike for 2017?

B) $200,000

50. How much income did Harley report from Bike for 2018?

D) $320,000

51. What was the reported Balance of Harley’s Investment in Bike Co. At December 31, 2017?

C) $2,480,000

52. What was the reported Balance of Harley’s Investment in Bike Co. At December 31, 2018?

E) $2,680,000

53. What is the balance in The investment account on December 31, 2018?

B) $1,960,000

54. What amount of equity Income would Anderson recognize in 2018 from its ownership interest in Barney?

E) $28,000 loss

55. Luffman Inc. Owns 30% of Bruce Inc. And appropriately applies the equity method. During the current Year, Bruce bought inventory costing $52,000 and then sold it to Luffman for $80,000. At year-end, all of the merchandise had been sold by Luffman to other Customers. What amount of gross profit on intra-entity sales must be deferred By Luffman?

A) $         0

56. What was the balance in The investment account before the shares were sold?

A) $1,560,000

57. What is the gain/loss on The sale of the 15,000 shares?

E) $20,000 gain

58. What is the balance in The investment account after the sale of the 15,000 shares?

C) $780,000

59. What is the appropriate Journal entry to record the sale of the 15,000 shares?

B) B Above

60. What was the balance in The investment account before the shares were sold?

D) $604,000

61. What is the gain/loss on The sale of the 10,000 shares?

D) $1,000   loss

62. What is the balance in The investment account after the sale of the 10,000 shares?

C) $453,000

63. What is the appropriate Journal entry to record the sale of the 10,000 shares?

C) C Above

64. What is the amount of the Excess of purchase price over book value?

C) $1,000,000

65. How much goodwill is Associated with this investment?

D) $   200,000

66. What is the amount of excess Amortization expense for Bailey’s investment in Emery for the first year?

B) $  84,000

67. What is the amount of the Excess of purchase price over book value?

E) $  1,100,000

68. How much goodwill is associated With this investment?

C) $   650,000

69. What is the amount of Excess amortization expense for Jackie Corp’s investment in Rob Co. For year 2018?

D) $55,000

70. What is the balance in Jackie Corp’s Investment in Rob Co. Account at December 31, 2018?

B) $2,005,000

71. What is Acker’s share of The intra-entity inventory gross profit that should be deferred on December 31, 2017?

A) $  1,600

72. What is Acker’s share of The intra-entity inventory gross profit that should be deferred on December 31, 2018?

B) $  8,000

73. What is the Equity in Howell Income that should be reported by Acker in 2017?

D) $38,400

74. What is the balance in Acker’s Investment in Howell account at December 31, 2017?

B) $598,400

75. What is the Equity in Howell Income that should be reported by Acker in 2018?

B) $41,600

76. What is the balance in Acker’s Investment in Howell account at December 31, 2018?

A) $624,000

77. What is the investor’s Share of gross profit on intra-entity inventory sales that should be deferred On December 31, 2018?

A) $   900

78. What is the investor’s Share of gross profit on intra-entity inventory sales that should be deferred On December 31, 2019?

B) $2,400

79. What is the Equity in Maya Income that should be reported by Cayman in 2018?

D) $29,100

80. What is the balance in Cayman’s Investment in Mayaaccount at December 31, 2018?

B) $467,100

81. What is the Equity in Maya Income that should be reported by Cayman in 2019?

C) $34,500

82. What is the balance in Cayman’s Investment in Maya account at December 31, 2019?

B) $489,600

83. Which of the following Results in a decrease in the investment account when applying the equity Method?

D) Share of gross profit on Intra-entity inventory sales for the current year

84. Which of the following Results in an increase in the investment account when applying the equity Method?

A) Investor’s share of gross Profit from intra-entity inventory sales for the prior year

85. Which of the following Results in a decrease in the Equity in Investee Income account when applying The equity method?

C) Investor’s share of gross Profit from intra-entity inventory sales for the current year

86. Which of the following Results in an increase in the Equity in InvesteeIncome account when Applying the equity method?

D) Investor’s share of gross Profit from intra-entity inventory sales for the prior year

87. How much is the Adjustment to the Investmentin Stanley Corporation for the change from The fair-value method to the equity method on January 1, 2018?

E) There is no adjustment

88. What is the balance in The Investment in Stanley Corporation on December 31, 2018?

C) $523,000

89. How are Dividends received from Inkblot reflected in Trycker’s accounting records for 2017?

E) Increase Dividend Income by $120,000

90. At what amount will Inkblot be reflected in Trycker’s December 31, 2017 balance sheet?

D)  $2,800,000

91. For each of the following numbered situations below, select The best letter answer concerning accounting for investments:

Answer: (1) A; (2) D; (3) B; (4) D; (5) D; (6) D; (7) D; (8) D; (9) B; (10) C; (11) A; (12) B

92. Jarmon Company owns twenty-three percent (23%) of the voting Common stock of Kaleski Corp. Jarmon does not have the ability to exercise Significant influence over the operations of Kaleski. What method should Jarmon Use to account for its investment in Kaleski?

Answer:

The fair-value method should be used. Generally, Ownership of more than twenty percent (20%) of the voting common stock would be Presumed to carry significant influence and would require use of the equitymethod. The equity method is not appropriate in this case because of the lack of the Ability to exercise significant influence.

93. Idler Co. Has an investment in Cowl Corp. For which it uses the Equity method. Cowl has suffered large losses for several years, and the balance In the investment account has been reduced to zero. How should Idler account For this investment?

Answer:

Idler should discontinue the use of the equity Method. The investment would have a zero balance until investee Profits eliminate unrecognized losses.

94. Which types of transactions, exchanges, or events would Indicate that an investor has the ability to exercise significant influence Over the operations of an investee?

Answer:

When an investor has the ability to exercise Significant influence over the operations of an investee, the investor should Use the equity method to account for the investment. GAAP suggests several Events or conditions which would indicate such influence: (1) investor Representation on the investee’s board of directors; (2) material transactions Between investor and investee; (3) interchange of managerial personnel; (4) Technological dependency between investor and investee; and (5) the extent of Investor ownership and the concentration of other ownership interests in the Investee; (6) investor participation in the policy-making process of the Investee. All of these conditions should be examined to determine whether the Investor has the ability to exercise significant influence over the investee.

95. You are auditing a company that owns twenty percent of the Voting common stock of another corporation and uses the equity method to Account for the investment. How would you verify that the equity method is Appropriate in this case?

Answer:

In order to verify that the equity method is Appropriate, the auditor should determine whether the investor is able to Exercise significant influence over the operations of the investee. The ability To influence the investee’s operations is the most important criterion for Adopting the equity method. The auditor should look for such evidence of Significant influence such as: (1) frequent or material intercompany Transactions; (2) exchange of managerial personnel; (3) technological Interdependency; and (4) investor participation in the decision-making process Of the investee.

96. How does the use of the equity method affect the investor’s Financial statements?

Answer:

The use of the equity method influences the investor’s Income statement and balance sheet. On the income statement, the investor’s Total revenues will be increased by its share of the investee’s earnings Reduced by any amortization of cost in excess of fair value of depreciable net Assets. On the balance sheet, the investor’s total assets will include the Investment account. The balance of the investment account is increased by the Investor’s share of the investee’s income and decreased by investee losses and Dividends paid and amortization of depreciable allocations. The investor’s Retained earnings are influenced by the investee’s income or loss reported on The investor’s income statement.

97. What is the primary objective of the equity method of accounting For an investment?

Answer:

The objective of the equity method is to reflect the Special relationship between investor and investee. The equity method is used When the investor holds a relatively large share of the investee, but not a Controlling interest. The large ownership percentage indicates that the Investor has the ability to influence the decision-making processes of the Investee. Use of the fair-valuemethod would not reflect the Relationship between the two parties.

98. What is the justification for the timing of recognition of Income under the equity method?

Answer:

According to the equity method, the investor should Recognize its share of the investee’s income in the same period in which it is Earned by the investee. The equity method applies accrual accounting when the Investor could exercise significant influence over the investee.

99. What argument could be made against the equity method?

Answer:

An argument could be made against the recognition of Income under the equity method. The investor is required to recognize its share Of the investee’s income even when it is unlikely that the investor will ever Receive the entire amount in cash dividends.

100. How would a change be made from the equity method to the fair Value method of accounting for investments?

Answer:

A change to the fair value method is appropriate when The investor can no longer exercise significant influence over the operations Of the investee. No retrospective adjustment of previous years’ financial Statements or the balance in the investment account is required. The balance in The investment account at the time of the change would be treated prospectively As the cost of the investment.

101. How should an investor account for, and report, an investee’s Other comprehensive income (or loss)?

Answer:

The investor should account for other comprehensive Income or loss by including it in an income statement account that is separate From the Equity in Investee Income account. The investor should record its Share of investee OCI, which should be included in its balance sheet as Accumulated Other Comprehensive Income (AOCI).

102. When Should an investor not use the equity method for an investment of 21% in Another corporation?

Answer:

When the investor does not have significant influence With regard to the investee.

103. What is The primary objective of the fair value method of accounting for an investment?

Answer: The investor possesses only a small percentage Of an investee and cannot expect to have a significant impact on the operations Or decision-making of the investee. Since the shares are bought in anticipation Of cash dividends or appreciation of stock market values, dividends received Are accounted for as income and the investment is reflected at each balance Sheet date at its fair value which is generally the market value at that date.

104. How would A change be made from the fair value method to the equity method of accounting For investments?

Answer: According to GAAP, when there is a change from The fair value method to the equity method for investments, the change should Be incorporated prospectively.

Learning Objective: 01-05a

105. When the fair value option is elected For application to an investment in which the investor has significant Influence over the investee, how would the investor reflect the use of the fair Value option in its balance sheet and in its income statement?

Answer: In the balance sheet, the Investment in Investee account will be at fair value at the balance sheet date. In the income statement, any change in fair value from period to period would Be reflected as investment Income (increase in fair value) or loss (decrease in Fair value). Also in the income statement, the dividends received would be Reflected as dividend income.

106. Charlie Co. Owns 30% of the voting common stock of Turf Services Inc. Charlie uses the equity method to account for its investment. On January 1, 2018, the balance in the investment account was $624,000. During 2018, Turf Services reported net income of $120,000 and paid dividends of $30,000. Any excess of fair value over book value is attributable to goodwill With an indefinite life.

What is the balance in the investment account as of December 31, 2018?

Answer:

107. Tinker Co. Owns 25% of the common stock of Harbor Co. And uses the equity method to Account for the investment. During 2018, Harbor reported income of $120,000 and Paid dividends of $40,000. Harbor owns a building with a useful life of twenty Years, which was undervalued by $80,000 at the time that Tinker bought its Shares of Harbor’s common stock.

Required:

Prepare a schedule to show the equity income Tinker should Recognize for 2018 related to this investment.

Answer:

108. Aqua Corp. Purchased 30% of the common stock of Marcus Co. By paying $500,000. Of this Amount, $50,000 is associated with goodwill.

Required:

Prepare the journal entry to record Aqua’s investment.

Answer:

109. On January 2, 2018, Heinreich Co. Paid $500,000 for 25% of The voting common stock of Jones Corp. At the time of the investment, Jones had Net assets with a book value and fair value of $1,800,000. During 2018, Jones Incurred a net loss of $60,000 and paid dividends of $100,000. Any excess cost Over book value is attributable to goodwill with an indefinite life.

Required:

1) Prepare a schedule to show the amount of goodwill From Heinrich’s investment in Jones

2) Prepare a schedule to show the balance in Heinreich’s investment account at December 31, 2018

Answer:

110. On January 3, 2018, Jenkins Corp. Acquired 40% of the Outstanding common stock of Bolivar Co. For $1,200,000. This acquisition gave Jenkins the ability to exercise significant influence over the investee. The Book value of the acquired shares was $950,000. Any excess cost over the Underlying bookvalue was assigned to a patent that was undervalued on Bolivar’s balance sheet. This patent has a remaining useful life of ten years. For the year ended December 31, 2018, Bolivar reported net income of $312,000 And paid cash dividends of $96,000.

Required:

Prepare a schedule to show the balance Jenkins should Report as its Investment in Bolivar Co. At December 31, 2018.

Answer:

111. On January 1, 2018, Spark Corp. Acquired a 40% interest in Cranston Inc. For $250,000. On that date, Cranston’s balance sheet disclosed net assets Of $430,000. During 2018, Cranston reported net income of $100,000 and paid Cash dividends of $30,000. Spark sold inventory costing $40,000 to Cranston During 2018 for $50,000. Cranston used all of this merchandise in its Operations during 2018. Any excess cost over fair value is attributable to an unamortized Trademark with a 20-year remaining life.

Required:

Prepare all of Spark’s journal entries for 2018 to Apply the equity method to this investment.

Answer:

**Note: All merchandise was used, so no deferral entry Is needed.

112. Wathan Inc. Sold $180,000 in inventory to Miller Co. During 2017, for $270,000. Miller resold $108,000 of this merchandise in 2017 with the Remainder to be disposed of during 2018.

Required:

Assuming Wathan owns 25% of Miller and applies the Equity method, prepare the journal entry Wathan should have recorded at the end Of 2017 to defer gross profit on intra-entity inventory sales.

Answer:

113. Jager Inc. Holds 30% of the outstanding voting shares of Kinson Co. And appropriately applies the equity method of accounting. Amortization Associated with this investment equals $11,000 per year. For 2018, Kinson Reported earnings of $100,000 and paid cash dividends of $40,000. During 2018, Kinson acquired inventory for $62,400, which was then sold to Jager for $96,000. At the end of 2018, Jager still held some of this inventory at its Intra-entity selling price of $50,000.

Required:

Determine the amount of Equity in InvesteeIncome That Jager should have reported for 2018.

Answer:

114. On January 2, 2017, Hull Corp. Paid $516,000 for 24% (48,000 Shares) of the outstanding common stock of Oliver Co. Hull used the equity Method to account for the investment. At the end of 2017, the balance in the Investment account was $620,000. On January 2, 2018, Hull sold 12,000 shares of Oliver stock for $12 per share. For 2018, Oliver reported net income of $118,000 and paid dividends of $30,000.

Required:

(A) Prepare the journal entry to record the sale of The 12,000 shares.

(B) After the sale has been recorded, what is the Balance in the investment account?

(C) What percentage of Oliver Co. Stock does Hull own After selling the 12,000 shares?

(D) Because of the sale of stock, Hull can no longer Exercise significant influence over the operations of Oliver. What effect will This have on Hull’s accounting for the investment?

(E) Prepare Hull’s journal entries related to the Investment for the rest of 2018.

Answer:

115. On January 1, 2018, Jolley Corp. Paid $250,000 for 25% of the Voting common stock of Tige Co. On that date, the book value of Tige was $850,000. A building with a carrying value of $160,000 was actually worth $220,000. The building had a remaining life of twenty years. Tige owned a Trademark valued at $90,000 over cost that was to be amortized over 20 years.

During 2018, Tige sold to Jolley inventory costing $60,000, at a markup of 50% on Cost. At the end of the year, Jolley still owned some of these goods with an Intra-entity selling price of $33,000. Jolly uses a Perpetual inventory system.

Tige reported net income of $200,000 during 2018. This Amount included a gain of $35,000. Tige paid dividends totaling $40,000.

Required:

Prepare all of Jolley’s journal entries for 2018 in Relation to Tige Co. Assume the equity method is appropriate for use.

Answer:

Required journal entries:

116. On January 1, 2017, Pond Co. Acquired 40% of the outstanding Voting common shares of Ramp Co. For $700,000. On that date, Ramp reported Assets and liabilities with book values of $2.2 million and $700,000, Respectively. A building owned by Ramp had an appraised value of $300,000, Although it had a book value of only $120,000. This building had a 12-year Remaining life and no salvage value. It was being depreciated on the Straight-line basis.

Ramp generated net income Of $300,000 in 2017 and a loss of $120,000 in 2018. In each of these two years, Ramp paid a cash dividend of $70,000 to its stockholders.

During 2017, Ramp sold Inventory to Pond that had an original cost of $60,000. The merchandise was Sold to Pond for $96,000. Of this balance, $72,000 was resold to outsiders During 2017 and the remainder was sold during 2018. In 2018, Ramp sold Inventory to Pond for $180,000. This inventory had cost only $108,000. Pond Resold $120,000 of the inventory during 2018 and the rest during 2019.

Required:

For 2017 and then for 2018, Calculate the equity income to be reported by Pond for external reporting Purposes.

Answer:

117. Pursley, Inc. Acquires 10% of Ritz Corporation on January 3, 2017, for $80,000 when the book value of Ritz was $800,000. Pursley adjusted the investment to its fair value of $162,500 At December 31, 2017. During 2017 Ritz reported net income of $125,000 and paid Dividends of $30,000. On January 10, 2018, Pursley purchased an additional 20% Of Ritz for $325,000, giving Pursley the ability to significantly influence the Operating policies of Ritz. Any excess of cost over book value is attributable To goodwill with an indefinite life. What journal entry(ies) is(are) required On January 1, 2018?

Answer:

Additionally, if the fair Value of the original 10% shares differed on January 10, 2018, than it did on December 31, 2017, Pursley would record the adjustment to the investment Account so that the proper allocation of excess payment to goodwill could be prepared When the ownership percentage required use of the equity method of accounting On January 10, 2018.

REFERENCE: 01-18

Steven Company owns 40% of the outstanding voting Common stock of Nicole Corp. And has the ability to significantly influence the Investee’s operations. On January 3, 2018, the balance in the Investment in Nicole Corp. account was $503,000. Amortization associated with this Acquisition is $12,000 per year. During 2018, Nicole earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2017, Nicole had Sold inventory costing $35,000 to Steven for $50,000. All but 25% of that Inventory had been sold to outsiders by Steven during 2017; the remainder was Sold in 2018. Additional sales were made to Steven in 2018 at an intra-entity Selling price of $75,000.  The goods in The intra-entity sales  cost Nicole $54,000. Only 10% of the 2018 intra-entity purchases from Nicole had not been sold to Outsiders by the end of 2018.

118. What amount of gross Profit on 2017 intra-entity sales should Steven defer at December 31, 2017?

Answer:

[($50,000 – $35,000) × .25 × .40]  =  $1,500

119. What amount of gross Profit on 2018 intra-entity sales should Steven defer at December 31, 2018?

Answer:

[($75,000 – $54,000) × .10 × .40]  =  $840

120. What amount of equity Income would Steven have recognized in 2018 from its ownership interest in Nicole?

Answer:

[($120,000 × .4) – $12,000 – $840 + $1,500]  =  $36,660

121. What was the balance in The Investment in Nicole Corp. Account at December 31, 2018?

Answer:

[$503,000 + $36,660 – ($40,000 × .4)]  =  $523,660