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Chapter 4 Tutorial Exercise

The document discusses accounting for investments using the equity method. It provides examples of journal entries to record the initial investment and subsequent activity under the equity method. It also addresses adjustments that would be required if the initial value or partial equity methods had been used instead.

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Farheen Akram
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25 views

Chapter 4 Tutorial Exercise

The document discusses accounting for investments using the equity method. It provides examples of journal entries to record the initial investment and subsequent activity under the equity method. It also addresses adjustments that would be required if the initial value or partial equity methods had been used instead.

Uploaded by

Farheen Akram
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 4

Solution
Req a: Building

Book value 195000 (10 years)


Fair value 345000
Book value at the end 2021: 175500

On Dec 31, 2021, Book value building: $175500

Excess acquisition-date fair value allocation (345000-195000) $150000

Excess value depreciation (150000/10 years) ($15000)

Building Net $310500

Req B: Technology process

Technology process $1000000


2021 amortization ($1000000/20) (50000)
Technology process at Dec 31, 2021 $950000
Req c: Net income attributable to Noncontrolling interest
Stayer’s income 2021 $350000
Depreciation 2021 ($15000)
Amortization 2021 ($50000)
Adjusted Net Income $285000
Stayer’s income 20% (285000*20%) $57000

Req d: Net income attributable to controlling interest

Johnsonvile income 2021 $650000


Adjusted income of Stayer Co. $285000
Controlling interest income (285000*80%) $228000
Net income attributable to controlling interest $878000

Req e: Noncontrolling Interest


Total Stayer fair value ($3000000/80%) $3750000
Noncontrolling interest percentage 20%
Noncontrolling interest acquisition-date fair value 750000
Net income attributable to noncontrolling interest 57000
Noncontrolling interest share of Stayer dividends (20% × $50,000) ($10000)
Noncontrolling interest in Stayer 12/31/21 797000

EX34

a. From the original fair value allocation, $30,000 is assigned based on the fair
value of the patent. With a 5-year remaining life, excess amortization will
be $6,000 per year.

Because the equity method is in use, no Entry *C is required.


Entry S
Common stock (Bandmor) ................................ 300,000
Retained earnings, 1/1/21 (Bandmor) ............... 268,000
Investment in Bandmor (70%) ..................... 397,600
Noncontrolling interest in Bandmor, 1/1/21. . 170,400

Entry A
Patent ................................................................ 18,000
Goodwill ............................................................. 190,000
Investment in Bandmor ................................ 145,600
Noncontrolling interest in Bandmor (30%).... 62,400

Entry I
Equity in Bandmor earnings .............................. 72,800
Investment in Bandmor ................................ 72,800
(To eliminate intra-entity income balance. Equity accrual of $72,800 [70% ×
($110,000 – 6,000 amortization)] has been recorded)

Entry D
Investment in Bandmor ..................................... 42,000
Dividends declared ...................................... 42,000
(To eliminate current intra-entity dividend transfers—70% of $60,000)

Entry E
Amortization expense......................................... 6,000
Patent............................................................ 6,000
Entry P
Accounts payable .............................................. 22,000
Accounts receivable ..................................... 22,000

Req b. If the initial value method had been applied, the parent would have
recorded only the subsidiary dividends declared as income rather than an
equity accrual. Therefore, Entry *C is needed to adjust the parent's beginning
retained earnings for 2021 to the equity method. During 2019 and 2020, the
subsidiary reported a total net income of $171,000 but declared dividends of
only $83,000. The parent's share of the difference is $61,600 (70% of
$88,000 [$171,000 - $83,000]). In addition, the parent’s 70% share of excess
amortization expense for two years must also be included ($8,400 = 2 years ×
$6,000 per year × 70%). The net amount to be recognized is $53,200
($61,600 - $8,400).

ENTRY *C
Investment in Bandmor ..................................... 53,200
Retained earnings, 1/1/21 ............................ 53,200
c. If the partial equity method had been applied, only the excess amortization
expenses for the previous two years would have been omitted from the
parent's retained earnings. As shown above, that figure is $8,400 (2 years ×
$6,000 per year × 70%).

ENTRY *C
Retained earnings, 1/1/21 ................................. 8,400
Investment in Bandmor ................................ 8,400

Req d. Net income attributable to noncontrolling interest—2021


[($110,000 – 6,000) × 30%] ............................... $31,200

Noncontrolling interest (NCI) fair value January 1, 2019 $210,000


Adjustments to original basis:
2019 NI to noncontrolling interest.......................... $20,700
Dividends to NCI........................................... (11,700) 9,000

2020 NI to noncontrolling interest.......................... $27,000


Dividends to NCI........................................... (13,200) 13,800

2021 Net income to noncontrolling interest........... $31,200


Dividends to NCI........................................... (18,000) 13,200
Noncontrolling interest in Bandmor 12/31/21.......... $246,000

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