Solution Manual For Advanced Accounting, 14th Edition

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Chapter 01-The Equity Method of Accounting for Investments–Hoyle, Schaefer, Doupnik,Advanced Accounting,14e1-1CHAPTER 1THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTSChapter OutlineI.Four methods are principally used to account for an investment in equity securities alongwith a fair value option.A.Fair value method: applied by an investor when only a small percentage of a company’svoting stock is held.1.The investor recognizes incomewhen the investee declares a dividend.2.Portfolios are reported at fair value. If fair values are unavailable, investment isreported at cost.B.Cost Method: applied to investments without a readily determinable fair value.When thefair value of an investment in equity securities is not readily determinable, and theinvestment provides neither significant influence nor control, the investment may bemeasured at cost.The investment remains at cost unless1.Ademonstrable impairmentoccurs for the investment, or2.Anobservable price change occursfor identical or similar investments of the sameissuer.The investor typically recognizesits share of investee dividends declaredas dividendincome.C.Consolidation: when one firm controls another (e.g., when a parent has a majorityinterest in the voting stock of a subsidiary or control through variable interests, theirfinancial statements are consolidated and reported for the combined entity.D.Equity method: applied when the investor has theability to exercise significantinfluenceover operating and financial policies of the investee.3.Ability to significantly influence investee is indicated by several factors includingrepresentation on the board of directors, participation in policy-making, etc.4.GAAP guidelines presume the equity method is applicable if 20 to 50 percent of theoutstanding voting stock of the investee is held by the investor.Current financial reporting standards allow firms to elect to use fair value for any newinvestment in equity shares including those where the equity method would otherwise apply.However, the option, once taken, is irrevocable.The investor recognizes both investeedividends and changes in fair value over time as income.II.Accounting for an investment: the equity methodA.Theinvestor adjusts the investment accountto reflect all changes in the equity of theinvestee company.B.The investor accrues investee incomewhen it is reported in the investee’s financialstatements.C.Dividends declared by the investee create a reduction in the carrying amount of theInvestment account.This book assumes all investee dividends are declared and paidin the same reporting period.

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Chapter 01-The Equity Method of Accounting for Investments–Hoyle, Schaefer, Doupnik,Fundamentals7e1-2III.Special accounting procedures used in the application of the equity methodA.Reporting a change to the equity method when the ability to significantly influence aninvestee is achieved through a series of acquisitions.1.Initial purchase(s) will be accounted for by means of the fair value method (or atcost) until the ability to significantly influence is attained.2.Whenthe ability to exercisesignificant influenceoccurs following a series of stockpurchases, theinvestor applies theequity method prospectively. The total fair valueat the date significant influence is attained is compared to the investee’s book valueto determine future excess fair value amortizations.B.Investee income from other than continuing operations1.The investor recognizes its share of investee reported other comprehensive income(OCI) through the investment account and the investor’s own OCI.2.Income items such as discontinued operations that are reported separately by theinvestee should be shown in the same manner by the investor. The materiality ofthese other investee income elements (as it affects the investor) continues to be acriterion for separate disclosure.C.Investee losses1.Losses reported by the investee create corresponding losses for the investor.2.A permanent decline in the fair value of an investee’s stock should be recognizedimmediately by the investor as an impairment loss.3.Investee losses can possibly reduce the carrying value of the investment account toa zero balance.At that point, the equity method ceases to be applicable and thefair-value method is subsequently used.D.Reporting the sale of an equity investment1.The investor applies the equity method until the disposal date to establish a properbook value.2.Following the sale, the equity method continues to be appropriate if enough sharesare still held to maintain the investor’s ability to significantly influence the investee.If that ability has been lost, the fair-value method is subsequently used.IV.Excess investment cost over book value acquiredA.The pricean investor paysfor equity securitiesoften differssignificantly from theinvestee’sunderlying book value primarily because the historical cost basedaccounting model does not keep track of changes ina firm’sfairvalue.B.Payments made in excess of underlying book value can sometimes be identified withspecific investee accounts such as inventory or equipment.C.An extra acquisition price can also be assigned to anticipated benefits that areexpected to be derived from the investment. In accounting, these amounts arepresumed to reflect an intangible asset referred to as goodwill. Goodwill is calculatedas any excess payment that is not attributable to specific identifiable assets andliabilities of the investee. Because goodwill is an indefinite-lived asset, it is notamortized.

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Chapter 01-The Equity Method of Accounting for Investments–Hoyle, Schaefer, Doupnik,Advanced Accounting,14e1-3V.Deferral of intra-entity gross profit in inventoryA.The investor’s share of intra-entity profits in ending inventory are not recognized untilthe transferred goods are either consumed or until they are resold to unrelated parties.B.Downstream sales of inventory1.“Downstream” refers to transfers made by the investor to the investee.2.Intra-entity gross profits from sales are initially deferred under the equity method andthen recognized as income at the time of the inventory’s eventual disposal.3.The amount of gross profit to be deferred is the investor’s ownership percentagemultiplied by the markup on the merchandise remaining at the end of the year.C.Upstream sales of inventory1.“Upstream” refers to transfers made by the investee to the investor.2.Under the equity method, thedeferral process for intra-entity gross profits is identicalfor upstream and downstream transfers.The procedures are separately identifiedin Chapter One because the handling does vary within the consolidation process.Answers to Discussion QuestionsThe textbook includes discussion questions to stimulate student thought and discussion. Thesequestions are also designed to allow students to consider relevant issues that might otherwise beoverlooked. Some of these questions may be addressed by the instructor in class to motivatestudent discussion. Students should be encouraged to begin by defining the issue(s) in each case.Next, authoritative accounting literature (FASB ASC) or other relevant literature can be consultedas a preliminary step in arriving at logical actions. Frequently, the FASB Accounting StandardsCodification will provide the necessary support.Unfortunately, in accounting, definitive resolutions to financial reporting questions are not alwaysavailable. Students often seem to believe that all accounting issues have been resolved in the pastso that accounting education is only a matter of learning to apply historically prescribed procedures.However, in actual practice, the only real answer is often the one that provides the fairestrepresentation of thefirm’s transactions. If an authoritative solution is not available, students shouldbe directed to list all of the issues involved and the consequences of possible alternative actions.The various factors presented can be weighed to produce a viable solution.The discussion questions are designed to help students develop research and critical thinking skillsin addressing issues that go beyond the purely mechanical elements of accounting.Did the Cost Method Invite Manipulation?The cost method of accounting for investments often caused a lack of objectivity in reported incomefigures. With a large block of the investee’s voting shares, an investor could influence the amountand timing of the investee’s dividenddeclarations. Thus, when enjoying a good earnings year, aninvestor might influence the investee to withholddeclaring adividend until needed in a subsequentyear. Alternatively, if the investor judged that its current year earnings “needed a boost,” it mightinfluence theinvestee to declare a current year dividend.The equity method effectively removesmanagers’ ability to increase current income (or defer income to future periods) through theirinfluence over the timing and amounts of investee dividenddeclarations.At first glance it may seem that the fair value method allows managers to manipulate incomebecause investee dividends are recorded as income by the investor.However, dividends paid

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Chapter 01-The Equity Method of Accounting for Investments–Hoyle, Schaefer, Doupnik,Fundamentals7e1-4typically are accompanied by a decrease in fair value (also recognized in income), thus leavingreported net income unaffected.Does the Equity Method Really Apply Here?The discussion in the case between the two accountants is limited to the reason for the investmentacquisition and the current percentage of ownership. Instead, they should be examining the actualinteraction that currently exists between the two companies. Although the ability to exercisesignificant influence over operating and financial policies appears to be a rather vague criterion,ASC 323"Investments—Equity Method and Joint Ventures," clearly specifies actual events thatindicate this level of authority (paragraph323-10-15-6):Ability to exercise that influence may be indicated in several ways, such as representation on theboard of directors, participation in policy-making processes, material intra-entity transactions,interchangeofmanagerialpersonnel,ortechnologicaldependency.Anotherimportantconsideration is the extent of ownership by an investor in relation to the concentration of othershareholdings, but substantial or majority ownership of the voting stock of an investee company byanother investor does not necessarily preclude the ability to exercise significant influence by theinvestor.In this case, the accountants would be wise to determine whether Dennis Bostitch or any othermemberoftheHighlandLaboratoriesadministrationisparticipatinginthemanagementofAbraham, Inc. If any individual from Highland's organization is on Abraham’s board of directors oris participating in management decisions, the equity method would seem to be appropriate.Likewise, if significant transactions have occurred between the companies (such as loans byHighland to Abraham), the ability to apply significant influence becomes much more evident.However, if James Abraham continues to operate Abraham, Inc., with little or no regard forHighland, the equity method should not be applied. This possibility seems especially likely in thiscase since one stockholder, James Abraham, continues to hold a majority (2/3) of the voting stock.Thus, evidence of the ability to apply significant influence must be present before the equity methodis viewed as applicable. The mere holding of 1/3 of the stock is not conclusive.

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Chapter 01-The Equity Method of Accounting for Investments–Hoyle, Schaefer, Doupnik,Advanced Accounting,14e1-5Answers to Questions1.Through itsvoting rights overaninvestee, an investor firm canelectmembers to the investee’sboard of directors and thus exercisepower over the strategic direction of the investee in waysthat align with the investor’sown operating and financial interests.2.An investor should apply theequity methodwhen it hasthe ability to exercise significantinfluence over the operating and financial policies of the investee. However,if the investorcontrols the investee, consolidating the financial information of the two companies will normallybe the appropriate method for reporting the investment.3.For equity securities without readily determinable fair values, ASC 321 allows the cost methodfor the investment asset.The investor recognizes dividend income for itsshare of investeedividends declared. Under the cost method, the investment account remains at cost unlessthere is (a) a demonstrable impairment or (b) observable price changes for identical or similarinvestments of the same issuer.4.According to FASB ASC paragraph 323-10-15-6 "Ability to exercise that influence may beindicated in several ways, such as representation on the board of directors, participation inpolicy-makingprocesses,materialintra-entitytransactions,interchangeofmanagerialpersonnel, or technological dependency. Another important consideration is the extent ofownership by an investor in relation to the extent of ownership of other shareholdings." Themost objective of the criteria established by the Board is that holding (either directly or indirectly)20 percent or more of the outstanding voting stock ispresumedto constitute the ability to holdsignificant influence over the decision-making process of the investee.5.Dividendsreceived from an investee reducethe investment account. The investor does notrecord such dividends asrevenue, to avoid reporting the income from the investee twice.Theequity method is appropriate when an investor has the ability to exercise significant influenceover the operating and financing decisions of an investee. Because dividends representfinancing decisions, the investor may have the ability to influence dividend timing.If investorsrecorded dividends receivedas income, managers could affect reported income in a way thatdoes not reflect actual performance. Therefore, in reflecting the close relationship between theinvestor and investee, the equity method employs accrual accounting to record incomewhenreportedby the investee.Theinvestor increases itsinvestment account for theinvestor’s shareof theinvestee’snetincome and then decreases the investment accountsas theinvesteedistributes its net incomethrough dividends.From the investor’s view, the decrease in theinvestment asset (from investee dividends) is offset by an immediate increase in dividendsreceivable and an eventual increase in cash.6.If Jones cannot significantly influence the operating and financial policies of Sandridge, theequity method should not be applied regardless of the ownership level. However, an owner of25 percent of a company's outstandingcommonstock is assumed to possess this ability. Thispresumption stands until overcome by predominant evidence to the contrary.Examples of indications that an investor may be unable to exercise significant influence overthe operating and financial policies of an investee include (ASC 323-10-15-10):a.Opposition by the investee, such as litigation or complaints to governmental regulatoryauthorities, challenges the investor's ability to exercise significant influence.b.The investor and investee sign an agreement under which the investor surrenders significantrights as a shareholder.

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Chapter 01-The Equity Method of Accounting for Investments–Hoyle, Schaefer, Doupnik,Fundamentals7e1-6c.Majority ownership of the investee is concentrated among a small group of shareholderswho operate the investee without regard to the views of the investor.d.The investor needs or wants more financial information to apply the equity method than isavailable to the investee's other shareholders (for example, the investor wants quarterlyfinancial information from an investee that publicly reports only annually),tries to obtain thatinformation, and fails.e.The investor tries and fails to obtain representation on the investee's board of directors.7.The following events necessitate changes in this investment account.a.Net income earned by Watts would be reflected by an increase in the investment balancewhereas a reported loss is shown as a reduction to that same account.b.Dividends declared by the investee decrease its book value, thus requiring a correspondingreduction to be recorded in the investment balance.c.If, in the initial acquisition price, Smith paid extra amounts because specific investee assetsand liabilities had values differing from their book values, amortization of this portion of theinvestment account is subsequently required. As an exception, if the specific asset is landor goodwill, amortization is not appropriate.d.Intra-entity gross profits created by sales between the investor and the investee must bedeferred until resale to outside parties or consumed by the purchasing affiliate. The initialdeferral entry made by the investor reduces the investment balance whilethe eventualrecognition of the gross profit increases this account.8.The equity method has been criticized because it allows the investor to recognize income thatmay not be received in any usable forminthe foreseeable future.The investor accrues incomebased on the investee's reported earnings, not on the investor’s share of investee dividends.Frequently, equity income will exceed the investor’s share of investee cash dividends with noassurance that the difference will ever be forthcoming.Many companies have contractual provisions (e.g., debt covenants, managerial compensationcontracts) based on ratios in the main body of the financial statements. Relative to consolidation,a firm employing the equity method will report smaller values forassets and liabilities.Consequently, higher rates of return for its assets and sales, as well as lower debt-to-equityratios may result. Meeting such contractual provisions of may provide managers incentives tomaintain technical eligibility for the equity method rather than full consolidation.9.Accounting standards requirethat an investor treat achange to the equity methodprospectively.Any new investment (or other investor or investee activity) that provides significant influencerequires application of the equity method. At the date the investor’s influence becomessignificant, the investor prepares an investment fair value allocation schedule.The resultingexcess fair over book value amortizations serve to compute future equity in investee earnings.10.In reporting equity earnings for the current year, Riggins must separate its accrual into twocomponents: (1) net income and (2) other comprehensive income or loss. This handling enablesthe reader of the investor's financial statements to assess the nature of the change to theinvestment account.11.Under the equity method, losses are recognized by an investor at the time that they are reportedby the investee. However, because of the conservatism inherent in accounting, any permanentlosses in value should also be recorded immediately. Because theinvestee's stock has suffereda permanent impairment in this question, the investor recognizes the loss applicable to itsinvestment.

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Chapter 01-The Equity Method of Accounting for Investments–Hoyle, Schaefer, Doupnik,Advanced Accounting,14e1-712.Following the guidelines established by the ASC, Wilson would recognize an equity loss of$120,000 (40 percent) stemming from Andrews' reported loss. However, since the book valueof this investment is only $100,000, Wilson's loss is limited to that amount with the remaining$20,000 omitted.The investor will record subsequentincome based on investee dividends. IfAndrews is ever able to generate sufficient future profits to offset the total unrecognized losses,the investor will revert to the equity method.13.In accounting, goodwill is derived as a residual figure. It is the investor's cost in excess of itsshare of the fair value of the investee assets and liabilities. Although a portion of the acquisitionprice may represent either goodwill or valuation adjustments to specific identifiable investeeassets and liabilities, the investor records the entire cost in a single investment account. Noseparate identification of the cost components is made in the reporting process. Subsequently,the cost figures attributed to specific accounts (having a limited life), besides goodwill and otherindefinite life assets, are amortized based on their anticipated lives. This amortization reducesthe investment and the accrued income in future years.14.On June 19, Princeton removes the portion of this investment account that has been sold andrecognizes the resulting gross profit or loss. For proper valuation purposes, the equity methodis applied (based on the 40 percent ownership) from the beginningof Princeton's fiscal yearuntil June 19. Princeton's method of accounting for any remaining shares after June 19 willdepend upon the degree of influence that is retained. If Princeton still has the ability tosignificantly influence the operating and financial policies of Yale, the equity method continuesto be appropriate based on the reduced percentage of ownership. Conversely, if Princeton nolonger holds this ability, the fair-value method becomes applicable, based on the remainingequity value after the sale.15.Downstream salesoccur when an investor sellsto the investee while upstream sales are fromthe investee to the investor. These titlesreflectthe traditional positions given to the two partieswhen presented on an organization-type chart. Under the equity method, no accountingdistinctionexistsbetween downstream and upstream sales. Separate presentation is made inthis chapter only because the distinction becomes significant in the consolidation process asdemonstrated in Chapter Five.16.The portion of an intra-entity gross profit is computed based on the markup on any transferredinventory retained by the buyer at year's end. The markup percentage (based on sales price)multiplied by the intra-entity ending inventory gives the seller’sprofit remaining in the buyer’sending inventory. The product of the ownership percentage and this profit figure is the investor’sshare of gross profit from the intra-entity transaction.The investor defers this gross profitin therecognition of equityearnings until subsequently recognized following use or resale to anunrelated party.17.Intra-entity transfers do not affect the financialreporting of the investee except that the relatedparty transactions must be appropriately disclosed and labeled.18. Under fair value accounting, firms report the investment’s fair value as an asset and changesin fair value as earnings.Dividendsfrom an investee are included in earnings under the fairvalueaccounting.Dividends are not recognized in income but instead reduce the investmentaccount under the equity method.Also, under the equity method, firms recognize theirownership share of investee profits adjusted for excess cost amortizations and intra-entityprofits.

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Chapter 01-The Equity Method of Accounting for Investments–Hoyle, Schaefer, Doupnik,Fundamentals7e1-8Answers to Problems1.D2.B3.C4.B5.D6.BAcquisition price...........................................................................$2,295,000Equity income ($750,000 ×30%)..................................................225,000Dividends (90,000 shares × $1.00)................................................(90,000)Investment inO’Fallonas of December 31..................................$2.430,0007.AAcquisition price.............................................................................$700,000Income accruals:2020—$170,000 × 20%.......................................34,0002021—$210,000 × 20%......................................42,000Amortization (see below):2020......................................................(10,000)Amortization:2021..........................................................................(10,000)Dividends:2020—$70,000 × 20%...................................................(14,000)2021—$70,000 × 20%....................................................(14,000)Investment in Martes, December 31,2021.....................................$728,000Acquisition priceof Martes.............................................................$700,000Acquired net assets (book value) ($3,000,000 ×20%).................(600,000)Excess costover book value to patent.........................................$100,000Annual amortization (10 year remaining life)...............................$10,0008.BPurchase price of Johnson stock..................$500,000Book value of Johnson ($900,000 × 40%)......(360,000)Cost in excess of book value....................$140,000RemainingAnnualPayment identified with undervalued............lifeamortizationBuilding ($140,000 × 40%).........................56,0007 yrs.$8,000Trademark ($210,000 × 40%).....................84,00010 yrs.8,400Total.................................................................$-0-$16,400

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Chapter 01-The Equity Method of Accounting for Investments–Hoyle, Schaefer, Doupnik,Advanced Accounting,14e1-98. (continued)Investmentpurchase price............................................$500,000Basic income accrual ($90,000 × 40%)....................36,000Amortization (above).................................................(16,400)Dividends declared ($30,000 × 40%)........................(12,000)Investment in Johnson...................................................$507,6009.DThe2020purchase is reported using the equity method.Purchase price of Evan stock.........................................................$600,000Book value of Evan stock ($1,200,000 × 40%)...............................(480,000)Goodwill...........................................................................................$120,000Life of goodwill................................................................................indefiniteAnnual amortization........................................................................(-0-)Cost on January 1,2020.................................................................$600,0002020Income accrued ($140,000 x 40%).........................................56,0002020Dividend ($50,000 × 40%).......................................................(20,000)2021Income accrued ($140,000 × 40%).........................................56,0002021Dividend ($50,000 × 40%).......................................................(20,000)2022Income accrued ($140,000 × 40%).........................................56,0002022Dividend ($50,000 × 40%).......................................................(20,000)Investment in Evan, 12/31/22.....................................................$708,00010. D11. AGross profit rate (GPR): $15,000÷$75,000 =20%Inventory remaining at year-end....................................................$30,000GPR...................................................................................................×20%Gross profit.................................................................................$6,000Ownership........................................................................................×35%Intra-entity gross profit—deferred............................................$2,100

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Chapter 01-The Equity Method of Accounting for Investments–Hoyle, Schaefer, Doupnik,Fundamentals7e1-1012.BPurchase price of Steinbart shares...............................................$530,000Book value of Steinbart shares ($1,200,000 × 40%)......................(480,000)Trade name......................................................................................$ 50,000Remaining life of trade name..........................................................20yearsAnnual amortization........................................................................$2,5002020Gross profit rate = $30,000÷$100,000 = 30%2021Gross profit rate = $54,000÷$150,000 = 36%2021—Equity income in Steinbart:Income accrual ($110,000 × 40%)...................................................$44,000Amortization (above).......................................................................(2,500)Recognition of2020deferred gross profit($25,000 × 30% GPR × 40% ownership)....................................3,000Deferral of2021intra-entity gross profit($45,000 × 36% GPR × 40% ownership.....................................(6,480)Equity income inSteinbart—2021............................................$38,02013.(6 minutes) (Investment account after one year)Purchase price.....................................................................................$1,160,000Basic2021equity accrual ($260,000 × 40%).....................................104,000Amortization of copyright:Excess payment ($1,160,000–$820,000 = $340,000)to copyright allocated over 10 year remaining life..................(34,000)Dividends (50,000 × 40%)....................................................................(20,000)Investment account balance at year end...........................................$1,210,00014. (7 minutes)a.Purchase price.................................................................................$2,290,000Equity income accrual ($720,000 × 35%).......................................252,000Other comprehensive loss accrual ($100,000 × 35%)...................(35,000)Dividends (20,000 × 35%)................................................................(7,000)Investment in Steel at December 31,2021....................................$2,500,000b.Equity income of Steel = $252,000 (does not include OCI share which isreported separately).

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Chapter 01-The Equity Method of Accounting for Investments–Hoyle, Schaefer, Doupnik,Advanced Accounting,14e1-1115.(15 minutes) (Investment account after 2 years)a.Acquisition price.................................................................................$2,700,000Book value acquired ($5,175,000 × 20%)...........................................1,035,000Excess payment..................................................................................$1,665,000Excess fair value: Computing equipment($700,000 × 20%)........140,000Excess fair value: Patented technology ($3,900,000 × 20%)........780,000Excess fair value: Trademark ($1,850,000 × 20%)........................370,000Goodwill...............................................................................................$375,000Amortization:Computing equipment ($140,000÷7).......................................$20,000Patented technology ($780,000÷3)..........................................260,000Trademark (indefinite)................................................................-0-Goodwill (indefinite)...................................................................-0-Annual amortization........................................................................$280,000b.Basic equity accrual2020($1,800,000 × 20%)..................................$360,000Amortization—2020(above)...............................................................(280,000)Equity in2020earnings of Sauk Trail................................................$ 80,000Basic equity accrual2021($1,985,000 × 20%)..................................$397,000Amortization—2021(above)...............................................................(280,000)Equity in2021earnings of Sauk Trail................................................$117,000c.Acquisition price.................................................................................$2,700,000Equity in2020earnings of Sauk Trail (above)..................................80,000Dividends—2020($150,000 × 20%)....................................................(30,000)Investment in Sauk Trail, 12/31/20.....................................................$2,750,000Investment in Sauk Trail, 12/31/20.....................................................$2,750,000Equity in2021earnings of Sauk Trail (above)..................................$117,000Dividends—2021($160,000 × 20%)....................................................(32,000)Investment in Sauk Trail, 12/31/21.....................................................$2,835,000

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Chapter 01-The Equity Method of Accounting for Investments–Hoyle, Schaefer, Doupnik,Fundamentals7e1-1216.(10 minutes) (Investment account after 2 years with fair value accountingincluded)a.Acquisition price.................................................................................$60,000Book value—assets minus liabilities ($125,000 × 40%)...............50,000Excess payment.........................................................................$10,000Value of patent in excess of book value ($15,000 × 40%)............6,000Goodwill...........................................................................................$4,000Amortization:Patent ($6,000÷6)......................................................................$1,000Goodwill......................................................................................-0-Annual amortization.............................................................$1,000Acquisition price.............................................................................$60,000Basic equity accrual2020($30,000 × 40%)...................................12,000Dividends—2020($10,000 × 40%)..................................................(4,000)Amortization—2020(above)...........................................................(1,000)Investment in Holister, 12/31/20.....................................................$67,000Basic equity accrual—2021($50,000 × 40%)................................20,000Dividends—2021($15,000 x 40%)..................................................(6,000)Amortization—2021(above)...........................................................(1,000)Investment in Holister, 12/31/21.....................................................$80,000b.Dividend income ($15,000 × 40%)..................................................$6,000Increase in fair value ($75,000–$68,000)......................................7,000Investment income under fair value accounting—2021...............$13,00017.(10minutes) (Equity entries for one year, includes intra-entity transfers but nogross profit deferral)Purchase price of Burks stock.......................................................$210,000Book value of Burks stock ($360,000 × 40%)................................(144,000)Unidentified asset (goodwill)..........................................................$ 66,000Life....................................................................................................indefiniteAnnual amortization........................................................................$-0-No intra-entity profit exists at year’s end because all of the transferredmerchandise was used during the period.

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Chapter 01-The Equity Method of Accounting for Investments–Hoyle, Schaefer, Doupnik,Advanced Accounting,14e1-1317.(continued)Investment in Burks, Inc...........................................210,000Cash (or a Liability)..............................................210,000Torecord acquisition of a 40 percent interest in Burks.Investment in Burks, Inc...........................................32,000Equity in Investee Income...................................32,000To recognize 40 percent income earned during period by Burks, an equitymethod investment.Dividend Receivable..................................................10,000Investment in Burks, Inc......................................10,000To record investee dividend declaration.Cash............................................................................10,000Dividend Receivable............................................10,000To record collection of dividend from investee.18.(25 Minutes)(Equity entries for one year, includesprospective application ofequity method)JANUARY 1,2021(Date significant influence is attained)Purchase price of 30% of Seida’s stock......................................$600,000Fair value of original 10% investment in Seida...........................200,000Total fair value of 40% investment in Seida................................800,000Book value ofSeidastock ($1,850,000 ×40%)............................(740,000)Fair valuein excess of book value...............................................$60,000Excess cost assigned to undervalued land($120,000 ×40%).......................................................................(48,000)Trademark......................................................................................$12,000Remaining life of Trademark........................................................8yearsAnnual Amortization.....................................................................$1,500Journal Entries:To recordacquisition of Seida stock.Investment in Seida...................................................600,000Cash......................................................................600,000Investment in Seida...................................................120,000Equity in Investee Income...................................120,000Torecord income for the year: 40% of the $300,000 reported income.

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Chapter 01-The Equity Method of Accounting for Investments–Hoyle, Schaefer, Doupnik,Fundamentals7e1-14Equity in Investee Income........................................1,500Investment in Seida.............................................1,500To record2021amortization.Dividend Receivable..................................................44,000Investment in Seida.............................................44,000To record dividenddeclaration from Seida (40% of $110,000).Cash............................................................................44,000Dividend Receivable............................................44,000To record collection of dividend from investee.19. (7 minutes) (Deferral of intra-entity gross profit)Ending inventory ($200,000–$85,000)...............................................$115,000Gross profit percentage (GP $80,000÷Sales $200,000)....................×40%Grossprofiton sale to Eckerle............................................................$46,000Ownership.............................................................................................×30%Intra-entity gross profit—deferred.......................................................$13,800Entry to Defer Intra-entity Gross Profit:Equity in Investee Income............................................13,800Investment inEckerle..............................................13,80020. (10 minutes) (Reporting of equity income and transfers)a.Equity in investee income:Equity income accrual ($100,000 × 25%)..................................$25,000Less: deferral of intra-entity gross profit (below)..................(3,000)Less: patent amortization (given)............................................(10,000)Equity in investee income....................................................$12,000Deferral of intra-entity gross profit:Remaining inventory—end of year......................................$32,000Gross profit percentage (GP $30,000÷Sales $80,000)......×37½%Profit within remaininginventory........................................$12,000Ownership percentage.........................................................×25%Intra-entity gross profit deferral....................................................$3,000

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Chapter 01-The Equity Method of Accounting for Investments–Hoyle, Schaefer, Doupnik,Advanced Accounting,14e1-15b.In2021, the deferral of $3,000 can be recognized by BuyCo’s use or sale ofthis inventory. Thus, the equity accrual for2021will be increased by $3,000in that year. Recognition of this amount is simply being delayed from2020until2021, the year when the goods are sold to customers outside theaffiliated entity.c.The direction (upstream versus downstream) of the intra-entity transferdoes not affect the above answers. However,as discussed in Chapter Five,a controlling interest calls for a 100% gross profit deferral for downstreamintra-entity transfers. In the presence of only signification influence,however, equity method accounting is identical regardless of whether anintra-entity transfer is upstream or downstream.21. (25 minutes) (Equity method with a subsequentpartial investment sale)Equity method income accrual for202125 percent of $600,000 for ½ year =......................................$75,00021percent of $600,000 for ½ year =......................................63,000Total income accrual(no amortization ordeferred gross profit)........$138,000Gain on sale (below)........................................................................32,000Total income statement effect–2021................................................$170,000Gain on sale of12,000 shares ofSedgwick:Cost of initial acquisition—2019.....................................................$1,480,00025%income accrual—2019..............................................................85,00025%of dividends—2019...................................................................(30,000)25%income accrual—2020..............................................................120,00025%of dividends—2020...................................................................(35,000)25%income accrual for ½ year—2021............................................75,00025%of dividends for ½ year—2021.................................................(20,000)Book value of75,000 shares on July 1,2021...........................$1,675,000Cash proceeds from the sale:12,000 shares × $25.........................$300,000Less: book value of shares sold:$1,675,000 × (12,000÷75,000).....268,000Gain on sale.................................................................................$32,000

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