Advanced Financial Accounting
12th Edition
ISBN: 9781259916977
Author: Christensen, Theodore E., COTTRELL, David M., Budd, Cassy
Publisher: Mcgraw-hill Education,
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Chapter 7, Problem 7.23AE
a
To determine
Modified equity method and cost method: When investments were accounted for using the modified equity method, the proportionate share of subsidiary income and dividends are recorded in the same manner as under the fully adjusted equity method. However, the share of unrealized profits from intercompany transactions is not different, instead, these unrealized gains or losses are removed from the parent’s
The
a
Expert Solution
Explanation of Solution
- Entries recorded by P related to his investment in SS in 20X4
- Elimination entries
| Particulars | Debit $ | Credit $ |
| Investment in SS Company | 45,500 | |
| Income from SS Company | 45,500 | |
| (Income from Subsidiary recognized) | ||
| Cash | 13,000 | |
| Investment in SS Company | 13,000 | |
| (Received cash on account of dividends from subsidiary) |
| Particulars | Debit $ | Credit $ |
| Common stock | 300,000 | |
| Retained earnings | 145,000 | |
| Income from SS company | 45,500 | |
| Non-controlling interest in net income of SS Company | 27,300 | |
| Dividends declared | 20,000 | |
| Investment in SS company | 321,750 | |
| Non-controlling interest in net assets of SS company | 176,050 | |
| (Elimination of beginning investment in SS) | ||
| Investment in SS company | 11,000 | |
| Land | 11,000 | |
| (Elimination of gain on purchase of land) | ||
| Investment in SS Company | 26,000 | |
| Non-controlling interest in net assets of SS | 14,000 | |
| Equipment | 40,000 | |
| (Elimination of gain on equipment) | ||
| 8,000 | ||
| Depreciation expenses | 8,000 | |
| (Recognition of depreciation expense) |
- P’s share of income in SS for 20X4 is recognized
- Dividends from SS recognized
- Elimination of beginning investment Retained earnings
- Gain on purchase of land eliminated $11,000 = ($41,000 − $30,000)
- Gain on sale of equipment eliminated recognized and extra depreciation recorded.
Elimination entries
Income from SS Company
Non-controlling interest of Net income from SS
Investment in SS Company (P’s share of book value)
| Common stock | $300,000 |
| Retained earnings January 1 20X3 | 145,000 |
| Book value at 20X3 | $445,000 |
| Add net income 20X4 | 70,000 |
| Less: dividends 20X4 | (20,000) |
| Book value at 20X4 | $495,000 |
P share of book value
Non-controlling interest in Net assets of SS Company
b
To determine
Modified equity method and cost method: When investments were accounted for using the modified equity method, the proportionate share of subsidiary income and dividends are recorded in the same manner as under the fully adjusted equity method. However, the share of unrealized profits from intercompany transactions is not different, instead, these unrealized gains or losses are removed from the parent’s retained earnings in the period after the intercompany sale, and in that case, the parent’s net income is usually not equal to the amount of consolidated net income allocated to the controlling interest.
The journal entries recorded in P’s books related to investment and all consolidation entries needed, assuming P uses the cost method.
b
Expert Solution
Explanation of Solution
- Entries recorded by P related to his investment in SS in 20X4
| Particulars | Debit $ | Credit $ |
| Cash | 13,000 | |
| Dividend income | 13,000 | |
| (Received cash on account of dividends from subsidiary) |
3. Elimination entries
| Particulars | Debit $ | Credit $ |
| Common stock | 300,000 | |
| Retained earnings | 100,000 | |
| Investment in SS company | 260,000 | |
| Non-controlling interest in net assets of SS company | 140,000 | |
| (Elimination of beginning investment in SS) | ||
| Dividend income | 13,000 | |
| Non-controlling interest in net income of SS | 7,000 | |
| Dividend declared | 20,000 | |
| (Declared dividends eliminated) | ||
| Non-controlling interest in net income of SS | 20,300 | |
| Retained earnings | 15,750 | |
| Non-controlling interest in net assets of SS Company | 36,050 | |
| (Prior undistributed income assigned to non-controlling interest) | ||
| Investment in SS company | 11,000 | |
| Land | 11,000 | |
| (Elimination of gain on purchase of land) | ||
| Investment in SS Company | 26,000 | |
| Non-controlling interest in net assets of SS | 14,000 | |
| Equipment | 40,000 | |
| (Elimination of gain on equipment) | ||
| Accumulated | 8,000 | |
| Depreciation expenses | 8,000 | |
| (Recognition of depreciation expense) |
- Dividends from SS recognized
- Beginning investment eliminated by reversal.
- Dividends declared in 20X4 eliminated by reversal.
- Prior year undistributed earning eliminated.
- Gain on purchase of land eliminated $11,000 = ($41,000 − $30,000).
- Gain on sale of equipment eliminated recognized and extra depreciation recorded.
Elimination entries
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Peanut Company acquired 90 percent of Snoopy Company’s outstanding common stock for $270,000 on January 1, 20X8, when the book value of Snoopy’s net assets was equal to $300,000. Peanut uses the equity method to account for investments. Trial balance data for Peanut and Snoopy as of December 31, 20X8, follow:
Peanut Company
Snoopy Company
Debit
Credit
Debit
Credit
Cash
$ 158,000
$ 80,000
Accounts Receivable
165,000
65,000
Inventory
200,000
75,000
Investment in Snoopy Company
319,500
0
Land
200,000
100,000
Buildings and Equipment
700,000
200,000
Cost of Goods Sold
200,000
125,000
Depreciation Expense
50,000
10,000
Selling & Administrative Expense
225,000
40,000
Dividends Declared
100,000
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Accumulated Depreciation
$ 450,000
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75,000
60,000
Bonds Payable
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85,000
Common Stock
500,000
200,000
Retained Earnings
225,000
100,000
Sales
800,000
250,000…
Peace Company issued common shares with a par value of $50,000 and a market value of $165,000 in exchange for 30 percent ownership of Symbol Corporation on January 1, 20X2. Symbol reported the following balances on that date:
SYMBOL CORPORATION
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Book Value
Fair Value
Assets
Cash
$ 40,000
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Accounts Receivable
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Inventory (FIFO basis)
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Liabilities & Equities
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$ 30,000
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Bonds Payable
100,000
100,000
Common Stock
150,000
Additional Paid-In Capital
20,000
Retained Earnings
250,000
Total Liabilities & Equities
$ 550,000
The estimated economic life of the patents held by Symbol is 10 years. The buildings and equipment are expected to last 12 more years on average. Symbol paid dividends…
Chapter 7 Solutions
Advanced Financial Accounting
Ch. 7 - Prob. 7.1QCh. 7 - Prob. 7.2QCh. 7 - Prob. 7.3QCh. 7 - Prob. 7.4QCh. 7 - Prob. 7.5QCh. 7 - Prob. 7.6QCh. 7 - Prob. 7.7QCh. 7 - Prob. 7.8QCh. 7 - Prob. 7.9QCh. 7 - Prob. 7.10Q
Ch. 7 - Prob. 7.11QCh. 7 - Prob. 7.12QCh. 7 - Prob. 7.13QCh. 7 - Prob. 7.14QCh. 7 - Prob. 7.15QCh. 7 - Prob. 7.16QCh. 7 - Prob. 7.17QCh. 7 - Prob. 7.18AQCh. 7 - Prob. 7.1CCh. 7 - Prob. 7.2CCh. 7 - Prob. 7.3CCh. 7 - Prob. 7.4CCh. 7 - Prob. 7.5CCh. 7 - Prob. 7.1.1ECh. 7 - Prob. 7.1.2ECh. 7 - Prob. 7.1.3ECh. 7 - Prob. 7.1.4ECh. 7 - Prob. 7.1.5ECh. 7 - Prob. 7.2.1ECh. 7 - Prob. 7.2.2ECh. 7 - Prob. 7.2.3ECh. 7 - Prob. 7.2.4ECh. 7 - Prob. 7.2.5ECh. 7 - Prob. 7.2.6ECh. 7 - Prob. 7.3ECh. 7 - Prob. 7.4ECh. 7 - Prob. 7.5ECh. 7 - Prob. 7.6ECh. 7 - Prob. 7.7ECh. 7 - Transfer of Depreciable Asset at Year-End Pitcher...Ch. 7 - Prob. 7.9ECh. 7 - Sale of Equipment to Subsidiary in Current Period...Ch. 7 - Prob. 7.11ECh. 7 - Prob. 7.12ECh. 7 - Prob. 7.13ECh. 7 - Prob. 7.14ECh. 7 - Prob. 7.15ECh. 7 - Prob. 7.16ECh. 7 - Prob. 7.17ECh. 7 - Prob. 7.18ECh. 7 - Prob. 7.19ECh. 7 - Prob. 7.20ECh. 7 - Prob. 7.21ECh. 7 - Prob. 7.22ECh. 7 - Prob. 7.23AECh. 7 - Prob. 7.24PCh. 7 - Prob. 7.25PCh. 7 - Prob. 7.26PCh. 7 - Prob. 7.27PCh. 7 - Prob. 7.28.1PCh. 7 - Prob. 7.28.2PCh. 7 - Prob. 7.28.3PCh. 7 - Prob. 7.28.4PCh. 7 - Prob. 7.29PCh. 7 - Prob. 7.30PCh. 7 - Prob. 7.31PCh. 7 - Prob. 7.32PCh. 7 - Prob. 7.33PCh. 7 - Prob. 7.34PCh. 7 - Prob. 7.35PCh. 7 - Prob. 7.37PCh. 7 - Prob. 7.38PCh. 7 - Prob. 7.41AP
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