Solution manual advanced accounting 10e by fischer taylor CH10

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SPECIAL APPENDIX 2
UNDERSTANDING THE ISSUES
1. (a) Company E net income .........................
Parent’s share .......................................
Less: Equipment amortization
[$200,000 – ($500,000 × 30%)] ÷ 10 .....
Investment income ................................

$
×
$

40,000
30%
12,000
(5,000)
7,000

$

(b) Beginning balance .................................
Investment income ................................
Less dividends ($10,000 × 30%) ...........
Investment balance ...............................

$200,000
7,000
(3,000)
$204,000

(c) The investment balance is the cost of the investment plus the investor’s share of the investee’s
undistributed income, less the amortization of the excess of the price paid over the investor’s
share of book value.
2. (a) Company E income ...............................
Gain on sale of equipment.....................
Realized gain ($20,000 ÷ 5) ..................
Parent’s share .......................................
Investment income ................................

$

$
×
$

50,000
(20,000)
4,000
34,000
30%
10,200

There is no further adjustment for the profit on the equipment.
(b) Investment income = $50,000 × 30% = $15,000
Adjustment for equipment profit:
Gain on Sale of Equipment
($20,000 × 30%) ...............................
Deferred Gain ................................

6,000
6,000

Deferred Gain ($6,000/5) ....................
Realized Gain on Equipment Sale

1,200
1,200

3. (a) Investment income = $10,000 dividends × 10% = $1,000
(b) Investment income = [($100,000 × ½) × 10%] + [($100,000 × ½) × 25%] = $17,500
(c) Investment income = [($100,000 × ½) × 30%] + ($10,000 dividends × 10%) = $16,000
4. Cost of investment .......................................
20X0–20X4 income, 25% × $200,000 .........
20X5–20X9 loss, 25% × ($300,000) ............
Unrecorded loss ...........................................

$

$

20,000
50,000
(75,000)
(5,000)

20Y0 income (25% × $30,000 reported income) – unrecorded $5,000 prior loss = $2,500
Investment balance = ($5,000 unrecorded loss) – (25% × $30,000 reported income) = $2,500

SA-7

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SA2—Exercises

EXERCISES
EXERCISE SA2-1
Investment in Like ..................................................................................
Investment Income ...........................................................................
To record 20X7 investment income.

4,000

Investment in Like ..................................................................................
Dividends Receivable ............................................................................
Investment Income ...........................................................................
To record 20X8 investment income and dividends receivable
(20,000 shares × 25% × $0.25 per share).

3,500
1,250

Like Company income .....................................................................
Adjustment for inventory profit ($5,000 profit × 20%).......................
Adjusted income ..............................................................................
Ownership percentage .....................................................................
Less amortization of excess:
Equipment ($10,000 ÷ 10 years) ................................................
Investment income ...........................................................................

4,000

4,750

20X7
$20,000

×
$

$

EXERCISE SA2-2
Determination and Distribution of Excess Schedule
Price paid for investment ........................
Less book value of interest acquired:
Common stock ($10 par)................... $100,000
Paid-in capital in excess of par .........
20,000
Retained earnings ............................. 130,000
Total stockholders’ equity ............ $250,000
Interest acquired ............................... ×
30%
Excess of cost over book value (debit) ...
Building, amortized over 20 periods, $750 per year

SA-8

$90,000

75,000
$15,000

20X8
$24,000
(1,000)
$20,000
$23,000
25%
× 25%
5,000 $
5,750
(1,000)
4,000 $

(1,000)
4,750


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SA2—Exercises

Exercise SA2-2 Concluded
Minnie Company Income Distribution
Profit in ending inventory
Internally generated net
(40% × $40,000) ...................... $16,000
income .....................................

Realized profit on beginning
inventory (40% × $10,000) ......
Adjusted income ............................
Turf’s ownership interest ...............
Share of income ............................
Less building depreciation .............
Turf’s net share of income .............

Investment in Minnie ........................................................................
Investment Income .....................................................................

13,650

Gain on Sale of Machine ($5,000 × 30%) ........................................
Deferred Gain.............................................................................

1,500

Deferred Gain ($1,500 ÷ 5) ..............................................................
Realized Profit on Machine Sale ................................................

$60,000
4,000
$48,000
× 30%
$14,400
(750)
$13,650

13,650

1,500
300
300

EXERCISE SA2-3
Werl Corporation Income Distribution
Profit in ending inventory
(30% × $30,000) ......................
Gain on sale of machine ...............

$9,000
5,000

Internally generated net
income ....................................
Realize 1/5 of machine
profit ........................................
Realize profit on beginning
inventory (30% × $20,000) ......
Adjusted net income .....................
Ownership interest ........................
Interest on adjusted income ..........
Less equipment depreciation ........
Net investment income .................

Investment in Werl ...........................................................................
Investment Income .....................................................................

21,700

Cash.................................................................................................
Investment in Werl (30% × $20,000 dividends) .........................

6,000

SA-9

$90,000
1,000
6,000
$83,000
× 30%
$24,900
(3,2
$21,700

21,700

6,000


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SA2—Exercises

EXERCISE SA2-4
Determination and Distribution of Excess Schedule
10% purchase:
Price paid .................................................................

Less interest acquired:
Total stockholders’ equity...................................
Interest acquired ......................................................
Goodwill ...................................................................
15% purchase:
Price paid .................................................................
Less interest acquired:
Total stockholders’ equity...................................
Interest acquired ......................................................
Excess of book value over cost (credit balance) ......
Decrease in equipment (4-year life) .........................

$80,000
$750,000
×
10%

75,000
$ 5,000 Dr.

$110,000
$800,000
×
15%

120,000
$(10,000)
10,000 Cr.
$
0

(1) Investment in Novic ..................................................................
Retained Earnings ..............................................................
To record equity “catch-up” entry.

5,000
5,000

Calculations:
Increase in retained earnings, January 1, 20X6,
to January 1, 20X8 .........................................................
Ownership interest ..............................................................
Equity “catch-up” adjustment ..............................................
(2) Investment in Novic ..................................................................
Cash (50,000 shares × 25% × $0.20 per share) ......................
Investment Income .............................................................
To record net share of subsidiary income and
dividends received.

$50,000
× 10%
$
5,000
10,000
2,500
12,500

Income Distribution for Investment in Novic Company
Reported income ...........................
Ownership interest .........................

Share of income.............................
Decrease in equipment
depreciation expense
($10,000 ÷ 4)............................
Investment income, net of
amortizations ...........................

SA-10

$40,000
× 25%
$10,000

2,500
$12,500


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SA2—Exercises

EXERCISE SA2-5
Determination and Distribution of Excess Schedule
Price paid .................................................................
Equity interest purchased, 30% × $400,000 ............
Excess of cost over book value (debit balance) .......
Allocate to machinery, 30% × $50,000, 5-year life,
$3,000 per year ..................................................
Goodwill

$200,000
120,000
$ 80,000
15,000 Dr.
$ 65,000 Dr.

Calculation of investment account balance, January 2, 20X9:
Original cost .............................................................
Share of income:
20X7 ...................................................................
20X8 ...................................................................
Dividends paid:
20X7 ...................................................................
20X8 ...................................................................

$200,000
$50,000
45,000
$95,000 × 30%
$10,000
10,000
$20,000 × 30%

Amortization of excess:
Machinery ($3,000 × 2 years) ............................
Balance ....................................................................
Entry:
Cash.........................................................................
Investment in Aluma-Boat Company..................
Realized Gain on Sale of Investment .................

SA-11

28,500

(6,000)
(6,000)
$216,500

230,000
216,500
13,500


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SA2—Problems

PROBLEMS
PROBLEM SA-1
Determination and Distribution of Excess Schedule
Price paid for investment in Fink ..............................
Less interest acquired:
Total stockholders’ equity...................................
Interest acquired ................................................
Excess of cost over book value (debit balance) .
Attributable to long-lived assets:
Less undervaluation of building
($40,000 × 0.25, 20 years, $500 per year) ...
Goodwill ...................................................................

$320,000
$1,000,000
×
25%

250,000
$ 70,000

10,000
$ 60,000

20X6 Income Distribution for Investment in Fink Company
Reported net income .....................

$48,000

Adjusted net income ......................
Ownership interest ........................
Share of income ............................
Less excess amortization ..............
Net share of income ......................

$48,000
× 25%
$12,000
500
$11,500

20X6 Entries:

Cash ($10,000 × 25%) ...............................................................
Investment in Fink ($11,500 – $2,500 dividends) ......................
Investment Income ...............................................................
Sales ($8,000 × 25%) ................................................................
Realized Gross Profit (1/10 × $2,000 × ½ year) ...................
Deferred Gross Profit ...........................................................

SA-12

2,500
9,000
11,500
2,000
100
1,900


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SA2—Problems

Problem SA-1 Concluded
20X7 Income Distribution for Investment in Fink Company
Profit in ending inventory
($2,000 × 25%) ........................

Reported net income .....................

$50,000

Adjusted net income ......................
Ownership interest ........................
Share of income ............................
Less excess amortization ..............
Net share of income ......................

$49,500
× 25%
$12,375
500
$11,875

$500

20X7 Entries:
Cash ($10,000 × 25%) ...............................................................
Investment in Fink ($11,875 – $2,500 dividends) ......................
Investment Income ...............................................................
Deferred Gross Profit .................................................................
Realized Gross Profit ...........................................................

2,500
9,375
11,875
200
200

20X8 Income Distribution for Investment in Fink Company
Profit in ending inventory
($3,000 × 25%) ........................

$750

Reported net income ..................... $65,000
Beginning inventory profit
($2,000 × 25%) ........................
500
Adjusted net income ......................
Ownership interest ........................
Share of income ............................
Less excess amortization ..............
Share of income ............................

20X8 Entries:
Cash ($10,000 × 25%) ...............................................................
Investment in Fink ($15,687 – $2,500 dividends) ......................
Investment Income ...............................................................
Deferred Gross Profit .................................................................
Realized Gross Profit ...........................................................

SA-13

$64,750
× 25%
$16,187
500
$15,687

2,500
13,187

15,687
200
200


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SA2—Problems

PROBLEM SA2-2
December 31, 20X6:
Investment in Cramer Company ................................................
Cash (for dividends) ...................................................................
Investment Income ...............................................................
Reported income of Cramer
($60,000 – $18,000 tax) ...............................
Ownership interest .............................................

8,500
1,250
9,750

$42,000
× 25%

$10,500

Less amortizations of excess cost:
Equipment ($7,500 ÷ 10 years) ............................................
Adjusted income.........................................................................

750
9,750

Provision for Income Tax (30% × 20%* × $10,500) .........................
Income Tax Payable (30% × 20%* × $1,250) ............................
Deferred Tax Liability .................................................................
To record provision for tax; amortizations of excess are
not deductible.
*100% – 80% dividend exclusion.
December 31, 20X7:
Investment in Cramer Company ................................................
Cash (for dividends) ...................................................................
Investment Income (See IDS, which follows) .......................

$

630
75
555

9,963
2,500
12,463

Provision for Income Tax (30% × 20%* × $13,213) .........................
Income Tax Payable (30% × 20%* × $2,500) ............................
Deferred Tax Liability .................................................................
*100% – 80% dividend exclusion.

793

Sales ($4,000 × 40% × 25% interest) income before amortization ..
Deferred Gross Profit on Sales to Investee................................

400

Deferred Tax Liability .......................................................................
Provision for Income Tax ...........................................................
Tax on deferred gross profit on ending inventory
(30% × $400).

120

SA-14

150
643

400

120


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SA2—Problems

Problem SA2-2, Continued
Cramer Company Income Distribution (20X7)

Gain on machine sale ...................

$5,000 Reported net income .....................
Realized gain on machine* ...........

$80,000
500

Adjusted income ...........................
Income tax (30%) ..........................
Net income ....................................
Ownership interest ........................
Interest in income ..........................
Less amortization of excess
cost (as above)........................

$75,500
22,650
$52,850
× 25%
$13,213

Net investment income..................

$12,463

750

*$5,000 × ½ year × 1/5
December 31, 20X8:

Investment in Cramer Company ................................................
Cash (for dividends) ...................................................................
Investment Income (See IDS, which follows) .......................
Provision for Income Tax (30% × 20%* × $17,675) income before
amortization ..................................................................................
Income Tax Payable (30% × 20%* × $2,500) ............................
Deferred Tax Liability .................................................................
*100% – 80% dividend exclusion.

14,425
2,500
16,925

1,061
150
911

Sales (net increase $1,000* × 40% × 25% interest) ........................
100
Deferred Gross Profit on Sales to Investee................................
*$5,000 ending inventory profit – $4,000 beginning inventory profit = net increase
Provision for Income Tax .................................................................
Deferred Tax Liability .................................................................
Tax on increase in deferred gross profit on ending
inventory (30% × $100).

SA-15

100

30
30


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SA2—Problems

Problem SA2-2, Concluded
Cramer Company Income Distribution (20X8)
Reported net income .....................
Realized gain on machine .............

$100,000
1,000

Adjusted income ............................
Income tax (30%) ..........................
Net income ....................................
Ownership interest.........................
Interest in income ..........................
Less amortization of excess
cost (as above) ........................

$101,000
30,300
$ 70,700
×
25%
$ 17,675

Net investment income ..................

$ 16,925

SA-16

750