Solution manual introduction to management accounting 14e by horngren ch17

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CHAPTER 17
COVERAGE OF LEARNING OBJECTIVES

LEARNING
OBJECTIVE
LO1: Contrast
accounting for
investments using the
equity method and the
market-value method.
LO2: Explain the basic
ideas and methods used
to prepare consolidated
financial statements.
LO3: Describe how
goodwill arises and how
to account for it.
LO4: Explain and use a
variety of popular
financial ratios.
LO5: Identify the major
implications that
efficient stock markets
have for accounting.
LO6: Explain and
illustrate four methods
of measuring income:
historical cost/nominal
dollars, current

cost/nominal dollars,
historical cost/constant
dollars, and current
cost/constant dollars
(Appendix 17).

EXCEL,
FUNDAMENTAL ADDITIONAL COLLAB.,
ASSIGNMENT
ASSIGNMENT &
MATERIAL
MATERIAL
INTERNET
EXERCISES
A1, B1, B3
26, 29, 40, 41
55
49

A2, A3, B2

25, 30, 32, 34
35, 39, 40, 42
43, 44, 49. 52

A4

31, 32, 33, 45
46

A5, B4, B5

27, 36, 47, 48

28, 37, 38, 50,
51

971

55

53, 54,55


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CHAPTER 17
Understanding and Analyzing Consolidated Financial Statements
17-A1 (15-20 min.) Answers are in millions of dollars.
1.

Equity Method
Assets = Liab. + Stk. Eq.
Invest- Liabil- Stock.
Cash ments
ities
Equity
a. Acquisition
-68
+68 =

b. Net income of Akron
+12 =
+12
c. Dividends from Akron + 7
- 7 =
Effects for year
-61
+73 =
+12
The journal entries that would accompany this table are:
a. Investment in Akron
Cash

68

b. Investment in Akron
Investment revenue*

12

c. Cash
Investment in Akron

7

68

12

7

* More frequently called Equity in Earnings of Affiliates

972


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Under the equity method, Reo Motors recognizes income as
Akron earns it rather than when Reo receives dividends. Cash
dividends do not affect net income; they increase cash and decrease
the investment balance. In a sense, the dividend is a partial
liquidation of the investor's "claim" against the investee. The
receipt of a dividend is similar to the collection of an account
receivable. The revenue from a sale of merchandise on account is
recognized when the receivable is created; to include the collection
also as revenue would be double-counting. Similarly, it would be
double-counting to include the $7 million of dividends as income
after the $12 million of income is already recognized as it is earned.
2.

Market-Value Method
Assets = Liab. + Stk. Eq.
Invest- Liabil- Stock.
Cash ments
ities Equity
a. Acquisition
-68
+68 =
b. Dividends from Akron + 7

=
+7 (Revenue)
c. Increase in market value
+8 =
+ 8 (Other comprehensive
income)
Effects for year
-61
+76 =
+15
The journal entries that would accompany this table are:
a. Investment in Akron
Cash

68
68

b. Cash
Dividend revenue**

7
7

c. Investment in Akron
8
Unrealized gain on available-for-sale securities
** Frequently called "dividend income"
973

8

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17-A2 (25-35 min.) A common mistake is to think that the $50
million is additional money flowing into the Calgary Company
rather than into the pockets of the Calgary shareholders as
individuals. Amounts are in millions.
1.

Assets
=Liab.+ Stockholders' Equity
Investment
Cash
Accounts
in
and Other
Payable, Stockholders'
Calgary + Assets =
etc.
+ Equity

Alberta’s accounts,
Jan. 1:
Before acquisition
Acquisition of Calgary +50
Calgary’s accounts, Jan. 1
Intercompany eliminations -50
Consolidated, Jan. 1
0

2.
Sales
Expenses
Operating income
Pro-rata share (100%) of
unconsolidated subsidiary
net income
Net income

350
- 50
70
+

370

=
=
=
=
=

Alberta Calgary
$330
$100
245
90
$ 85
$ 10

10
$ 95

974

$ 10

110

+

240

20

+

130

+

50
- 50
240

Consolidated
$430
335
$ 95

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Alberta’s parent-company-only income statement would show
its own sales and expenses plus its pro-rata share of Calgary's
net income, as the equity method requires. Reflect on the
changes in Alberta’s balance sheet equation (in millions):
Assets
= Liab.+Stockholders' Equity
InvestCash
ment
and
Accounts
in
Other
Payable, Stockholders'
Calgary + Assets =
etc.
+ Equity
Alberta’s accounts:
Beginning of the year
50 +
300
=
110 +
240
Operating income
+ 85
=
+ 85

Share of Calgary's
income
+10
=
+ 10
End of year
60 +
385
=
110 +
335
Calgary's accounts:
Beginning of the year
70
=
20 +
50
Net income
+ 10
=
+ 10
End of the year
80
=
20 +
60
Intercompany eliminations -60
____
=
- 60

Consolidated, end of year
0 +
465
=
130 +
335
3.

Calgary’s balance sheet accounts would have increased by $10
million.
At this point, review to see that consolidated statements are the
summation of the individual accounts of two or more separate
legal entities. These statements are prepared periodically via
worksheets. A consolidated entity does not have a separate
continuous set of books like its legal entities. Moreover, a
consolidated income statement is merely the summation of the
revenue and expenses of the separate legal entities being
consolidated after the elimination of double-counting.

975


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4.

Consolidated accounts would be unaffected. Calgary’s cash
and stockholders' equity would decline by $7 million.
Alberta’s investment in Calgary would decline by $7 million,
but Alberta’s cash would rise by $7 million.

17-A3 (30-45 min.) A common error is to think that the $40 million
is additional money flowing into the Calgary Company rather than
into the pockets of the Calgary shareholders. Amounts are in
millions.
1.

Assets
InvestCash
ment
and
in
Other
Calgary + Assets

= Liab.+Stockholders' Equity
Accounts
Payable, Minority Stockholders'
= etc. +Interest +
Equity

Alberta’s accounts,
Jan. 1:
Before acquisition
350 =
Acquisition of Calgary
+40
- 40 =
Calgary’s accounts,
Jan. 1

70 =
Intercompany eliminations -40
=
Consolidated, Jan. 1
0 + 380 =
2.

110

+

240

20

+

50
- 50
240

+10
130 + 10

+

The same basic procedures are followed by Alberta and
Calgary regardless of whether Calgary is 100% owned or
80% owned. However, the presence of a minority interest
changes the consolidated statements slightly. The income

statements would include:

976


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Alberta Calgary
$330
$100
245
90
$ 85
$ 10

Sales
Expenses
Operating income
Pro-rata share (80%)
of unconsolidated
subsidiary net income
8
Net income
$ 93
Minority interest (20%) in
consolidated subsidiaries'
net income
Net income to consolidated entity
3.

Assets
InvestCash
ment
and
in
Other
Calgary + Assets

Alberta’s accounts:
Beginning of year
Operating income
Share of Calgary's
income
End of year
Calgary’s accounts:
Beginning of year
Net income
End of year
Intercompany eliminations
Consolidated, end of year

$ 10

2
$ 93
= Liab.+Stockholders' Equity
Accounts
Payable, Minority Stockholders'
= etc. +Interest +
Equity

40

+ 310a =
+ 85 =

+8
48

=
+ 395 =

70
+ 10
80
-48
____
0 + 475

a

=
=
=
=
=

350 beginning of year - 40 for acquisition = 310
10 beginning of year + .20(10) = 10 + 2 = 12

b

977

Consolidated
$430
335
$ 95

110

+

110

+

20

+

20

+
b

+ 12
130 + 12

+

240
+ 85
+ 8
333
50
+ 10
60
- 60
333


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4.

Consolidated accounts would be affected because the minority
interest's claim would be partially liquidated in the amount of
20% of $7 million, or $1.4 million. Calgary’s cash would
decline by $7 million, Alberta’s investment in Calgary would
decline by .80 x $7 million = $5.6 million, but Alberta’s cash
would rise by $5.6 million. See following balance sheet
equations:
Assets
InvestCash
ment
and
in
Other
Calgary +Assets

End of year balances:
Alberta’s accounts
48.0 +
Effect of Calgary
dividend
- 5.6
Balance
42.4 +
Calgary’s accounts
(from 3):
Effect of Calgary dividend
Balance
Consolidated accounts
42.4
Intercompany eliminations-42.4
Balance
0 +

= Liab.+Stockholders' Equity
Accounts
Payable, Minority Stockholders'
= etc. +Interest +
Equity

395.0 =

110

+

333

+ 5.6 =
400.6 =

110

+

333

20

+

20
130

+
+

60
- 7
53
386
- 53
333

80.0 =

- 7.0 =
73.0 =
473.6 =
=
473.6 =

978

+10.6
130 + 10.6


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17-A4
1.

(25-35 min.)
Assets

=Liab.+Stockholders' Equity

InvestCash
ment
and
Accounts
in Good- Other
Payable, Stockholders'
Calgary + will +Assets =
etc.

+ Equity
Alberta’s accounts,
Jan. 1:
Before acquisition
350
Acquisition of 100%
of Calgary
+80
- 80
Calgary’s accounts,
Jan. 1
70
Intercompany eliminations - 80 +30 ____
Consolidated, Jan. 1
0 + 30*+ 340

=

110

+

240

20

+

50
- 50

240

=
=
=
=

130

* The $30 million "goodwill" would appear in the consolidated balance sheet
as a separate intangible asset account. It often is shown as the final item in a
listing of assets. It remains on the books until its value is impaired.

2.

a.

If the book values of the Calgary’s individual assets are
not equal to their fair values, the usual procedures are:
(1) Calgary continues as a going concern and keeps its
accounts on the same basis as before.
(2) Alberta records its investment at its acquisition cost
(the agreed purchase price).
(3) For consolidated reporting purposes, the excess of the
acquisition cost over the book values of Calgary is
identified with the individual assets, item by item. (In
effect, they are revalued at the current market prices
prevailing when Alberta acquired Calgary.) Any
remaining excess that cannot be identified is labeled
as purchased goodwill.

979


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The balance sheet accounts immediately after acquisition
would be the same as in Requirement 1, except that goodwill
would be $18 million instead of $30 million (that is, $27 million
- $15 million = $12 million less), and other assets would be
higher by $12 million. The $12 million would appear in the
consolidated balance sheet as an integral part of the "other
assets." That is, Calgary’s equipment would be shown at $12
million higher in the consolidated balance sheet than the
carrying amount on Calgary’s books. Similarly, the
depreciation expense on the consolidated income statement
would be higher. For instance, if the equipment had four
years of useful life remaining, the straight-line depreciation
would be $12 ÷ 4 = $3 million higher per year. As in the
preceding tabulation, the $18 million "goodwill" would
appear in the consolidated balance sheet as a separate
intangible asset account.
b.

Consolidated income would be lower by the amount of
depreciation on the additional individual assets:
Extra annual depreciation, $12,000,000 ÷ 4 years = $3,000,000
The assigning of a "basket purchase price" to the various
assets can have a dramatic effect on income. Every dollar
assigned to individual assets rather than goodwill will become

an expense sometime, but dollars assigned to goodwill might
remain indefinitely on the books unless the value of the
goodwill becomes impaired.

980


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17-A5

(10-15 min.)

1.

(a) $500 million x 12% = $60 million
(b) $60 million ÷ 6% = $1,000 million
(c) $1,000 million ÷ $500 million = 2.0 times; or
12% ÷ 6% = 2.0 times

2.

(a) ¥250 million ÷ 5 = ¥50 million
(b) ¥20 million ÷ ¥250 million = 8%
(c) ¥20 million ÷ ¥50 million = 40%; or 8% x 5 = 40%

17-B1 (15 min.) The year-end balance in Investment in Khosla is $64
million under the equity method, and $39 million under the marketvalue method.
1.

=Liab.+Stockholders' Equity
Stockholders'
Cash +Investments = Liabilities + Equity

Equity Method:
1. Acquisition
-53
2. Net income of Khosla
3. Dividends from
Khosla
+9
Effects for year
-44
Market-Value Method:
1. Acquisition
-53
2. Dividends from Khosla + 9
3. Adjustment to market
value
Effects for year
-44

Assets

+53
+20

=
=

+20

-9
+64

=
=

+20

+53

=
=

+9 (revenue)

=
=

-14 (loss)
-5

- 14
+39

981


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Journal entries (not required):
Equity Method
1. Investment in Khosla
Cash

53
53

2. Investment in Khosla
Investment revenue*

20

3. Cash
Investment in Khosla

9

20

9

* More frequently called Equity in Earnings of Affiliates
Market-Value Method
1. Investment in Khosla
Cash

53
53

2. Cash
Dividend revenue**
3. Loss on trading securities
Investment in Khosla

9
9
14
14

** Frequently called "dividend income"

Microsoft would be required to use the equity method because
its ownership of 33% is between 20% and 50%.

982


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17-B2 (25-40 min.) Amounts are in millions of dollars.
A common mistake is to think that the $400 million is
additional money flowing into Bayliner rather than into the pockets
of Bayliner shareholders as individuals.
1.

Assets
InvestCash
ment

and
in
Other
Bayliner + Assets

Brunswick's accounts,
Jan. 1:
Before acquisition
Acquisition of Bayliner +400
Bayliner's accounts,
Jan. 1:
Intercompany eliminations -400
Consolidated, Jan. 1
0
2.
Sales
Expenses
Operating income
Pro-rata share (100%) of
unconsolidated subsidiary
net income
Income of parent company

=Liab.+Stockholders' Equity
Accounts
Payable, Stockholders'
=
etc.
+ Equity

1,400 =
- 400
=
600

=
=
1,600 =

+

Brunswick
$1,800
1,400
$ 400

100
$ 500

983

800

+

600

200

+

400
-400
600

Bayliner
$600
500
$100

1,000+

Consolidated
$2,400
1,900
$ 500


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3.

Brunswick's parent-company-only income statement would
show its own sales and expenses plus its pro-rata share of
Bayliner's net income (as the equity method requires). Reflect
on the changes in Brunswick's balance sheet equation (in
millions of dollars):
Assets
InvestCash
ment

and
in
Other
Bayliner + Assets

Brunswick's accounts:
Beginning of year
400 +
Operating income
Share of Bayliner's
income
+100
End of year
500 +
Bayliner's accounts:
Beginning of year
Net income
End of year
Intercompany eliminations -500
Consolidated, end of year
0 +
4.

=Liab.+Stockholders' Equity
Accounts
Payable, Stockholders'
=
etc.
+ Equity

1,000 =
+400
=
_ ___
=
1,400 =
600
=
+100
=
700
=
_ ___
=
2,100 =

800

+

600
+400

800

+100
+
1,100

200

+

400
+100
200 + 500
_____
-500
1,000+
1,100

The important point to see is that the consolidated accounts
would be unaffected. Bayliner's cash and stockholders' equity
would decline by $15 million. Brunswick's investment in
Bayliner would decline by $15 million, but Brunswick's cash
would rise by $15 million.

984


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17-B3 (15-20 min.)
1.

Under the equity method Ford will recognize 34% of Mazda's
net income: 34% x $566,000,000 = $192,440,000.

2.

The balance is increased by Ford's share of Mazda's net
income ($192,440,000 from requirement 1) and decreased by
the cash dividends received from Mazda (34% x $32,000,000 =
$10,880,000):
$768,000,000 + $192,440,000 - $10,880,000 = $949,560,000.
Using a T account might help:

3.

Beginning bal.
Equity in Mazda’s
net income

Investment in Mazda
768,000,000 Dividends received
from Mazda
192,440,000

Ending balance

949,560,000

10,880,000

(a) Of course, the market-value method is not an acceptable
accounting method under these circumstances. If it were,
the dividends received from Mazda would be recognized
as income by Ford:
34% x $32,000,000 = $10,880,000
(b) The account balance would be adjusted to market value,

$2.5 billion.
(c) The $400 million increase would be added to a
comprehensive income account in stockholders’ equity.

985


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4.

Ford is obliged to follow the generally accepted accounting
principles for investments:
(a) Investments that represent more than a 50% ownership
interest must be consolidated. A subsidiary is a
corporation controlled by another corporation. The usual
condition for control is ownership of a majority (more
than 50%) of the outstanding voting stock. In parentcompany-only statements, the equity method is used.
(b) The equity method is generally used for a 20% through
50% interest because such a level of ownership creates
the presumption that the owner has the ability to exert
significant influence. However, consolidated statements
are not reported.
(c)

All other investments in marketable equity securities
must be accounted for using the market-value method.

17-B4 (10-20 min.) Amounts are in millions.
1. a. Operating return on sales = operating income ÷ sales

Operating income = sales x operating return on sales
Operating income = €34,191 x 13.567% = €4,639
b. Oper. return on ave. total assets = oper. income ÷ ave. total assets
Ave. total assets = operating income ÷ oper. return on ave. total assets
Ave. total assets = €4,639 ÷ 20.632% = €22,484
c. Return on shareholders’ equity = net income ÷ ave. shareholders’ equity
Ave. shareholders’ equity = net income ÷ return on shareholders’ equity
Ave. shareholders’ equity = €3,616 ÷ 27.408% = €13,193

986


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2. Shareholders are most concerned with return on shareholders’
equity. It shows the amount of net income generated by the
shareholders’ claims. Return on sales can vary greatly by industry,
and it does not necessarily show how profitable a company is to its
investors.
17-B5 (20 min.)
1.
2.
3.
4.
5.
6.
7.
8.
9.

947  492 = 1.92
795  995 = 79.9%
1,852 2,785 = 66.5%
334  2,785 = 12.0%
334  [(1/2) x (995 + 669)] = 40.1%
(334 - 0)  87.161 = $3.83
64.64  3.83 = 16.9
0.60  64.64 = 0.9%
0.60  3.83 = 15.7%

17-1 Trading securities are investments “held for current resale,”
typically investments that management intends to sell shortly.
Available-for-sale securities are all other investments in marketable
securities – those that management does not intend to sell in the near
future.
17-2 No. Other comprehensive income is a separate account in
stockholders’ equity. Items that end up in other comprehensive
income do not appear in the income statement – they are carried
directly to stockholders’ equity.
17-3 Under the equity method, investments are carried in the
balance sheet at original cost plus the investor's share of
accumulated retained income since acquisition (that is, original cost
plus accumulated net income less dividends received).
987


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17-4 The equity method recognizes income as it is earned by the
investee and accounts for dividends as a reduction of the investment.

The market-value method recognizes income or loss from changes in
market value and income from the receipt of cash dividends from
the investee.
17-5 The equity method is usually appropriate for long-term
investments where the investor has an ownership interest of 20% or
more, because the owner would usually have the ability to exert
significant influence over the investee.
17-6 A parent-subsidiary relationship exists when one corporation
owns more than 50% of the outstanding voting shares of another
corporation.
17-7 The reasons for establishing subsidiaries include limiting the
liabilities in a risky venture, saving income taxes, conforming with
government regulations with respect to a part of the business, doing
business in a foreign country, and expanding in an orderly way.
17-8 No. After adding together the separate statements,
intercompany eliminations must be undertaken to avoid doublecounting.
17-9 If the parent owns less than 100% of the subsidiary stock, then
outsiders to the consolidated group own the remainder. The account
Minority Interest in Subsidiaries is a measure of the outside
shareholders’ interest. Note that this minority interest is in the
subsidiary, not in the parent company or the consolidated company.
17-10 Goodwill is measured by the excess of purchase price over the
fair-value, not the book value, of the net assets (assets less liabilities)
acquired.

988


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17-11 Not necessarily. Rules require that assets in a consolidated
statement reflect the fair market value at the time of the acquisition.
When leeway exists, recording goodwill avoids the depreciation
charges incurred on the individual assets.
17-12 No. Pro forma statements are hypothetical (“as if”) amounts.
Formal financial statements report historical results following
GAAP.
17-13 It is difficult to compare financial statements of firms that
differ in size. Using component percentages (or common-size
statements) allows direct comparison of percentages across
companies that differ in size.
17-14 Three types of comparisons are: 1) time-series comparisons,
2) comparisons with benchmarks, and 3) cross-sectional
comparisons.
17-15 Pre-tax operating rate of return on total assets = operating
income percentage on sales x total asset turnover.
17-16 Ratios are mechanical because their computation requires
following a set rule. They are incomplete because they give only a
hint as to their importance or relevance; they must be used in
conjunction with further information.
17-17 No. An efficient capital market is one in which market prices
"fully reflect" all information publicly available at a given time.
Therefore, searching for "underpriced" securities using public
information is fruitless.
17-18 Three sources of information include dividend
announcements, industry statistics, and national economic
indicators.
989

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17-19 The quote assumes that the market applies a fixed priceearnings ratio to income, regardless of the accounting methods used
to calculate net income. There is much evidence that this is not so.
If software development costs are already disclosed, it is highly
unlikely that requiring them to be capitalized will affect IBM's share
price.
17-20 There is much evidence showing that the stock market is not
likely to be "fooled" by manipulating reported income. Only an
accounting change that discloses new information will affect stock
prices.
17-21 Return on capital is essentially a rental charge for the use of
money. It is a return received in addition to getting back the
original investment. Return of capital is the recoupment of the
original investment itself.
17-22 The physical concept of capital maintenance is that no income
can emerge until provisions are made for replacing the physical
assets (for example, inventories and equipment) used to generate
revenue. In contrast, the financial concept of capital maintenance is
that no income can emerge until the amount of money invested in
generating revenue is recovered.
17-23 Although the choice is often expressed that way, there are
actually four major concepts. The fourth arises because constantdollar (general-price-level) accounting may be combined with either
historical-cost accounting or current-cost accounting.
17-24 The major reason for excluding holding gains from income is
that no income can emerge unless a company can replace the
physical capital devoted to operations during the current period.

990

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17-25 The amount that P pays above the book value of the net assets
of S consists of two parts. The first part is an adjustment of the
book values of S’s net assets to market values. This amount becomes
part of the depreciation of S’s assets in the consolidated statements,
although it is not charged on S’s books. The second part is the
amount that P must have paid in excess of the market value of the
net assets. This additional amount is goodwill. It was initially
recorded as an asset. Because some of the goodwill was written off,
management must have determined that the value of the goodwill
asset had declined since the purchase.
17-26 A purchase of about 20% of another company is right at the
borderline of allowing the market-value or equity methods. More
than 20% and the equity method should be used; less than 20% and
Disney should use the market-value method. Under the equity
method, changes in market value are ignored. The book value of the
investment will increase only by Disney’s share of the company’s
profits less any dividends, which is likely to result in only a very
small increase in the reported asset value. In contrast, the marketvalue method would record the asset at its market value, which
Disney expects to increase significantly. Thus, if Disney’s
expectations are met, the market-value method would result in much
larger asset value recorded in Disney’s investment account on its
balance sheet.

991


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17-27 If a company reduces its inventories (a component of current
assets), and everything else remains unchanged, its current ratio will
decrease. Because holding inventories costs resources, both for the
capital invested in them and for costs of handling and storing the
inventories, it is often good to reduce inventories. However, many
analysts think that a higher current ratio is better. This seems to
generate a conflict. In general, analysts will look at the current ratio
differently for companies that use a just-in-time inventory system.
They will expect such companies to have a lower current ratio and
thus will not downgrade their estimate of the liquidity of such
companies. An old rule of thumb was that most companies should
have a current ratio of about 2.0 to have sufficient liquidity.
However, recently that standard has been lowered, especially for
companies using just-in-time inventory methods.
17-28 To maintain financial capital, the Treasurer can pay out to
investors all of the net income as measured by the traditional
historical cost method. That leaves the company an amount equal to
the historical cost of the assets consumed during the period to use to
replace those resources. The company will have maintained the
dollar value of its investments. In contrast, if the Treasurer wants to
maintain physical capital, he can pay out only the amount of net
income measured by the current cost method. This method
maintains enough capital to replace assets consumed at their current
prices. For example, if a unit of inventory was purchased for $4 but
costs $5 to replace today, and if it is sold for $6, financial capital
maintenance would allow payment of $2 to investors; the company
would still have the $4 financial measure it started with, although it
is now $4 of cash and not $4 of inventory. However, since it costs $5
to buy a new unit of inventory, the company cannot maintain its

physical capital with that $4 – it now requires $5 to buy the
inventory that keeps the company in the same physical position as
before the sale of the unit. Thus, only $1 is available to pay to
investors and still maintain physical capital.
992


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Which measure an investor might prefer depends on the investor’s
objectives, especially income versus capital appreciation. An
investor who wants current income would probably prefer the
financial capital maintenance method even though it might imply a
decreasing investment in the firm as the financial resources buy less
and less in an inflationary environment. An investor who seeks
appreciation wants the company to grow, so a measure that implies
a positive income even though the company cannot maintain its
physical capital often does not lead to the needed reinvestment in the
company for the capital to grow substantially.
17-29 (15 min.) The year-end balance in Investment in Y is $43
million under the equity method, and $50 million under the marketvalue method:
Assets
=Liab.+Stockholders' Equity
Cash +Investments = Liabilities + Stk. Equity
Equity Method:
1. Acquisition
-40
+40
=
2. Net income of Y

+5
=
+5
3. Dividends from Y
+2
- 2
=
Effects for year
-38
+43
=
+5
Market-Value Method:
1. Acquisition
2. Net income of Y
3. Dividends from Y
4. Increase in market
value of Y
Effects for year

-40

+40

=
No entry and no effect.
=
+2

+ 10

+50

=
=

+2

-38

+10
+12

The year-end balance is $43 million under the equity method and
$50 million under the market-value method. If this were a trading
security, the $10 million increase in market price would be included
in income. If it were an available-for-sale security, the $10 million
increase would be added directly to the other comprehensive income
account in Stockholders’ Equity.
993


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17-30 (35-50 min.) The formal statements are not presented here
because the following tabulations are easier to understand (in
thousands of dollars):
1.
Boulder Long Peak Consolidated
Sales (other income reclassified below)
5,300* 1,100

6,400
Expenses
5,100 950
6,050
Operating income
200
150
350
Boulder’s share of Long Peak's net income
150
Net income
350
150
*5,450 - 150 = 5,300
Assets
InvestCash
ment
and
in
Other
Long Peak + Assets

=Liab.+Stockholders' Equity
Accounts
Payable, Stockholders'
=
etc.
+ Equity

Boulder’s accounts:

Beginning of year
1,000 =
Investment in Long Peak +250
- 250
=
Operating income
+ 200
=
Share of Long Peak’s
income
+150
=
End of year
400 +
950
Long Peak’s accounts:
Beginning of year
500
=
Net income
150
=
End of year
650
=
Intercompany eliminations -400
=
Consolidated, end of year
0 +
1,600 =

994

400

+

600
+200

400

+

+
+150
250 +

+150
950

250

250

650

400
-400
950

+


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2.
Boulder Long Peak Consolidated
Sales (other income reclassified below)
5,300*
1,100
6,400
Expenses
5,100
950
6,050
Operating income
200
150
350
Boulder’s share (60%) of Long Peak's
net income
90
Net income
290
150
Minority interest (40%) in Long Peak's
net income
60
Net income to consolidated entity

290
*5,390 - 90 = 5,300
The consolidated balance sheet would be as follows:
Assets
= Liab.+Stockholders' Equity
InvestCash
ment
and Accounts
Stockin
Other Payable, Minority holders'
Long Peak + Assets = etc.
Interest + Equity
Boulder’s accounts:
Beginning of year
1,000
600
Investment in Long Peak +150 + - 150 =
Operating income
+ 200 =
Share of Long Peak’s
income
+ 90
=
End of year
240 +
1,050
890
Long Peak’s accounts:
Beginning of year
500 =

Net income
150 =
End of year
650 =
Intercompany eliminations -240
=

995

= 400

+

+200
+ 90
400

+

250 +

250
150

250 +
+160*

400
- 400