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Chase
Advanced Accounting 805-51Cc
Date
Acquired
7/1/x3
4/1/x4
10/1/x5
1/1/x6
7/7/x6
Percent
acquired
(disposed)
20
40
30
(10)
(15)
Cost
(receipt)
30,000 $
74,000
81,000
(40,000)
(70,000)
Annual
SHE
1/1
100,000 $
150,000
190,000
235,000
Net
Income
50,000
40,000
45,000
55,000
SHE at
Acquisition
125,000
160,000
220,000
SHE
12/31
150,000
190,000
235,000
290,000
--all net assets of "S" are carried at "FMV" at the time of acquisitions except for a patent that has just been acquired;
--any excess of cost over book value is allocated to a patent with a ten year life from the date of allocation;
--on 1/1/x6 "P" sells 10% of "S" for $40,000;
--on 7/1/x6 "P" sells an additional 15% of "S" for $70,000
--assume that the $55,000 net income in year 6 is earned uniformly throughout the year;
Required:
1. Analyze each investment;
2. Present all necessary journal entries for years 3,4, and 5 on "P" books;
3. Compute the basis (book value) of the investment account at EOY 5;
4. Compute the basis (book value) of each investment at EOY 5;
5. Present the journal entries for year 6;
Attributable to:
Purchased NI (125-100)(.2)
Balance to GW............
Excess accounted for..
Investment
One
30,000
$
20,000 (.4)x150k)=
10,000
$
5,000
5,000
10,000
Investment
Two
74,000
$
60,000 (.3)x190k=
14,000
$
(160-150)(.4) 4,000
10,000
14,000
Investment
Three
81,000
57,000
24,000
(220-190)(.3) 9,000
15,000
24,000
2. present all necessary journal entries for years 3,4, and 5 on "P" books;
First year of investment; total interest 20%; equity method
7/1/x3 Record the first investment:
Investment in "S"...............................
30,000
Cash.......................................
30,000
12/31/x3 Record equity in "S" earnings:
Investment in "S" (50,000-(125,000-100,000)(.2).
Subsidiary NI..............................
5,000
5,000
74,000
8,000
12,000
74,000
20,000
1,250
Simple Equity
24,750
60,000
12/31/x4 Allocate the excess of cost over book value per analysis:
Purchased NI (per first investment).............
Purchased NI (per second investment)............
Patent (per first investment).................
Patent (per second investment)................
Investment in "S"..........................
5,000
4,000
5,000
10,000
500
750
250
18,750
18,750
84,750
24,000
1,500
Sophisticated Equity
20,000
25,000
60,000
20,000
85,000
Third year of investment; total interest 90%; equity method, consolidation rules apply
10/1/x5 Record the third investment:
Investment in "S"...............................
Cash.......................................
81,000
9,000
18,000
4,500
500
1,000
375
81,000
31,500
1,875
Simple Equity
29,625
32,250
71,250
57,000
12/31/x5 Allocate the excess of cost over book value per analysis:
Purchased NI (per first investment).............
Purchased NI (per second investment)............
Purchased NI (per third investment).............
Patent (per first investment).................
Patent (per second investment)................
Patent (per third investment).................
Investment in "S"..........................
5,000
4,000
9,000
5,000
10,000
15,000
500
1,000
375
1,500
29,625
160,500
48,000
3,375
3. compute the basis (book value) of the investment account at end of year 5:
20%
40%
30%
Total
Cost...............
$
30,000 $
74,000 $
81,000 $
185,000
Equity in "S" ni:
Year 3
4,750
0
0
4,750
Year 4
7,500
11,250
0
18,750
Year 5
8,500
17,000
4,125
29,625
Basis EOY 5........
$
50,750 $
102,250 $
85,125 $
238,125
4. compute the basis (book value) of each investment at end of year 5:
Investment in "S":
Simple Equity
Sophisticated Equity
Beginning Balance 7/1/x3...... $
30,000
$
30,000
Add: equity is "S" ni.........
5,000
5,000
Deduct: Amortization of Patent
(250)
0
Balance 12/31/x3..............
$
34,750
$
35,000
Sophisticated Equity
31,500
33,000
72,000
57,000
31,500
162,000
34,750
20,000
74,000
(1,250)
127,500
127,500
31,500
81,000
(1,875)
238,125
35,000
20,000
74,000
0
130,000
130,000
31,500
81,000
0
241,500
2,750
1,375
19,250
16,500
125
438
500
1,500
Consolidation entries:
39,875
2,563
Simple Equity
37,312
88,250
61,125
12/31/x5 Allocate the excess of cost over book value per analysis:
Purchased NI (per second investment)............
Purchased NI (per third investment).............
Patent (per second investment)................
Patent (per third investment).................
Investment in "S"..........................
4,000
9,000
10,000
15,000
37,312
149,375
38,000
Sophisticated Equity
39,875
90,000
62,000
39,875
152,000
938
1,500
1,500
3,938