Chapter 2 - Problem 1
Part A
On January 1, Year 5, Anderson Corporation paid $650,000 for 20,000 (20%) of the outstanding
shares of Carter Inc. The investment was considered to be one of significant influence. In Year
5, Carter reported profit of $95,000; in Year 6, its profit was $105,000. Dividends paid were
$60,000 in each of the two years.
Required Calculate the balance in Anderson’s investment account as at December 31, Year 6
Jan 1, Year 5
Investment in Carter Inc.
Cash
650,000
Dec 31, Year 5
Investment in Carter Inc. (95,000 x 20%)
Equity Method Income
Cash
12,000
Investment in Carter Inc
Dec 31, Year 6
Investment in Carter Inc. (105,000 x 20%)
Equity Method Income
Cash
12,000
Investment in Carter Inc.
650,000
19,000
19,000
12,000
21,000
21,000
12,000
Investment in Carter Inc: 666,0000
Part B Now assume that on December 31, Year 6, Anderson lost its ability to significantly
influence the operating, investing, and financing decisions for Carter when another party
obtained sufficient shares in the open market to obtain control over Carter. Accordingly, the
investment in Carter was reclassified as a FVTPL investment. The fair value of the Carter shares
was $35 per share on this date. In Year 7, Carter reported profit of $115,000 and paid dividends
of $50,000. On December 31, Year 7, Anderson sold its investment in Carter for $37 per share.
Required
(a) Prepare the journal entry at December 31, Year 6, to reclassify the investment from
significant influence to FVTPL.
35 x 20,000 = 700,000 – 666,000 = 34,000
Investment in Carter Inc
34,000
Cash
34,000
(b) Prepare all journal entries for Year 7 related to Anders
Year 7
Cash (20% x 50,000)
Dividends
10,000
10,000
Dec 31, Year 7
Cash
740,000
Investment in Carter
Gain on Sale
700,000
40,000
Problem 2
Baskin purchased 20,000 common shares (20%) of Robbin on January 1, Year 5, for $275,000
and classified the investment as FVTPL. Robbin reported net income of $85,000 in Year 5 and
$90,000 in Year 6, and paid dividends of $40,000 in each year. Robbin’s shares were trading at
$16 per share on December 31, Year 5, and January 1, Year 6. On January 1, Year 6, Baskin
obtained significant influence over the operating, investing, and financing decisions of Robbin
when the controlling shareholder sold some shares in the open market and lost control over
Robbin. Accordingly, the investment in Robbin was reclassified to an investment in an associate.
On December 31, Year 6, Baskin sold its investment in Robbin for $17 per share.
Required
Prepare all journal entries for Years 5 and 6 related to Baskin’s investment in Robbin
Jan 1, Year 5
Investment in Robbin
Cash
275,000
Dec 31, Year 5
Cash
Dividend Income
8,000
Investment in Robbin
Unrealized Gains
275,000
8,000
45,000
45,000
Dec 31, Year 6
Investment in Robbin (90,000 x 0.2)
Equity Method Income
Cash
8,000
Investment in Robbin
Cash
18,000
18,000
8,000
340,000
Gain on Sale
Investment in Robbin
10,000
330,000
Problem 5
Her Company purchased 22,000 common shares (20%) of Him Inc. on January 1, Year 4, for
$374,000. Additional information on Him for the three years ending December 31, Year 6, is as
follows:
Year Net Income Dividends Paid
Market Value per Share on December 31
Year 4 $220,000
$165,000
$18
Year 5 $247,500
$176,000
$20
Year 6 $264,000
$192,500
$23
On December 31, Year 6, Her sold its investment in Him for $506,000.
Required
(a) Compute the balance in the investment account at the end of Year 5, assuming that the
investment is classified as
(i) FVTPL
Jan 1, Year 4
Investment in Him Inc
374,000
Cash
374,00
Dec 31, Year 4
Cash (165,000 x 20%)
Dividend Income
Investment in Him Inc
Unrealized Gain
Dec 31, Year 5
Cash
Dividend Income
Investment in Him Inc
Unrealized Gain
33,000
33,000
22,000
22,000
35,200
35,200
44,000
44,000
Total Investment at the end of Year 5: 440,000
(ii) Investment in associate
Jan 1, Year 4
Investment in Him Inc
Cash
374,000
374,000
Dec 31, Year 4
Investment in Him Inc (20% x 220,000)
Equity Method Income
44,000
44,000
Cash
33,000
Investment in Him Inc
33,000
Dec 31, Year 5
Investment in Him Inc
49,500
Equity Method Income
49,500
Cash
35,200
Investment in Him Inc
35,200
Total Investment in Him Inc at the end of Year 5: 399,300
(iii) FVTOCI
(b) Calculate how much income will be reported in net income and other comprehensive
income in each of Years 4, 5, and 6, and in total for the three years assuming that the
investment is classified as
(i) FVTPL
(ii) Investment in associate
(iii) FVTOCI
(c) What are the similarities and differences in your answers for the three parts of (b