P16-2. Equity method
Requirement 1:
Investment income reported by Figland:
Figland’s equity in Irene’s earnings (40% x $600,000)
Less:
Amortization of excess paid over book value for
inventory
Depreciable assets ($150,000/10 yrs.)
Investment income for 2005
$240,000
(50,000)
(15,000)
$175,000
Requirement 2:
Balance in investment in Irene Company on 12/31/05:
Cost of initial investment
Investment income [see requirement (1)]
Less: Dividends received (40% x $325,000)
Balance in investment account on 12/31/05
$1,800,000
175,000
(130,000)
$1,845,000
P16-4. Mark-to-market for trading securities
Requirement 1:
Journal entry for mark-to-market adjustment on 12/31/04:
Desired balance in Market adjustment account
Cost
$80,000
Market value on 12/31/04
85,000
Previous balance before adjustment
Required adjustment to Market adjustment account
Entry:
DR Market adjustment—trading securities
CR Unrealized gain on trading securities
$5,000 DR
0
$5,000 DR
$5,000
Requirement 2:
Entry to record the sale of Company B common stock:
DR Cash
$14,000
1
DR Market adjustment—trading securities
2,500
CR Trading securities—Co. B common
stock (50% of $30,000)
CR Realized gain on sale of trading securities
$5,000
$15,000
1,500
1
Unrealized loss on Co. B common stock included in mark-to-market
adjustment on
12/31/04 was determined as follows:
Cost of Co. B common stock
$30,000
Market value on 12/31/04
(25,000)
Unrealized loss included in 12/31/04 mark-to-market adjustment 5,000
Portion of Co. B shares being sold
50%
Market adjustment related to Co. B shares sold
$2,500
Requirement 3:
Mark-to-market adjustment of 12/31/05.
Desired balance in market adjustment account:
Co. A Common
Co. B Common
Co. C Preferred
Cost
$50,000
15,000
20,000
$85,000
12/31/05
Market
$55,000
13,000
25,000
$93,000
$8,000 DR
Previous balance after adjusting for Co. B stock sale
on 6/30/04 ($5,000 DR + $2,500 DR)
Required adjustment to Market adjustment account
Entry:
DR Market adjustment—trading securities
CR Unrealized gain on trading securities
7,500 DR
$500 DR
$500
$500
Requirement 4:
Mark-to-market adjustment for 12/31/06.
Desired balance in market adjustment account:
12/31/06
Cost
Market
Co. A Common
$50,000
$58,000
Co. B Common
15,000
10,000
Co. C Preferred
20,000
18,000
Co. D Warranty
10,000
12,000
$95,000
$98,000
Previous balance after 12/31/05 mark-to-market
adjustment
8,000
DR
Required adjustment to Market adjustment account
Entry:
DR Unrealized loss on trading securities
CR Market adjustment—trading securities
$3,000 DR
$5,000 CR
$5,000
$5,000
Requirement 5:
Required entry for Co. B common stock sale if considered an
available-for-sale security:
DR Cash
DR Realized loss on sale of available-for-sale
securities
CR Available-for-sale Securities—Co. B
common stock
$14,000
1,000
$15,000
DR Market adjustment—available-for-sale
securities(1)
$2,500
CR Unrealized market gains/losses—stk. equity
$2,500
1Unrealized
loss on Co. B common stock included in mark-to-market
adjustment on
12/31/04 was determined as follows:
Cost of Co. B common
Market value of 12/31/04
Unrealized loss included in 12/31/04 mark-tomarket adjustment
Portion of Co. B shares being sold
Market adjustment related to Co. B shares sold
$30,000
(25,000)
5,000
50%
$2,500
P16-7. Purchase method with goodwill
Requirement 1:
Delta would make the following entry on January 1, 2005 to
record the acquisition of Sigma:
DR Investment in Sigma
CR Cash
$80,000
$80,000
Requirement 2:
Cost of purchase
$80,000
Fair value of net assets acquired (without goodwill)
Cash
$ 8,000
Accounts receivable
9,000
Inventory
43,000
Land
12,000
Plant and equipment
51,000
Accounts Payable
(35,000)
Long-term debt
(15,000)
Goodwill
73,000
$ 7,000
Requirement 3:
Delta would make the following elimination entry to prepare
the consolidated balance sheet:
DR
DR
DR
DR
DR
DR
DR
Common stock (Sigma)
Additional paid-in-capital (Sigma)
Retained earnings (Sigma)
Land
Plant and equipment, net
Inventory
Goodwill
CR Accounts receivable
CR Investment in Sigma
$2,000
12,000
30,000
7,000
16,000
12,000
7,000
$ 6,000
80,000
Requirement 4:
Following is Delta Inc’s balance sheet immediately after the
acquisition of Sigma Company:
($ in thousands)
Delta
Sigma Eliminations Consolidated
Cash
Accounts receivable
Inventory
Investment in Sigma
Land
Plant and equipment
Goodwill
$11,000
19,000
47,000
80,000
12,000
66,000
-0$235,000
$ 8,000
15,000
31,000
5,000
35,000
-0$94,000
Accounts payable
Long-term debt
Common stock
Add. paid in cap.
Retained earnings
$52,000
66,000
5,000
30,000
82,000
$235,000
$35,000
15,000
2,000
12,000
30,000
$94,000
($ 6,000)
12,000
(80,000)
7,000
16,000
7,000
2,000
12,000
30,000
-0-
P16-9. Consolidation at acquisition
Purchase price of Sprite’s stock
Book value of Sprite’s net assets
$25,000)
Purchase price differential
$30,000
23,750 (95% x
$ 6,250
The purchase price differential is allocated:
Inventory $3,750
(60% x $6,250)
Goodwill
2,500
(40% x $6,250)
$6,250
Requirement 1:
Total consolidated current assets would be:
Prince’s reported current assets $30,000*
Sprite’s reported current assets
15,000
Allocation to inventory
3,750
Total
$48,750
$ 19,000
28,000
90,000
-024,000
117,000
7,000
$285,000
$87,000
81,000
5,000
30,000
82,000
$285,000
*Note that Prince’s current assets remain at $30,000 after
the acquisition. The $30,000 received from the debt
issuance was used to buy Sprite’s common stock.
Requirement 2:
Total consolidated noncurrent assets would be:
Prince’s reported noncurrent assets
$55,000
Sprite’s reported noncurrent assets
25,000
Allocation to goodwill
2,500
Total
$82,500
Requirement 3:
Total current liabilities would be:
Prince’s reported current liabilities
Sprite’s reported current liabilities
Total
$20,000
10,000
$30,000
Requirement 4:
Total noncurrent liabilities would be:
Prince’s reported noncurrent liabilities
Debt issued in the acquisition
Sprite’s reported noncurrent liabilities
Minority interest
Total
$20,000
30,000
5,000
1,250**
$56,250
**Minority interest equals 5% x $25,000 Sprite equity.
Requirement 5:
Total stockholders’ equity would be the $45,000 reported by
Prince. All of Sprite’s equity is eliminated in the consolidation
process.