MATERIA PRIMA (PAPA X, POLLO CRUDO,

34 Chapter 1

accounts are considered as equal to fair values except for a copyright whose value accounted for Anderson’s excess cost in each purchase. The copyright had a remaining life of 16 years at January 1, 2011.

Barringer reported $210,000 of net income during 2012 and $230,000 in 2013. Dividends of $100,000 are paid in each of these years. Anderson uses the equity method.

a. On comparative income statements issued in 2013 by Anderson for 2011 and 2012, what amounts of income would be reported in connection with the company’s investment in Barringer?

b. If Anderson sells its entire investment in Barringer on January 1, 2014, for $400,000 cash, what is the impact on Anderson’s income?

c. Assume that Anderson sells inventory to Barringer during 2012 and 2013 as follows:

Cost to Price to Year-End Balance

Year Anderson Barringer (at Transfer Price)

2012 $35,000 $50,000 $20,000 (sold in following year) 2013 33,000 60,000 40,000 (sold in following year)

What amount of equity income should Anderson recognize for the year 2013?

27. Smith purchased 5 percent of Barker’s outstanding stock on October 1, 2011, for $7,475 and acquired an additional 10 percent of Barker for $14,900 on July 1, 2012. Both of these pur- chases were accounted for as available-for-sale investments. Smith purchases a final 20 percent on December 31, 2013, for $34,200. With this final acquisition, Smith achieves the ability to significantly influence Barker’s decision-making process and employs the equity method.

Barker has a book value of $100,000 as of January 1, 2011. Information follows concern- ing the operations of this company for the 2011–2013 period. Assume that all income was earned uniformly in each year. Assume also that one-fourth of the total annual dividends are paid at the end of each calendar quarter.

Year Reported Income Dividends

2011 $20,000 $ 8,000

2012 30,000 16,000

2013 24,000 9,000

On Barker’s financial records, the book values of all assets and liabilities are the same as their fair values. Any excess cost from either purchase relates to identifiable intangible assets. For each purchase, the excess cost is amortized over 15 years. Amortization for a portion of a year should be based on months.

a. On comparative income statements issued in 2014 for the years of 2011, 2012, and 2013, what would Smith report as its income derived from this investment in Barker?

b. On a balance sheet as of December 31, 2013, what should Smith report as investment in Barker?

28. Hobson acquires 40 percent of the outstanding voting stock of Stokes Company on January 1, 2012, for $210,000 in cash. The book value of Stokes’s net assets on that date was $400,000, although one of the company’s buildings, with a $60,000 carrying value, was actually worth $100,000. This building had a 10-year remaining life. Stokes owned a royalty agreement with a 20-year remaining life that was undervalued by $85,000.

Stokes sold inventory with an original cost of $60,000 to Hobson during 2012 at a price of $90,000. Hobson still held $15,000 (transfer price) of this amount in inventory as of December 31, 2012. These goods are to be sold to outside parties during 2013.

Stokes reported a loss of $60,000 for 2012, $40,000 from continuing operations and $20,000 from an extraordinary loss. The company still manages to pay a $10,000 cash divi- dend during the year.

During 2013, Stokes reported a $40,000 net income and distributed a cash dividend of $12,000. It made additional inventory sales of $80,000 to Hobson during the period. The origi- nal cost of the merchandise was $50,000. All but 30 percent of this inventory had been resold to outside parties by the end of the 2013 fiscal year.

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The Equity Method of Accounting for Investments 35

Prepare all journal entries for Hobson for 2012 and 2013 in connection with this invest- ment. Assume that the equity method is applied.

29. Penston Company owns 40 percent (40,000 shares) of Scranton, Inc., which it purchased sev- eral years ago for $182,000. Since the date of acquisition, the equity method has been properly applied, and the book value of the investment account as of January 1, 2013, is $248,000. Excess patent cost amortization of $12,000 is still being recognized each year. During 2013, Scranton reports net income of $200,000; $320,000 in operating income earned evenly through- out the year, and a $120,000 extraordinary loss incurred on October 1. No dividends were paid during the year. Penston sold 8,000 shares of Scranton on August 1, 2013, for $94,000 in cash. However, Penston retains the ability to significantly influence the investee.

During the last quarter of 2012, Penston sold $50,000 in inventory (which it had originally purchased for only $30,000) to Scranton. At the end of that fiscal year, Scranton’s inventory retained $9,000 (at sales price) of this merchandise, which was subsequently sold in the first quarter of 2013.

On Penston’s financial statements for the year ended December 31, 2013, what income ef- fects would be reported from its ownership in Scranton?

30. On July 1, 2011, Gibson Company acquired 75,000 of the outstanding shares of Miller Com- pany for $12 per share. This acquisition gave Gibson a 35 percent ownership of Miller and allowed Gibson to significantly influence the investee’s decisions.

As of July 1, 2011, the investee had assets with a book value of $2 million and liabilities of $400,000. At the time, Miller held equipment appraised at $150,000 above book value; it was considered to have a seven-year remaining life with no salvage value. Miller also held a copyright with a five-year remaining life on its books that was undervalued by $650,000. Any remaining excess cost was attributable to goodwill. Depreciation and amortization are com- puted using the straight-line method. Gibson applies the equity method for its investment in Miller.

Miller’s policy is to pay a $1 per share cash dividend every April 1 and October 1. Miller’s income, earned evenly throughout each year, was $550,000 in 2011, $575,000 in 2012, and $620,000 in 2013.

In addition, Gibson sold inventory costing $90,000 to Miller for $150,000 during 2012. Miller resold $80,000 of this inventory during 2012 and the remaining $70,000 during 2013.

a. Prepare a schedule computing the equity income to be recognized by Gibson during each of these years.

b. Compute Gibson’s investment in Miller Company’s balance as of December 31, 2013. 31. On January 1, 2011, Plano Company acquired 8 percent (16,000 shares) of the outstanding

voting shares of the Sumter Company for $192,000, an amount equal to Sumter’s underlying book and fair value. Sumter pays a cash dividend to its stockholders each year of $100,000 on September 15. Sumter reported net income of $300,000 in 2011, $360,000 in 2012, $400,000 in 2013, and $380,000 in 2014. Each income figure can be assumed to have been earned evenly throughout its respective year. In addition, the fair value of these 16,000 shares was indetermi- nate, and therefore the investment account remained at cost.

On January 1, 2013, Plano purchased an additional 32 percent (64,000 shares) of Sumter for $965,750 in cash and began to use the equity method. This price represented a $50,550 payment in excess of the book value of Sumter’s underlying net assets. Plano was willing to make this extra payment because of a recently developed patent held by Sumter with a 15-year remaining life. All other assets were considered appropriately valued on Sumter’s books.

On July 1, 2014, Plano sold 10 percent (20,000 shares) of Sumter’s outstanding shares for $425,000 in cash. Although it sold this interest, Plano maintained the ability to significantly influence Sumter’s decision-making process. Assume that Plano uses a weighted average cost- ing system.

Prepare the journal entries for Plano for the years of 2011 through 2014.

32. On January 1, 2012, Stream Company acquired 30 percent of the outstanding voting shares of Q-Video, Inc., for $770,000. Q-Video manufactures specialty cables for computer moni- tors. On that date, Q-Video reported assets and liabilities with book values of $1.9 million and $700,000, respectively. A customer list compiled by Q-Video had an appraised value of $300,000, although it was not recorded on its books. The expected remaining life of the cus- tomer list was five years with a straight-line depreciation deemed appropriate. Any remaining excess cost was not identifiable with any particular asset and thus was considered goodwill.

Q-Video generated net income of $250,000 in 2012 and a net loss of $100,000 in 2013. In each of these two years, Q-Video paid a cash dividend of $15,000 to its stockholders.

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