Chapter 2 Test Bank

STOCK INVESTMENTS-INVESTOR ACCOUNTING AND REPORTING

Multiple Choice Questions LO1 1

When Eagle Company has less than 50% of the voting stock of Fish Corporation which of the following applies? a. Only the fair value method may be used. b. Only the equity method may be used. c. Either the fair value method or the equity method may be used. d. Neither the fair value method or the equity method may be used. Which one of the following items, originally recorded in the Investment in Falcon Co. account under the equity method, would not be systematically charged to income on a periodic basis? a. Amortization expense of goodwill. b. Depreciation expense on the excess fair value attributed to machinery. c. Amortization expense on the excess fair value attributed to lease agreements. d. Interest expense on the excess fair value attributed to long-term bonds payable.

LO1 2

LO2 3

Which one of the investor company?

following

statements

is

correct

for

an

a. Once the balance in the Investment in Osprey Co. account reaches zero, it will not be reduced any further. b. Under the equity method, the balance in the Investment in Osprey Co. account can be negative if the investee corporation operates at a loss. c. Application of the equity method is discontinued when the investors share of losses reduces the carrying amount of the investment to zero. d. Under the equity method, any goodwill inherent or contained in the Investment in Osprey Co. account will be amortized to the income earned from the investee.

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LO2 4

Kestral Inc. owns 10% of Mouse Company. In the most recent year, Mouse had net earnings of $60,000 and paid dividends of $8,000. Kestrals accountant mistakenly assumed considerable influence and used the equity method instead of the cost method. What is the impact on the investment account and net earnings, respectively? a. By using the equity method, the accountant has understated the investment account and overstated the net earnings. b. By using the equity method, the accountant has overstated the investment account and understated the net earnings. c. By using the equity method, the accountant has understated the investment account and understated the net earnings. d. By using the equity method, the accountant has overstated the investment account and overstated the net earnings.

LO2 5

Griffon Incorporated holds a 30% ownership in Duck Corporation. Griffon should use the equity method under which of the following circumstances? a. Griffon has surrendered significant stockholder rights by agreement between Griffon and Duck. b. Griffon has been unable to secure a position on the Duck Corporation Board of Directors. c. Griffons ownership is temporary. d. The ownership of Duck Corporation is diverse. Swan Corporation uses the fair value method of accounting for its investment in Pond Company. Which one of the following events would affect the Investment in Pond Co. account? a. b. c. d. Investee losses Investee dividend payments An increase in the investees share price from last period. all of the above would affect the Investment in Pond Co. account

LO2 6

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LO3 7

Mudflat Corporations stockholders equity at December 31, 2004 included the following: 8% Preferred stock, $10 par value Common stock, no par Additional paid-in capital Retained earnings $ 2,000,000 20,000,000 8,000,000 8,000,000 38,000,000

Brolga Corporation purchased a 30% interest in Mudflats common stock from other shareholders on January 1, 2005 for $11,600,000. What was the book value of Brolgas investment in Mudflat? a. b. c. d. LO3 8 $10,800,000 $11,400,000 $14,240,000 $14,880,000

Jabiru Corporation purchased a 20% interest in Fish Company common stock on January 1, 2002 for $300,000. This investment was accounted for using the complete equity method and the correct balance in the Investment in Fish account on December 31, 2004 was $440,000. The original excess purchase transaction included $60,000 for a patent amortized at a rate of $6,000 per year. In 2005, Fish Corporation had net income of $4,000 per month earned uniformly throughout the year and paid $20,000 of dividends in May. If Jabiru sold one-half of its investment in Fish on August 1, 2005 for $500,000, how much gain was recognized on this transaction? a. b. c. d. $278,950 $280,000 $280,950 $282,000

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LO3 9

An investor uses the cost method of accounting for its investment in common stock. During the current year, the investor received $25,000 in dividends, an amount that exceeded the investors share of the investee companys undistributed income since the investment was acquired. The investor should report dividend income of what amount? a. $25,000. b. $25,000 less the amount in excess of its share of undistributed income since the investment was acquired. c. $25,000 less the amount that is not in excess of its share of undistributed income since the investment was acquired. d. None of the above is correct.

Use the following information in answering questions 10 and 11. On January 1, 2005, Coot Company acquired a 15% interest in Roost Corporation for $120,000 when Roosts stockholders equity consisted of $600,000 capital stock and $200,000 retained earnings. Book values of Roosts net assets equaled their fair values on this date. Roosts net income and dividends for 2005 through 2007 was as follows: Net income Dividends paid LO3 10 $ 2005 12,000 10,000 $ 2006 15,000 10,000 $ 2007 25,000 10,000

Assume that Coot Incorporated used the cost method of accounting for its investment in Roost. The balance in the Investment in Roost account at December 31, 2007 was a. b. c. d. $118,000. $120,000. $121,800. $130,800.

LO3 11

Assume that Coot has significant influence and uses the equity method of accounting for its investment in Roost. The balance in the Investment in Roost account at December 31, 2007 was a. b. c. d. $118,000. $120,000. $121,800. $123,300.

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LO3 12

Swamphen Corporation accounts for its 30% investment in Frog Company using the equity method. On the date of the original investment, fair values were equal to the book values except for a patent, which cost Swamphen an additional $40,000. The patent had an estimated life of 10 years. Frog has a steady net income of $20,000 per year and its dividend payout ratio is 40%. Which one of the following statements is correct? a. The net will be b. The net will be c. The net will be d. The net will be change in the investment a debit of $400. change in the investment a debit of $3,600. change in the investment a credit of $400. change in the investment a credit of $3,600. account for each full year account for each full year account for each full year account for each full year

LO4 13

Jacana Corporation paid $200,000 for a 25% interest in Lilypad Corporations common stock on January 1, 2005, but was not able to exercise significant influence over Lilypad. During 2006, Jacana reported income of $120,000, excluding its income from Lilypad, and paid dividends of $50,000. Lilypad reported net income of $40,000 during 2006 and paid dividends of $20,000. Jacana should report net income for 2006 in the amount of a. b. c. d. $115,000. $120,000. $125,000. $130,000.

LO4 14

Robin Corporation purchased 150,000 previously unissued shares of Nest Companys $10 par value common stock directly from Nest for $3,400,000. Nests stockholders equity immediately before the investment by Robin consisted of $3,000,000 of capital stock and $2,600,000 in retained earnings. What is the book value of Robins investment in Nest? a. b. c. d. $1,500,000. $1,680,000. $2,800,000. $3,000,000.

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LO4 15

The income from an equity investee is reported on one line of the investor companys income statement except when a. the cost method is used. b. the investee has extraordinary or other below the line items. c. the investor company is amortizing cost-book value differentials. d. the investor company changes from the cost to the equity method.

LO5 16

Bart Company purchased a 30% interest in Simpson Corporation on January 1, 2004, and Bart accounted for its investment in Simpson under the equity method for the next 3 years. On January 1, 2007, Bart sold one-half of its interest in Simpson after which it could no longer exercise significant influence over Simpson. Bart should a. continue to account for its remaining investment in Dak under the equity method for the sake of consistency. b. adjust the investment in Simpson account to one-half of its original amount and account for the remaining 15% interest using the equity method. c. account for the remaining investment under the cost method, using the investment in Simpson account balance immediately after the sale as the new cost basis. d. adjust the investment account to one-half of its original amount (one-half of the purchase price in 2004), and account for the remaining 15% investment under the cost method.

LO5 17

Pelican Corporation acquired a 30% interest in Crustacean Incorporated at book value several years ago. Crustacean declared $100,000 dividends in 2005 and reported its income for the year as follows: Income from continuing operations Loss on discontinued division Net income Pelicans Investment increase by a. b. c. d. $ $ $ $ 150,000 160,000 180,000 210,000 2-6 in Crustacean account $700,000 (100,000) $600,000 for 2003 should

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LO5 18

Cormorant Corporation paid $800,000 for a 40% interest in Plumage Company on January 1, 2005 when Plumages stockholders equity was as follows: 10% cumulative preferred stock, $100 par Common stock, $10 par value Other paid-in capital Retained earnings Total stockholders equity $ 500,000 300,000 400,000 800,000 $2,000,000

On this date, the book values of Plumages assets and liabilities equaled their fair values and there were no dividends in arrears. Goodwill from the investment is a. b. c. d. LO5 19 $0. $150,000. $200,000. None of the above is correct.

In reference to material transactions between an investor and an investee, when the investor can significantly influence the investee, which of the following statements is correct, assuming that the investor is using the equity method? a. There is the presumption of arms-length bargaining between the related parties. b. As long as the investor recognizes the effects of the transaction in its financial statements, it is not required to provide any additional disclosures. c. In reporting its share of earnings and losses of an investee, the investor must eliminate the effect of profits and losses on the transactions until they are realized. d. None of the above is correct.

LO6 20

In reference to the determination of goodwill impairment, which of the following statements is correct? a. The goodwill impairment test under FASB 142 is a three-step process. b. If the reporting units fair value exceeds its carrying value, goodwill is unimpaired. c. Under FASB 142 firms must first compare carrying values (book values) at the firm level. d. All of the above are correct.

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LO6 21

Firms must conduct annually when

impairment

tests

more

frequently

than

a. other shareholders hold more than 50% interest b. a more-likely-than-not expectations exists that a unit will be sold or disposed of c. a specific unit does not have publicly traded stock d. using the equity method.

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Exercises LO3 Exercise 1 Crake Corporation paid $50,000 for a 10% interest in Lagoon Corp. on January 1, 2004, when Lagoons stockholders equity consisted of $400,000 of $10 par value common stock and $100,000 retained earnings. On December 31, 2005, Crake paid $96,000 for an additional 20% interest in Lagoon Corp. Both of Crakes investments were made when Lagoons book values equaled their fair values. Lagoons net income and dividends for 2004 and 2005 were as follows: Net income Dividends Required: 1. Prepare journal entries for Bender Corporation to account for its investment in Andy Corporation for 2004 and 2005. 2. Calculate the balance of Benders investment in Andy at December 31, 2005. 2004 $30,000 $10,000 2005 $70,000 $20,000

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LO3 Exercise 2 Waders Corporation paid $120,000 for a 25% interest in Shell Company on July 1, 2005. No information is available on the fair value of Shells assets and liabilities. Assume the equity method. Shells trail balances were as follows:

Debits Current assets Noncurrent assets Expenses Dividends (paid in June) Total Credits Current Liabilities Capital stock (no change) Retained earnings Jan. 1 Sales Total

December 31 $ 100,000 300,000 160,000 40,000 $ 600,000

July 1 $ 50,000 310,000 120,000 40,000 $ 520,000

60,000 200,000 100,000 240,000 $ 600,000

40,000 200,000 100,000 180,000 520,000

Required: 1. What is Waders investment income from Shell for the year ending December 31, 2005? 2. Calculate Waders investment in Shell at year end December 31, 2005.

LO5
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Exercise 3 Dotterel Corporation paid $200,000 cash for 40% of the voting common stock of Swamp Land Inc. on January 1, 2005. Book value and fair value information for Swamp on this date is as follows:

Assets Cash Accounts receivable Inventories Equipment

Book Values $ 60,000 120,000 80,000 340,000 $ 600,000 $ 200,000 120,000 200,000 80,000 $ 600,000

Fair Values $ 60,000 120,000 100,000 400,000 $ 680,000 $ 200,000 100,000 $ 300,000

Liabilities & Equities Accounts payable Note payable Capital stock Retained earnings

Required: Prepare an allocation schedule for Dotterels investment in Swamp Land.

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LO5 Exercise 4 Sandpiper Inc. acquired a 30% interest in Shore Corporation for $27,000 cash on January 1, 2005, when Shores stockholders equity consisted of $30,000 of capital stock and $20,000 of retained earnings. Shore Corporation reported net income of $18,000 for 2005. The allocation of the $12,000 excess of cost over book value acquired on January 1 is shown below, along with information relating to the useful lives of the items: Overvalued receivables (collected in 2005) Undervalued inventories (sold in 2005) Undervalued building (6 years useful life remaining at January 1, 2005) Undervalued land Unrecorded patent (8 years economic life remaining at January 1, 2005) Undervalued accounts payable (paid in 2005) Total of excess allocated to identifiable assets and liabilities Goodwill Excess cost over book value acquired Required: Determine Sandpipers investment income from Shore for 2005. $ ( 600 ) 2,400 3,600 900 3,200 ( 300 ) 7,200 2,800 12,000

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LO5 Exercise 5 Stilt Corporation purchased a 40% interest in the common stock of Shallow Company for $2,660,000 on January 1, 2005, when the book value of Shallows net equity was $6,000,000. Shallows book values equaled their fair values except for the following items: Book Value 450,000 100,000 400,000 350,000 Fair Value 500,000 450,000 200,000 400,000 Difference 50,000 350,000 ( 200,000 ) 50,000

Inventories Land Building-net Equipment-net Required:

Prepare a schedule to allocate any excess purchase cost to identifiable assets and goodwill.

LO5 Exercise 6 Curlew Corporation paid $50,000 on January 1, 2005 for a 20% interest in Waterway Inc. On January 1, 2005, Waterways stockholders equity consisted of $100,000 of common stock and $100,000 of retained earnings. All the excess purchase cost over book value was attributable to a patent with an estimated life of 8 years. During 2005 and 2006, Waterway paid $2,500 of dividends each quarter and reported net income of $30,000 for 2005 and $20,000 for 2006. Curlew used the equity method. Required: 1. Calculate Curlews income from Waterway for 2005. 2. Calculate Curlews income from Waterway for 2006. 3. Determine the balance of Curlews Investment in Waterway account on December 31, 2006.

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LO5 Exercise 7 Lowtide Corporation had $300,000 of $10 par value common stock outstanding on January 1, 2004, and retained earnings of $100,000 on the same date. During 2004, 2005, and 2006, Lowtide earned net incomes of $40,000, $70,000, and $30,000, respectively, and paid dividends of $30,000, $55,000, and $10,000, respectively. On January 1, 2004, Avocet purchased 21% of Lowtides outstanding common stock for $124,000. On January 1, 2005, Avocet purchased 9% of Lowtides outstanding stock for $51,000, and on January 1, 2006, Avocet purchased another 5% of Lowtides outstanding stock for $32,000. All payments made by Avocet that are in excess of the appropriate book values were attributed to equipment, with each block depreciable over 10 years under the straight-line method. Required: 1. How much depreciation expense will Avocet record in 2004, 2005, and 2006? 2. What will be the December 31, 2006 balance in the Investment in Lowtide account after all adjustments have been made?

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LO5 Exercise 8 For 2003, 2004, and 2005, Squid Corporation earned net incomes of $40,000, $70,000, and $100,000, respectively, and paid dividends of $24,000, $32,000, and $44,000, respectively. At the beginning of 2003, Squid had $500,000 of $10 par value common stock outstanding and $100,000 of retained earnings. On January 1 of each of these years, Albatross Corporation bought 5% of the outstanding common stock of Squid paying $37,000 per 5% block on January 1, 2003, 2004, and 2005. All payments made by Albatross in excess of book value were attributable to equipment, which is depreciated over five years on a straight-line basis. Required: 1. Assuming that Albatross uses the cost method of accounting for its investment in Albatross, how much dividend income will Tripp recognize for each of the three years and what will be the balance in the investment account at the end of each year? 2. Assuming that Albatross has significant influence and uses the equity method of accounting (even though its ownership percentage is less than 20%), how much net investee income will Albatross recognize for each of the three years? LO5 Exercise 9 On January 1, 2005, Petrel, Inc. purchased 70% of the outstanding voting common stock of Ocean, Inc., for $2,600,000. The book value of Oceans net equity on that date was $3,100,000. Book values were equal to fair values except as follows: Book Values $ 250,000 600,000 270,000 Fair Values $ 190,000 700,000 240,000

Assets & Liabilities Equipment Building Note payable Required:

Prepare a schedule to allocate any excess purchase cost to specific assets and liabilities.

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LO5 Exercise 10 On January 1, 2005, Shearwater, Co. purchased 60% of the outstanding voting common stock of Colony, Inc., for $1,800,000. The book value of Colonys net equity on that date was $3,000,000. Book values were equal to fair values except as follows: Book Values $ 200,000 850,000 300,000 Fair Values $ 225,000 750,000 320,000

Assets & Liabilities Inventory Building Note payable Required:

Prepare a schedule to allocate any excess purchase cost to specific assets and liabilities.

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SOLUTIONS
Multiple Choice Questions 1 2 3 4 5 6 7 C A C D D C A Total stockholders equity Less: preferred equity Equals: common equity x Brolgas percentage Book value of Brolga investment Dec 31, 2002 investment balance Jaribus interest in Fishs income from Jan 1-July 31: ($4,000 x 7 months x 20%) = Less: Dividends ($20,000 x 20%) = Less: Seven months of patent amortization: $500 x 7 = Investment account balance at July 31, 2003 Amount received from sale: Book value of one-half interest Gain on sale $
38,000,000 2,000,000 36,000,000 30% 10,800,000

440,000 5,600 4,000 ) 3,500 ) 438,100 500,000 219,050 280,950

( ( $ $

10

Income and dividends are not added or deducted from the investment account under the cost method unless liquidating dividends are received

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11

Initial Investment in Roost adjustments: 2003: 15% x ($12,000-$10,000)= 2004: 15% x ($15,000-$10,000)= 2005: 15% x ($25,000-$10,000)= Investment balance at 12/31/2005:

120,000 300 750 2,250 123,300

12 13

C C Jacanas separate income Dividend income from Lilypad equals $20,000 x 25% = Jacanas net income = Shares outstanding before new shares are issued Shares issued to Robin Total shares outstanding Percentage owned by Robin equals 150,000/450,000= Stockholders equity before new shares are issued +Investment by Robin =Stockholders equity after Robin investment x Robins percentage ownership =Book value of Robins interest $ $ 120,000 5,000 125,000 300,000 150,000 450,000 33.33% 5,600,000 3,400,000 9,000,000 33.33% 3,000,000

14

15 16 17

B C A Pelicans share of income Equals $600,000 x 30% = Pelicans share of dividends = $100,000 x 30% Increase in investment account $ $ 180,000 (30,000) 150,000

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18

Cost of Cormorants investment: Less: book value acquired: Total equity $ Less: Preferred equity Net common equity x percent acquired = Plumage book value Goodwill

800,000

2,000,000 500,000 1,500,000 40% 600,000 $

600,000 200,000

19 20 21 Exercises Exercise 1

C B B

Requirement 1 Date 01/01/04 12/31/04 Accounts Investment in Lagoon Cash Cash Dividend Income Cash Dividend Income Investment in Lagoon Cash Debit 50,000 1,000 Credit 50,000 1,000

12/31/05 12/31/05

2,000 96,000

2,000 96,000

Requirement 2 Calculation of investment balance Cost of initial purchase of a 10% interest Cost of second purchase of a 20% interest Investment balance, December 31, 2005 $ $ 50,000 96,000 146,000

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Exercise 2 Requirement 1 Sales (increase in trial balance) Less: Expense (increase in trial balance) Net Income = Waders ownership of 25% Requirement 2 Debit 120,000 5,000 125,000 Credit $ ( $ yields 5,000 investment income 60,000 40,000) 20,000

Initial Investment Investment Income Total

Exercise 3 Investment cost Book value acquired: $280,000 x 40% = Excess cost over book value acquired = Schedule to Allocate Cost-Book Value Differentials Fair valueBook value Inventories $20,000 Equipment 60,000 Notes payable 20,000 Allocated to specific assets Remainder allocated to goodwill Interest 40% 40% 40% Amount Assigned 8,000 24,000 8,000 40,000 48,000 88,000 $ 200,000 112,000 88,000

$ $

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Exercise 4 Sandpipers share of Shore net income ($18,000 x 30%) Add: Overvalued accounts receivable collected in 2005 Add: Undervalued accounts payable paid in 2005 Less: Undervalued inventories sold in 2005 Less: Depreciation on building undervaluation $3,600/6 Less: Amortization on patent $3,200/8 years Income from Shore $ 5,400 600 300 2,400) 600) 400) 2,900

( ( ( $

Exercise 5 Cost of Stilts 40% investment in Shallow Less: Value of net assets acquired: 40% x $6,000,000 of net equity = Excess cost over book value acquired = Schedule to Allocate Cost-Book Value Differentials Fair valueBook value Interest Inventories $ 50,000 x 40% Land 350,000 x 40% Building-net ( 200,000) x 40% Equipment-net 50,000 x 40% Excess allocated to specific assets and liabilities Excess allocated to goodwill Calculated excess of cost over book value Amount Assigned 20,000 140,000 ( 80,000) 20,000 100,000 160,000 260,000 $ $ 2,660,000 2,400,000 260,000

$ $ $

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Exercise 6 Cost of Curlews 20% investment in Waterway Less: Value of net assets acquired: 20% x $400,000 of net assets = Excess cost over book value acquired = Requirement 1: Curlews 2005 income from Waterway equals: (20% x $30,000) - $1,250 of patent amortization Requirement 2: Curlews 2006 income from Waterway equals: (20% x $20,000) - patent amortization of $1,250 = $ 2,750 $ $ 50,000 40,000 10,000

4,750

Requirement 3: Initial investment in Waterway Plus: Net change for 2005: (Income of $4,750 Dividends of $2,000) Plus: Net change for 2006: (Income of $2,750 Dividends of $2,000) Investment balance at December 31, 2006: $ 50,000 2,750 750 $ 53,500

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Exercise 7 Calculation of Lowtides net assets at the end of each year: Lowtides net assets on January 1, 2004 $ Plus: 2001 net income minus dividends ($40,000$30,000) Lowtides net assets at December 31, 2004 $ Plus: 2002 net income minus dividends ($70,000-$55,000) Lowtides net assets at December 31, 2005 Plus: 2003 net income minus dividends ($30,000-$10,000) $ Lowtides net assets at December 31, 2006 $ 400,000 10,000 410,000 15,000 425,000 20,000 445,000

Avocets adjusted fair value payments for equipment Avocets January 1, 2004 initial investment cost $ Less: Avocets share of Lowtides net assets on this date = (21% x $400,000) = Equals: fair value adjustment for equipment $ Avocets January 1, 2005 investment cost $ Less: Albions share of Lowtides net assets on this date = (9% x $410,000) = Equals: fair value adjustment for equipment $ Avocets January 1, 2006 investment cost $ Less: Avocets share of Lowtides net assets on this date = (5% x $425,000) = Equals: fair value adjustment for equipment $ Requirement 1 2004 equipment depreciation ($40,000/10 years)= 2005 equipment depreciation ($40,000/10 years) + ($14,100/10 years)= 2006 equipment depreciation ($40,000/10 years) + ($14,100/10 years) + ($10,750/10 years)=

124,000 84,000 40,000 51,000 36,900 14,100 32,000 21,250 10,750

$ $ $

4,000 5,410 6,485 207,000 1,900) 910) 515 204,705

Requirement 2: Direct investment costs ($124,000+$51,000+$32,000)= $ Plus: 2001 adjustments (21%)x($40,000-$30,000)-$4,000 = Plus: 2002 adjustments (30%)x($70,000-$55,000)-$5,410 = Plus: 2003 adjustments (35%)x($30,000-$10,000)-$6,485 = Equals: December 31, 2006 investment account balance $

( (

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Exercise 8 Calculation of Squid net assets at the end of each year: Squid net assets on January 1, 2003 Plus: 2003 net income minus dividends ($40,000$24,000) Squid net assets at December 31, 2003 Plus: 2004 net income minus dividends ($70,000-$32,000) Squid net assets at December 31, 2004 Plus: 2005 net income minus dividends ($100,000-$44,000) Squid net assets at December 31, 2005 $ $ $ $ 600,000 16,000 616,000 38,000 654,000 56,000 710,000

Albatross adjusted fair value payments for equipment Albatross January 1, 2003 initial investment cost $ Less: Albatross share of Squid net assets on this date = (5% x $600,000) = Equals: fair value adjustment for equipment $ Albatross January 1, 2004 investment cost $ Less: Albatross 5% share of Squid net assets on this date = (5% x $616,000) = Equals: fair value adjustment for equipment $ Albatross January 1, 2005 investment cost $ Less: Albatross share of Squid net assets on this date = (5% x $654,000) = Equals: fair value adjustment for equipment $ Requirement 1 2003 dividend income = 5%

37,000 30,000 7,000 37,000 30,800 6,200 37,000 32,700 4,300

x $24,000 of dividends =

$ $ $

1,200 3,200 6,600

2004 dividend income = 10% x $32,000 of dividends = 2005 dividend income = 15% x $44,000 of dividends =

Investment account Jan 1, 2003 purchase Dec 31, 2003 balance Jan 1, 2004 purchase Dec 31, 2004 balance Jan 1, 2005 purchase Dec 31, 2005 balance

= = = = = =

$ $ $ $ $ $

37,000 37,000 37,000 74,000 37,000 111,000

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Requirement 2: 2003 net income from Squib (investee) = (5% x 40,000) Depreciation of $1,400 ($7,000/5 years) =

$ (

600

2004 net income from Squib (investee) = (10% x 70,000) depreciation of $1,400 from the 2003 purchase and depreciation of $1,240 from the 2004 purchase ($6,200/5 $ years) for a total depreciation of $2,640. 2005 net income from Squib (investee) = (15% x 100,000) depreciation of $1,400 from the 2003 purchase and depreciation of $1,240 from the 2004 purchase and - $ depreciation of $860 from the 2005 purchase ($4,300/5 years)for a total depreciation of $3,500.

4,360

11,500

Exercise 9 Cost of Petrels 80% investment in Ocean Less: Value of net assets acquired: 70% x 3,100,000 of net assets = Excess cost over book value acquired = Schedule to Allocate Cost-Book Value Differentials Fair valueBook value Interest Equipment $ (60,000) x 70% Building 100,000 x 70% Note payable 30,000 x 70% Excess allocated to specific assets and liabilities Excess allocated to goodwill Calculated excess of cost over book value Amount Assigned (42,000) 70,000 21,000 49,000 381,000 430,000 $ $ 2,600,000 2,170,000 430,000

$ $

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Exercise 10 Cost of Boscos 60% investment in Elsie Less: Value of net assets acquired: 60% x 3,000,000 of net assets = Excess cost over book value acquired = Schedule to Allocate Cost-Book Value Differentials Fair valueBook value Interest Inventory $ 25,000 x 60% Building (100,000) x 60% Note payable (20,000) x 60% Excess allocated to specific assets and liabilities Excess allocated to goodwill Calculated excess of cost over book value Amount Assigned 15,000 ( 60,000) ( 12,000) ( 57,000) 57,000 0 $ $ 1,800,000 1,800,000 0

$ $

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