11.21 (Trusco; balance sheet and income effects of alternative methods of accounting for investments.)
Investment Net Income
a. $40 million $2 million
b. $39 million $2 million
c. $45 million $2 million
d. $129 milliona $15 millionb
e. $169 millionc $15 milliond
a$120 million + .30($50 million – $20 million) = $129 million.
b.30 X $50 million = $15 million.
c$160
million + .30($50 million – $20 million) = $169 million.
d.30 X $50 million = $15 million.\
11.26 (Mulherin Corporation; journal entries under various methods of accounting for investments.)
a. January 2
Investment in Hanson ............................................. 320,000
Investment in Maloney ............................................ 680,000
Investment in Quinn ................................................. 2,800,000
Cash ......................................................................... 3,800,000
To record acquisition of investments.
December 31
Cash ................................................................................. 6,000
Dividend Revenue ...................................................... 6,000
To record dividend from Hanson: .15 X $40,000 = $6,000.
December 31
Unrealized Holding Loss on Investment in Secur-
ities (SE/Comp Y) ...................................................... 15,000
Investment in Hanson ......................................... 15,000
To apply the market value method to the invest ment in Hanson.
December 31
Investment in Maloney ................................................ 150,000
Equity in Earnings of Maloney ............................... 150,000
To recognize share of Maloney’s earnings; .30 X $500,000 = $150,000.
December 31
Cash ................................................................................. 54,000
Investment in Maloney ............................................ 54,000
To recognize share of Maloney’s dividends; .30 X $180,000 = $54,000.
December 31
Amortization Expense .................................................. 8,000
Investment in Maloney ............................................ 8,000
To amortize excess acquisition cost for Maloney;
$680,000 – (.30 X $2,000,000) = $80,000;
$80,000/10 = $8,000.
December 31
Investment in Quinn ..................................................... 600,000
Equity in Earnings of Quinn .................................... 600,000
To recognize share of Quinn’s earnings.
December 31
Cash ................................................................................. 310,000
Investment in Quinn ................................................. 310,000
To recognize share of Quinn’s dividends.
b. Common Stock (Quinn) ............................................... 200,000
Additional Paid-in Capital (Quinn) ............................ 800,000
Retained Earnings (Quinn) ......................................... 690,000
Equity in Earnings of Quinn (Mulherin) ................... 600,000
Goodwill ........................................................................... 800,000
Investment in Quinn (Mulherin) ........................... 3,090,000
$2,800,000 + $600,000 – $310,000 = $3,090,000.
11.27 (CAR Corporation; consolidation policy and principal consolidation concepts.)
b. Charles Electronics ......................................(.75 X $120,000) = $ 90,000
Alexandre du France Software Systems ......(.80 X 60,000) = 48,000
R Credit Corporation ......................................(.90 X 144,000) = 129,600
Total
Income from Subsidiaries .............................................. $ 267,600
c. Minority Interest shown under accounting assumed in problem:
Charles Electronics .........................................(.25 X $120,000) = $ 30,000
Alexandre du France Software Systems .....................(None) = --
R Credit Corporation ........................................................(None)
= -
$30,000
CAR Corporation subtracts the minority interest in computing net income.
d. Charles Electronics, no increase because already consolidated.
Alexandre du France Software Systems increase by 80 percent of net income less dividends:
.80 X ($96,000 – $60,000) = $28,800.
R Credit Corporation, no increase because equity method results in the same income statement effects as do consolidated statements. Net income of CAR Corporation would be:
$1,228,800 = $1,200,000 (as reported) + $28,800 (increase).
e. Minority Interest shown if CAR Corporation consolidated all companies:
Charles Electronics ........................................(.25 X $120,000) = $ 30,000
Alexandre du France Software Systems ........(.20 X 96,000) = 19,200
R Credit Corporation ........................................(.10 X 144,000) = 14,400
$63,600
11.37 (Effects on statement of cash flows.)
a. The journal entry to record this transaction is as follows:
Marketable Securities .................................................. 59,700
Cash ............................................................................. 59,700
Because this entry involves a credit to the Cash account, Line (9) decreases by $59,700. The purchase of marketable securities is an Investing activity, so Line (5) increases by $59,700. Note that Line (5) carries a negative sign, so increasing it reduces cash.
b. The journal entries to record this transaction are as follows:
Cash ................................................................................. 47,900
Marketable Securities .............................................. 42,200
Realized Gain on Sale of Securities Available
for Sale (IncSt) ...................................................... 5,700
Unrealized Holding Gain on Securities Available
for Sale (SE/Comp Y) ................................................ 1,800
Marketable Securities ($44,000 – $42,200) ... 1,800
Because the first entry involves a debit to the Cash account, Line (9) increases by $47,900. The sale of marketable securities is an Investing activity, so Line (4) increases by $47,900. Because the realized gain is an income statement account, Line (1) increases by $5,700. We show all of the cash proceeds of sale ($47,900) on Line (4). We double count cash in the amount of the gain if we do not eliminate $5,700 from the Operations section of the statement of cash flows. Thus, Line (3) increases by $5,700 to offset the realized gain. The net effect of the entries on Line (1) and Line (3) is zero. The second entry does not involve an income statement account or the Cash account and therefore would not appear on the statement of cash flows.
c. The journal entries to record this transaction are as follows:
Cash ................................................................................. 18,700
Realized Loss on Sale of Securities Available for
Sale (IncSt) ................................................................. 6,400
Marketable Securities ......................................... 25,100
Marketable Securities ($25,100 – $19,600) ............ 5,500
Unrealized Holding Loss on Securities Available
for Sale (SE/Comp Y) ........................................... 5,500
Because the first entry involves a debit to the Cash account, Line (9) increases by $18,700. The sale of marketable securities is an Investing activity, so Line (4) increases by $18,700. Because the realized loss is an income statement account, Line (1) decreases by $6,400. The loss used no cash so Line (2) shows an addback of $6,400. The second entry does not involve the Cash account, nor any income statement account, so it does not affect the statement of cash flows.
d..The journal entry is as follows:
Unrealized Holding Loss on Securities Available
for Sale (SE/Comp Y) ................................................ 19,000
MarketableSecurities($220,500–201,500)........................................................ 19,000
This entry does not involve a debit or credit to the Cash account, so Line (9) is not affected. This entry also does not affect an income statement account (the Unrealized Holding Loss on Securities Available for Sale account is a shareholders’ equity account), so Line (1) is not affected. Thus, this entry does not appear on the statement of cash flows.
e. The journal entry is as follows:
Marketable Securities .................................................. 6,400
Unrealized Holding Gain on Securities Avail-
able for Sale (SE/Comp Y) .................................. 6,400
For the same reasons given in Part d. above, this entry does not appear on the statement of cash flows.
f. The journal entry to record this transaction is:
Cash ................................................................................. 7,000
Dividend Revenue ...................................................... 7,000
The Cash account increases, so Line (9) increases by $7,000. Net income increases, so Line (1) increases by $7,000.
g. The journal entry to record this event is:
Unrealized Holding Loss on Investment in Secur-
ities (SE/Comp Y) ...................................................... 2,000
Investments in Securities .................................... 2,000
The Cash account does not change so there is no effect on Line (9). Net income does not change so there is no effect on Line (1). The firm would disclose this event in a supplementary schedule or note if the amount was material.
h. The journal entry to record this transaction is:
Cash (.40 X $10,000) ..................................................... 4,000
Investment in Affiliate [.40($25,000 – $10,000)] ... 6,000
Equity in Earnings of Affiliate (.40 X $25,000) .... 10,000
The Cash account increases in the amount of the dividend, so Line (9) increases $4,000. Net income on Line (1) increases by $10,000 for the equity in earnings. Because the firm recognizes more revenue ($10,000) than the cash received ($4,000), it must increase Line (3) by $6,000 to convert net income to cash flow from operations.
i. The journal entry to record this event is:
Equity in Loss of Affiliate (.40 X $12,500) ................ 5,000
Investment in Affiliate ............................................. 5,000
There is no effect on the Cash account so Line (9) does not change. Net income decreases for the share of the loss so Line (1) decreases by $5,000. Because the loss does not use cash, Line (2) increases by $5,000 when converting net income to cash flow from operations.
j. The journal entry to record this event is:
Amortization Expense .................................................. 2,000
Investment in Affiliate ............................................. 2,000
There is no effect on the Cash account so Line (9) does not change. Net income on Line (1) decreases for amortization expense. Because the amortization expense does not reduce cash, Line (2) increases by $2,000 when converting net income to cash flow from operations.
11.45 (Citibank; analysis of financial statement disclosures related to marketable securities.) (Amounts in Millions)
a. Cash ................................................................................. 37,600
Realized Loss on Sale of Securities Available for
Sale (IncSt) ................................................................. 113
Realized Gain on Securities Available for
Sale (IncSt) ........................................................ 443
Marketable Securities ......................................... 37,270a
a$14,075 + $37,163 – $13,968 = $37,270.
Marketable Securities .................................................. 262
Unrealized Holding Loss on Securities Avail-
able for Sale ($37,270 – $37,008) (SE/Comp
Y) .............................................................................. 262
b. Balance, December 31, Year 10 ($957 – $510) $ 447 Cr.
Net Unrealized Holding Loss on Securities Sold (from
Part a.) 262 Cr.
Increase in Net Unrealized Holding Gain on Securities
Held on December 31, Year 11 (Plug) 518 Cr.
Balance, December 31, Year 11 ($1,445 – $218) $ 1,227 Cr.
c. Interest and Dividend Revenue $ 1,081
Net Realized Gain on Securities Sold from Market
Price Changes Occurring During Year 11:
($37,600 – $37,008) 592
Net Unrealized Holding Gain on Securities Held on
December 31, Year 11 (from Part b.) 518
Total Income $ 2,191