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Chapter 10: Q.8RQ (page 566)
Question: What method is used for investments in equity securities with more than 50% ownership? Briefly describe this method.
Answer
The consolidation accounting method is used when the investor has ownership of more than 50%.
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Accounting for debt investments
Advance & Co. owns vast amounts of corporate bonds. Suppose Advance buys $1,100,000 of FermaCo bonds at face value on January 2, 2018. The FermaCo bonds pay interest at the annual rate of 3% on June 30 and December 31 and mature on December 31, 2037. Advance intends to hold the investment until maturity.
Requirements
1. Journalize any required 2018 entries for the bond investment.
Accounting for equity investments
Money Man Investments completed the following transactions during 2018:
Jan. 14 Purchased 400 shares of Technomite stock, paying \(56 per share. The investment represents 25% ownership in Technomite鈥檚 voting stock and Money Man has significant influence over Technomite. Money Man intends to hold the investment for the indefinite future.
Aug. 22 Received a cash dividend of \)0.27 per share on the Technomite stock.
Dec. 31 Technomite鈥檚 current market value is \(51 per share.
31 Technomite reported net income of \)180,000 for the year ended 2018.
Requirements
Classify and prepare partial financial statements for Money Man鈥檚 25% Technomite investment for the year ended December 31, 2018.
Question: P10-25 Accounting for debt and equity investments
This problem continues the Canyon Canoe Company situation from Chapter 9. Amber and Zack Wilson are pleased with the growth of their business and have decided to invest its temporary excess cash in a brokerage account. The company had the following securities transactions in 2019.
Jul. 1 Purchased 8,000 shares in Adobe Outdoor Adventure Company for \(3 per share. Canyon Canoe does not have significant influence over Adobe.
7 Purchased 35% of the stock of Bison Backpacks consisting of 43,750 shares of stock (out of a total of 125,000 shares) for \)5 per share. Canyon Canoe does have significant influence over Bison.
10 Purchased a bond from Camelot Canoes with a face value of \(80,000. Canyon Canoe intends to hold the bond to maturity. The bond pays interest semiannually on June 30 and December 31.
Sep. 30 Received dividends of \)0.15 per share from Adobe.
Nov. 1 Received dividends of \(0.30 per share from Bison.
Dec. 31 Received an interest payment of \)3,200 from Camelot Canoes.
31 Bison Backpacks reported net income of \(30,000 for the year.
31 Adjusted the Adobe stock for a market value of \)2.98 per share.
Requirements
Determine the effect on Canyon Canoe Company鈥檚 net income for the year for each of the three investments.
Question: P10-20A Accounting for equity investments
The beginning balance sheet of Waterfall Source Co. included a \(400,000 investment in Evan stock (20% ownership, Waterfall has significant influence over Evan). During the year, Waterfall Source completed the following investment transactions:
Mar. 3 Purchased 4,000 shares at \)11 per share of Lili Software common stock as a long-term equity investment, representing 7% ownership, no significant influence.
May 15 Received a cash dividend of \(0.61 per share on the Lili investment.
Dec. 15 Received a cash dividend of \)70,000 from Evan investment.
31 Received Evan鈥檚 annual report showing \(300,000 of net income.
31 Received Lili鈥檚 annual report showing \)120,000 of net income for the year.
31 Evan鈥檚 stock fair value at year-end was \(390,000.
31 Lili鈥檚 common stock fair value at year-end was \)12 per share.
Requirements
1. Journalize the transactions for the year of Waterfall Source.
Question: P10-20A Accounting for equity investments
The beginning balance sheet of Waterfall Source Co. included a \(400,000 investment in Evan stock (20% ownership, Waterfall has significant influence over Evan). During the year, Waterfall Source completed the following investment transactions:
Mar. 3 Purchased 4,000 shares at \)11 per share of Lili Software common stock as a long-term equity investment, representing 7% ownership, no significant influence.
May 15 Received a cash dividend of \(0.61 per share on the Lili investment.
Dec. 15 Received a cash dividend of \)70,000 from Evan investment.
31 Received Evan鈥檚 annual report showing \(300,000 of net income.
31 Received Lili鈥檚 annual report showing \)120,000 of net income for the year.
31 Evan鈥檚 stock fair value at year-end was \(390,000.
31 Lili鈥檚 common stock fair value at year-end was \)12 per share.
Requirements
3. Prepare Waterfall Source鈥檚 partial balance sheet at December 31, 2018, from your answers in Requirement 2.
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