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Chapter 22: 22-23E (page 1314)

Dan Aykroyd Corp. was a 30% owner of Steve Martin Company, holding 210,000 shares of Martin鈥檚 common stock on December 31, 2016. The investment account had the following entries.

Investment in Martin

1/1/15 Cost \(3,180,000 12/6/15 Dividend received \)150,000

12/31/15 Share of income 390,000 12/5/16 Dividend received 240,000

12/31/16 Share of income 510,000

On January 2, 2017, Aykroyd sold 126,000 shares of Martin for \(3,440,000, thereby losing its significant influence. During the year 2017, Martin experienced the following results of operations and paid the following dividends to Aykroyd.

Martin Dividends Paid Income (Loss) to Aykroyd 2017 \)300,000 \(50,400

At December 31, 2017, the fair value of Martin shares held by Aykroyd is \)1,570,000. This is the first reporting date since the January 2 sale.

Instructions (a) What effect does the January 2, 2017, transaction have upon Aykroyd鈥檚 accounting treatment for its investment in Martin?

(b) Compute the carrying amount of the investment in Martin as of December 31, 2017 (prior to any fair value adjustment).

(c) Prepare the adjusting entry on December 31, 2017, applying the fair value method to Aykroyd鈥檚 long-term investment in Martin Company securities.

Short Answer

Expert verified

The effect will be the change of the method for accounting of investments, and the Carrying amount will be $2,229,600, and the journal entry will be passed for the adjustment

Step by step solution

01

Effect of January 2, 2017 transaction

The company will lose the significant rights of the company鈥檚 shares, which will make the company change the recording method from equity to the fair value method.

02

Computation of carrying amount of investment

Amount ($)

Cost

3,180,000

Share of Income 12/31/2015

390,000

Share of Income 12/31/2016

530,000

4,100,000

Dividends Received on 12/6/2015

150,000

Dividends received on 12/5/2015

240,000

Investment value as of 31/12/2016 for 210,000

3,710,000

The investment value for 126,000 shares

2,226,000

Investment Value as on 01/01/2017

2,226,000

Add: profit for the year 2017 300000*18%

54,000

2,280,000

Less: Dividends received

-50,400

Carrying amount as of December 31, 2017

2,229,600

03

Adjusting journal entry

Date

Particulars

Debit ($)

Credit ($)

Investment In securities

659,600

Capital Reserve

659,600

(Being adjusting entry recorded)

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Most popular questions from this chapter

Holder-Webb Company began operations on January 1, 2015, and uses the average-cost method of pricing inventory. Management is contemplating a change in inventory methods for 2018. The following information is available for the years 2015鈥�2017. Net Income Computed Using Average-Cost Method FIFO Method LIFO Method 2015 \(15,000 \)19,000 $12,000 2016 18,000 23,000 14,000 2017 20,000 25,000 17,000 Instructions (Ignore all tax effects.) (a) Prepare the journal entry necessary to record a change from the average-cost method to the FIFO method in 2018. (b) Determine net income to be reported for 2015, 2016, and 2017, after giving effect to the change in accounting principle. (c) Assume Holder-Webb Company used the LIFO method instead of the average-cost method during the years 2015鈥� 2017. In 2018, Holder-Webb changed to the FIFO method. Prepare the journal entry necessary to record the change in principle.

Lenexa State Bank has followed the practice of capitalizing certain marketing costs and amortizing these costs over their expected life. In the current year, the bank determined that the future benefits from these costs were doubtful. Consequently, the bank adopted the policy of expensing these costs as incurred. How should the bank report this accounting change in the comparative financial statements?

At January 1, 2017, Beidler Company reported retained earnings of \(2,000,000. In 2017, Beidler discovered that 2016 depreciation expense was understated by \)400,000. In 2017, net income was \(900,000 and dividends declared were \)250,000. The tax rate is 40%. Prepare a 2017 retained earnings statement for Beidler Company

(Accounting for Accounting Changes and Errors) Listed below are various types of accounting changes and errors.

______ 1. Change in a plant asset鈥檚 salvage value.

______ 2. Change due to overstatement of inventory.

______ 3. Change from sum-of-the-years鈥�-digits to straight-line method of depreciation.

______ 4. Change from presenting unconsolidated to consolidated financial statements.

______ 5. Change from LIFO to FIFO inventory method.

______ 6. Change in the rate used to compute warranty costs.

______ 7. Change from an unacceptable accounting principle to an acceptable accounting principle.

______ 8. Change in a patent鈥檚 amortization period.

______ 9. Change from completed-contract to percentage-of-completion method on construction contracts.

______ 10. Change from FIFO to average-cost inventory method.

Instructions For each change or error, indicate how it would be accounted for using the following code letters:

(a) Accounted for prospectively.

(b) Accounted for retrospectively.

(c) Neither of the above.

Discuss briefly the three approaches that have been suggested for reporting changes in accounting principles.
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