QUESTION
| Assessment 1: Accounting for Equity Investments | ||
| Exercise 1 Worksheet: Journal Entries | ||
| On January 1, 2015, the Parker Corporation acquired 10% of Simon Inc. for $420,000, even though Simon’s book value on January 1 was $3,400,000. Simon held land on its books that was undervalued by $200,000. In 2015, Simon earned $480,000 in net income and paid cash dividends of $180,000. Parker acquired an additional 30% of Simon January 1, 2016, for $1,200,000. Simon’s land remained undervalued as of that date by $240,000. Any excess cost was ascribed to a trademark with a life of 10 years for the first acquisition and a life of nine years for the second acquisition. Because fair values were not readily available, Parker maintained the initial investment of 10% at cost. The equity method will now be applied. In 2016, Simon reported $600,000 in income and $220,000 of distributed dividends. | ||
| Complete steps 1 and 2 below. | ||
| Step 1: Restate the 2015 purchase to the equity method in Tables 1, 2, and 3. | ||
| Table 1: First Purchase – January 1, 2015 | This cell intentionally left blank. | |
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| Table 2: Book Value: Simon – January 1, 2016 (Before Second Purchase) | This cell intentionally left blank. | |
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| Table 3: Second Purchase – January 1, 2016 | This cell intentionally left blank. | |
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| Step 2: Record the 2016 journal entries for Parker, using Tables 4–8 below. | ||
| Table 4: Entry 1 – To Record the Second Acquisition of Simon Stock | ||
| Account | Debit | Credit |
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| Table 5: Entry 2 – To Restate Reported Figures for 2015 to the Equity Method for Comparability | ||
| Account | Debit | Credit |
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| Table 6: Entry 3 – To Record Income for the Year | ||
| Account | Debit | Credit |
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| Table 7: Entry 4 – To Record the Collection of Dividends From Simon | ||
| Account | Debit | Credit |
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| Table 8: Entry 5 – To Record Amortization for 2016 | ||
| Account | Debit | Credit |
| Assessment 1: Accounting for Equity Investments | |||||
| Exercise 2 Worksheet: Consolidated Balance Sheet | |||||
| On December 31, 2015, the Penn Corporation purchased all of Southern Company’s outstanding shares for $990,000 in cash. Penn will operate Southern as a wholly-owned subsidiary that has a separate legal and accounting identity. Many of Southern’s book values approximate fair values, but the fair values of some accounts differ from the book values. Additionally, Southern is carrying unrecorded, internally developed assets on its books. In determining the purchase price, Penn evaluated the differences between Southern’s fair values and its book values, as shown in the table below. | |||||
| Table 1: Southern’s Fair Values and Book Values | |||||
| Account | Book Values | Fair Values | This cell intentionally left blank. | ||
| Computer software | $40,000 | $140,000 | This cell intentionally left blank. | ||
| Equipment | $80,000 | $60,000 | This cell intentionally left blank. | ||
| Client contracts | $- | $200,000 | This cell intentionally left blank. | ||
| In-process research and development | $- | $80,000 | This cell intentionally left blank. | ||
| Notes payable | $(120,000) | $(130,000) | This cell intentionally left blank. | ||
| The financial information available for consolidation, as of December 31, 2015, is shown in the table below. | |||||
| Table 2: Financial Information Available for Consolidation | |||||
| Account | Penn | Southern | This cell intentionally left blank. | ||
| Cash | $72,000 | $36,000 | This cell intentionally left blank. | ||
| Receivables | $232,000 | $104,000 | This cell intentionally left blank. | ||
| Inventory | $280,000 | $180,000 | This cell intentionally left blank. | ||
| Investment in Southern | $990,000 | $- | This cell intentionally left blank. | ||
| Computer software | $420,000 | $40,000 | This cell intentionally left blank. | ||
| Buildings (net) | $1,190,000 | $260,000 | This cell intentionally left blank. | ||
| Equipment (net) | $616,000 | $80,000 | This cell intentionally left blank. | ||
| Client contracts | $- | $- | This cell intentionally left blank. | ||
| Research and development asset | $- | $- | This cell intentionally left blank. | ||
| Goodwill | $- | $- | This cell intentionally left blank. | ||
| Total assets | $3,800,000 | $700,000 | This cell intentionally left blank. | ||
| Accounts payable | $(176,000) | $(50,000) | This cell intentionally left blank. | ||
| Notes payable | $(1,020,000) | $(120,000) | This cell intentionally left blank. | ||
| Common stock | $(760,000) | $(200,000) | This cell intentionally left blank. | ||
| Additional paid-in capital | $(340,000) | $(50,000) | This cell intentionally left blank. | ||
| Retained earnings | $(1,504,000) | $(280,000) | This cell intentionally left blank. | ||
| Total liabilities and equities | $(3,800,000) | $(700,000) | This cell intentionally left blank. | ||
| Prepare a consolidated balance sheet for Penn and Southern, as of December 31, 2015, using Tables 3, 4, and 5 below. |
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| Table 3: Consolidated Balance Sheet Calculations 1 | |||||
| Account | Column 1 | Column 2 | This cell intentionally left blank. | ||
| Consideration transferred at fair value | This cell intentionally left blank. | ||||
| Book value | This cell intentionally left blank. | ||||
| Excess fair over book value | This cell intentionally left blank. | ||||
| Allocation of excess fair value to specific assets and liabilities: | This cell intentionally left blank. | ||||
| computer software | This cell intentionally left blank. | ||||
| equipment | This cell intentionally left blank. | ||||
| client contracts | This cell intentionally left blank. | ||||
| in-process research and development | This cell intentionally left blank. | ||||
| to notes payable | This cell intentionally left blank. | ||||
| Goodwill | This cell intentionally left blank. | ||||
| Table 4: Consolidated Balance Sheet Calculations 2 | |||||
| Account | Penn | Southern | Debit | Credit | Consolidated |
| Cash | |||||
| Receivables | |||||
| Inventory | |||||
| Investment in Southern | |||||
| Computer software | |||||
| Buildings (net) | |||||
| Equipment (net) | |||||
| Client contracts | |||||
| Research and development asset | |||||
| Goodwill | |||||
| Total assets | |||||
| Accounts payable | |||||
| Notes payable | |||||
| Common stock | |||||
| Additional paid-in capital | |||||
| Retained earnings | |||||
| Total liabilities and equities | |||||
| Table 5: Consolidated Balance Sheet | |||||
| Penn Company and Subsidiary Consolidated Balance Sheet December 31, 2015 |
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| Assets | Liabilities and Owners’ Equity | This cell intentionally left blank. | |||
| Cash | Accounts payable | This cell intentionally left blank. | |||
| Receivables | Notes payable | This cell intentionally left blank. | |||
| Inventory | This cell intentionally left blank. | This cell intentionally left blank. | This cell intentionally left blank. | ||
| Computer software | This cell intentionally left blank. | This cell intentionally left blank. | This cell intentionally left blank. | ||
| Buildings (net) | This cell intentionally left blank. | This cell intentionally left blank. | This cell intentionally left blank. | ||
| Equipment (net) | This cell intentionally left blank. | This cell intentionally left blank. | This cell intentionally left blank. | ||
| Client contracts | This cell intentionally left blank. | This cell intentionally left blank. | This cell intentionally left blank. | ||
| This cell intentionally left blank. | This cell intentionally left blank. | Common stock | This cell intentionally left blank. | ||
| Research and development asset | Additional paid-in capital | This cell intentionally left blank. | |||
| Goodwill | Retained earnings | This cell intentionally left blank. | |||
| Total assets | Total liabilities and equities | This cell intentionally left blank. | |||
ANSWER
| Step 1: Restate the 2015 purchase to the equity method in Tables 1, 2, and 3. | ||
| Table 1: First Purchase – January 1, 2015 | This cell intentionally left blank. | |
| Payment by investor | $420,000 | This cell intentionally left blank. |
| Percentage of book value acquired (3,400,000 x 10%) | $340,000 | This cell intentionally left blank. |
| Payment in excess of book value | $80,000 | This cell intentionally left blank. |
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| Excess payment identified with specific assets: | This cell intentionally left blank. | |
| Land (200,000 x 10%) | $20,000 | This cell intentionally left blank. |
| Trademark (600,000 x 10%) | $60,000 | This cell intentionally left blank. |
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| Table 2: Book Value: Simon – January 1, 2016 (Before Second Purchase) | This cell intentionally left blank. | |
| Book value on January 1, 2015 | $3,400,000 | This cell intentionally left blank. |
| 2015 net income | $480,000 | This cell intentionally left blank. |
| Less cash dividends paid | $(180,000) | This cell intentionally left blank. |
| Less Trademark amortization | $(6,000) | This cell intentionally left blank. |
| Book value on January 1, 2016 | $3,694,000 | This cell intentionally left blank. |
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| Table 3: Second Purchase – January 1, 2016 | This cell intentionally left blank. | |
| Payment by investor | $1,200,000 | This cell intentionally left blank. |
| Percentage of book value acquired (3,400,000 x 10%) | $1,110,000 | This cell intentionally left blank. |
| Payment in excess of book value | $90,000 | This cell intentionally left blank. |
| Excess payment identified with specific assets: | This cell intentionally left blank. | |
| Land (240,000 x 30%) | $72,000 | This cell intentionally left blank. |
| Trademark (540,000 x 30%) | $162,000 | This cell intentionally left blank. |
| Goodwill | $(144,000) | This cell intentionally left blank. |
| Step 2: Record the 2016 journal entries for Parker, using Tables 4–8 below. | ||
| Table 4: Entry 1 – To Record the Second Acquisition of Simon Stock | ||
| Account | Debit | Credit |
| Investment in Simon Inc | $1,200,000 | |
| Cash | $1,200,000 | |
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| Table 5: Entry 2 – To Restate Reported Figures for 2015 to the Equity Method for Comparability | ||
| Account | Debit | Credit |
| Investment in Simon Inc | $48,000 | |
| Equity Investment income | $48,000 | |
| Dividend recievable | $18,000 | |
| Investment in Simon Inc | $18,000 | |
| Table 6: Entry 3 – To Record Income for the Year | ||
| Account | Debit | Credit |
| Investment in Simon Inc. (600,000 x 40%) | $240,000 | |
| Equity in investment income | $240,000 | |
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| Table 7: Entry 4 – To Record the Collection of Dividends From Simon | ||
| Account | Debit | Credit |
| Dividends receivable (220,000 x 40%) | $88,000 | |
| Investment in Simon Inc. | $88,000 | |
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| Table 8: Entry 5 – To Record Amortization for 2016 | ||
| Account | Debit | Credit |
| Equity in Investment Incom | $18,000 | |
| Investment in Simon Inc. | $18,000 | |
| Exercise 2 Worksheet: Consolidated Balance Sheet | |||||
| On December 31, 2015, the Penn Corporation purchased all of Southern Company’s outstanding shares for $990,000 in cash. Penn will operate Southern as a wholly-owned subsidiary that has a separate legal and accounting identity. Many of Southern’s book values approximate fair values, but the fair values of some accounts differ from the book values. Additionally, Southern is carrying unrecorded, internally developed assets on its books. In determining the purchase price, Penn evaluated the differences between Southern’s fair values and its book values, as shown in the table below. | |||||
| Table 1: Southern’s Fair Values and Book Values | |||||
| Account | Book Values | Fair Values | This cell intentionally left blank. | ||
| Computer software | $40,000 | $140,000 | This cell intentionally left blank. | ||
| Equipment | $80,000 | $60,000 | This cell intentionally left blank. | ||
| Client contracts | $- | $200,000 | This cell intentionally left blank. | ||
| In-process research and development | $- | $80,000 | This cell intentionally left blank. | ||
| Notes payable | $(120,000) | $(130,000) | This cell intentionally left blank. | ||
| The financial information available for consolidation, as of December 31, 2015, is shown in the table below. | |||||
| Table 2: Financial Information Available for Consolidation | |||||
| Account | Penn | Southern | This cell intentionally left blank. | ||
| Cash | $72,000 | $36,000 | This cell intentionally left blank. | ||
| Receivables | $232,000 | $104,000 | This cell intentionally left blank. | ||
| Inventory | $280,000 | $180,000 | This cell intentionally left blank. | ||
| Investment in Southern | $990,000 | $- | This cell intentionally left blank. | ||
| Computer software | $420,000 | $40,000 | This cell intentionally left blank. | ||
| Buildings (net) | $1,190,000 | $260,000 | This cell intentionally left blank. | ||
| Equipment (net) | $616,000 | $80,000 | This cell intentionally left blank. | ||
| Client contracts | $- | $- | This cell intentionally left blank. | ||
| Research and development asset | $- | $- | This cell intentionally left blank. | ||
| Goodwill | $- | $- | This cell intentionally left blank. | ||
| Total assets | $3,800,000 | $700,000 | This cell intentionally left blank. | ||
| Accounts payable | $(176,000) | $(50,000) | This cell intentionally left blank. | ||
| Notes payable | $(1,020,000) | $(120,000) | This cell intentionally left blank. | ||
| Common stock | $(760,000) | $(200,000) | This cell intentionally left blank. | ||
| Additional paid-in capital | $(340,000) | $(50,000) | This cell intentionally left blank. | ||
| Retained earnings | $(1,504,000) | $(280,000) | This cell intentionally left blank. | ||
| Total liabilities and equities | $(3,800,000) | $(700,000) | This cell intentionally left blank. | ||
| Prepare a consolidated balance sheet for Penn and Southern, as of December 31, 2015, using Tables 3, 4, and 5 below. |
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| Table 3: Consolidated Balance Sheet Calculations 1 | |||||
| Account | Column 1 | Column 2 | This cell intentionally left blank. | ||
| Consideration transferred at fair value | $990,000 | This cell intentionally left blank. | |||
| Book value | $530,000 | This cell intentionally left blank. | |||
| Excess fair over book value | $460,000 | This cell intentionally left blank. | |||
| Allocation of excess fair value to specific assets and liabilities: | This cell intentionally left blank. | ||||
| computer software | $100,000 | This cell intentionally left blank. | |||
| equipment | $(20,000) | This cell intentionally left blank. | |||
| client contracts | $200,000 | This cell intentionally left blank. | |||
| in-process research and development | $80,000 | This cell intentionally left blank. | |||
| to notes payable | $(10,000) | $350,000 | This cell intentionally left blank. | ||
| Goodwill | $110,000 | This cell intentionally left blank. | |||
| Table 4: Consolidated Balance Sheet Calculations 2 | |||||
| Account | Penn | Southern | Debit | Credit | Consolidated |
| Cash | $72,000 | $36,000 | $108,000 | ||
| Receivables | $232,000 | $104,000 | $336,000 | ||
| Inventory | $280,000 | $180,000 | $460,000 | ||
| Investment in Southern | $990,000 | $- | $990,000 | $- | |
| Computer software | $420,000 | $40,000 | $100,000 | $560,000 | |
| Buildings (net) | $1,190,000 | $260,000 | $1,450,000 | ||
| Equipment (net) | $616,000 | $80,000 | $20,000 | $676,000 | |
| Client contracts | $- | $- | $200,000 | $200,000 | |
| Research and development asset | $- | $- | $80,000 | $80,000 | |
| Goodwill | $- | $- | $110,000 | $110,000 | |
| Total assets | $3,800,000 | $700,000 | $3,980,000 | ||
| Accounts payable | $(176,000) | $(50,000) | $(226,000) | ||
| Notes payable | $(1,020,000) | $(120,000) | $10,000 | $(1,150,000) | |
| Common stock | $(760,000) | $(200,000) | $200,000 | $(760,000) | |
| Additional paid-in capital | $(340,000) | $(50,000) | $50,000 | $(340,000) | |
| Retained earnings | $(1,504,000) | $(280,000) | $280,000 | $(1,504,000) | |
| Total liabilities and equities | $(3,800,000) | $(700,000) | $1,020,000 | $1,020,000 | $(3,980,000) |
| Table 5: Consolidated Balance Sheet | |||||
| Penn Company and Subsidiary Consolidated Balance Sheet December 31, 2015 |
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| Assets | Liabilities and Owners’ Equity | This cell intentionally left blank. | |||
| Cash | $108,000 | Accounts payable | $(226,000) | This cell intentionally left blank. | |
| Receivables | $336,000 | Notes payable | $(1,150,000) | This cell intentionally left blank. | |
| Inventory | $460,000 | This cell intentionally left blank. | This cell intentionally left blank. | This cell intentionally left blank. | |
| Computer software | $560,000 | This cell intentionally left blank. | This cell intentionally left blank. | This cell intentionally left blank. | |
| Buildings (net) | $1,450,000 | This cell intentionally left blank. | This cell intentionally left blank. | This cell intentionally left blank. | |
| Equipment (net) | $676,000 | This cell intentionally left blank. | This cell intentionally left blank. | This cell intentionally left blank. | |
| Client contracts | $200,000 | This cell intentionally left blank. | This cell intentionally left blank. | This cell intentionally left blank. | |
| This cell intentionally left blank. | This cell intentionally left blank. | Common stock | $(760,000) | This cell intentionally left blank. | |
| Research and development asset | $80,000 | Additional paid-in capital | $(340,000) | This cell intentionally left blank. | |
| Goodwill | $110,000 | Retained earnings | $(1,504,000) | This cell intentionally left blank. | |
| Total assets | $3,980,000 | Total liabilities and equities | $(3,980,000) | This cell intentionally left blank. | |
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