ACCT.

3021 HW3 12c

Q 12 14
The investor can use the equity method when investor has no control
but can significantly influence to the investee. It depends on what
investor owns compering to the other shareholders. For significantly
influence over the operating and financial policies of the investee
investor has to own approximately 20% to 50% of the investee`s
voting shares.
Q 12 16
Under the equity method the investor`s investment account increases
as the investee earns and reports income. And the investor`s
investment account is decreases whenever a dividends is collected,
because distribution of cash dividends reduces the book value of the
investee company. The reduction in the investee`s owner`s equity
creates a decrease in the investment.
Q 12 18
In this situation Bernard Company will record decrease in it`s
investment account for $40,000 = 40% x $100,000 and this decrease
doesn`t have any effect on income statement of the company.
BE 8: LO 12 5
In this exercise Turner`s will increase for $2,000,000 = 40% x
$5,000,000. As we remember from the book the dividend distribution is
considered to be decrease of the investee`s net assets, because of that
ownership interest of the investor also decrease.
E 14: LO 12 3,4,5.
1) Painters Equipment Company. Because this investments longterm investments we classify them as AFS and no significant influence.
Journal entries when investments were
purchased
Investments in AMC
Cash

DEBIT

Journal entries when dividends were

distributed.
Cash
Investment revenue

DEBIT

CREDIT

$480,000

$480,00
0
Now we need to calculate dividends when AMC earned net income,
cash dividend were 25 cents per share. Therefore, 400,000 (shares) x
25 cents = $100,000 x 20% = $20,000 (cash dividends)
CREDIT

$20,000

FV beginning year = $480,000

FV year-end = $505,000
FV adjustment = $505,000 - $480,000 = $25,000

$20,000

ACCT. 3021 HW3 12c

Adjusting entries
DEBIT
CREDIT
FV Adjustment
$25,000
Net unrealized holding gains and losses
$25,000
OCI
We do need anything to record on net income because no significant
influence was acquired.
2) AFS investments with significant influence for that reason we will
use equity method for accounting the investments.
Journal entries when investments were
purchased
Investments in AMC
Cash

DEBIT

CREDIT

$480,000
$480,00
0

20%(shares acquired) x $250,000(net income) = $50,000 investment

revenue.
Net Income
Investment in AMC
Investment revenue

DEBIT
$50,000

CREDIT
$50,00

400,000 (shares) x 25 cents = $100,000 x 20% = $20,000 (cash

dividends)
Journal entries when dividends were
distributed.
Cash
Investment revenue

DEBIT

CREDIT

$20,000
$20,000

E 15: LO 12 4,5.
Florists International. Investor has a significant influence over the
investee. Therefore journal entries would be:
Journal entries when investments were
purchased
Investments in Nursery Supplies

DEBIT

CREDIT

$56,000,0
00

Cash

$56,000,0
00

30%(shares acquired) x $40,000,000(net income) = $12,000,000

revenue.
Net Income

DEBIT

CREDIT

ACCT. 3021 HW3 12c

Investment in AMC

$12,000,0
00

Investment revenue

$12,000,0
00

8,000,000 (shares) x $1.25 cents =$10,000,000 x 30%=$3,000,000

(cash dividends)
Journal entries when dividends were
distributed.
Cash
Investment revenue

DEBIT

CREDIT

$20,000
$20,000

P 12 14: LO 12 1 through 5.
ITEM
A

35% of the nonvoting preferred stock of

American Aircraft Company.

M 2

Treasury bills to be held-to-maturity.

M 3

Two-year note receivable from affiliate.

Accounts receivable.

M 5

Treasury bond maturing in one week.

Common stock held in trading account for

immediate resale.

Bonds acquired to profit from short-term

differences in price.

35% of the voting common stock of

Computer Storage Devices Company.

90% of the voting common stock of Affiliated

Peripherals, Inc.

Corporate bonds of Primary Smelting

Company to be sold if interest rates fall

REPORTING
CATEGORY
T. Trading
securities
M. Securities
held-tomaturity
A. Securities
available-forsale
E. Equity
method
C.
Consolidation
N. None of
these

ACCT. 3021 HW3 12c

0

1
1

1
2

1/2%.
25% of the voting common stock of Smith
Foundries Corporation: 51% family owned by
Smith family; fair value determinable.
17% of the voting common stock of Shipping
Barrels Corporation: Investors CEO on the
board of directors of Shipping Barrels
Corporation.

CPA Exam Questions

CPA 1. Wall Co.
Purchased price of 2,000 shares = $31,500
Market value of the investments = $29,500
Sold price (2,000 shares x $14) = $28,000
Brokerage fee = $1,400
We need to find the amount that Wall will record as a realized loss.
Calculation would be:
$28,000 - $1,400 = $26,600
$26,600 - $31,500 = -$4,900
Answer is: d
CPA 4. Kopp Co.
In 2012 Kopp had decline in value of AFS securities with unrealized
holding loss, which they record in OCI of 2012. And in 2013 unrealized
holding loss should be recognized as loss in the determination of net
income. All the unrealized holding gains and losses should be recorded
in OCI.
Answer is: d
CPA 5.
Firms simply report the investments fair value as an asset and
changes in fair value as earnings. Dividends received from an investee
are included in earnings under the fair-value option. Because dividends
typically reduce an investments fair value, an increase in earnings
from dividends received would be offset by a decrease in earnings from
the decline in an investments fair value. Under the equity method any
changes in fair value of investment`s common stock will not be
recorded.
Answer is: d
CPA 6.
Investor made mistake by recognizing $2,000 of dividends as revenue,
which means that investment in affiliate overstated and retained
earnings are overstated.
Answer is: c

ACCT. 3021 HW3 12c

CPA 8. Well co.

Well Co. has a significant influence over the investee, because Well`s
officers are dominating ion Rea`s board of directors. Therefore, for
accounting the investments in common stock we can use the equity
method. Calculation for this problem would be:
Well`s ownership in Rea Inc. = 10%
Purchased outstanding common stock = $400,000
Rea`s 2013 reported net income $500,000
Paid Dividends = $150,000
$400,000 + $50,000 (10% x $500,000) - $15,000(10% x $150,000) =
$435,000
Answer is: a