Reporting & Interpreting Investments

in other corporations (Chap.12)

 P.12-6
1. Identify the accounting Method
• Case A
The Market Value Method,
Because :
According to accounting method, the Market
Value method must be used when the investment
company owns less than 20% of the outstanding
stock.
(Shore Company holds 10.000/100.000 = 10% of
shares).
 P.12-6
• Case B
The Equity Method,
Because :
According to accounting method, the Equity
method must be used when the investment
company owns at least 20% but not more than
50% of the outstanding stock.
(Shore Company holds 40.000/100.000 = 40% of
shares).
 P.12-6
Case A (10%) Case B (40%)
2. a Jan 10, 2004 Stock Acquisition :
Investment in Ship Co. (AFS) 200,000 800,000
Cash 200,000 800,000
(10,000 shares x $20) (40,000 shares x $20)
b Revenue recognition
Investment in Ship Co. 120,000
Equity in investee earning No entry 120,000
(40% x $ 300,000)
c Dividends received
Cash 6,000
Investment income 6,000
(10,000 shares x $ 0.6)
Cash 24,000
Investment in Ship Co. 24,000
(40,000 shares x $ 0.6)
d Market value effect
Net unrealized loss 20,000
Allowance to value at market 20,000 No entry
[10,000 shares x ($ 18 - $ 20)]
 P.12-6
Case A Case B
a Balance Sheet
Long-term investments:
Investment in AFS $180,000
($ 200,000 - $ 20,000)
Investment in Ship Co. $896,000
($ 800,000 - $ 24,000)

b Stockholder's equity
Net unrealized loss - AFS ($20,000)

c Income Statement
Investment income 6,000
Equity in investee earning 120,000
 P.12-6
4. The amounts reported are different
1) different approached are used in recognizing
investment revenue
2) adjustment for changes in market value are
only made for market value method (owning
less than 20%)
Statement of Cash Flow (Chap.13)
 P.13-3 Direct Method
Frank Corporation
Statement Of Cash Flows
Ended 31 Dec 2004

Cash flows from operating activities :

Cash collected from customers (400,000 - 5,000) $395,000
Cash paid to suppliers (268,000 + 3,000 - 8,000) (263,000)
Cash paid to employees (51,000 + 200) (51,200)
Cash paid for rent (5,800)
Cash paid for interest (12,200)
Cash paid for income taxes (11,000 - 2,000) (9,800)
Net cash flow from operating activities $53,000
Cash flows from investing activities :
Machinery sold 11,000
Machinery purchased1 (9,000)
Investment purchased (5,000)
Net cash flow from investing activities (3,000)
Cash flows from financing activities :
Borrowed on long term note payable 15,000
Paid a cash dividend (10,000)
Net cash flow financing activities 5,000
Net increase in cash during 2004 55,000
Cash, beginning of 2004 21,000
Cash, end of 2004 $76,000
 P.13-3 Direct Method
Additional Information :
1. Note that the $41,000 non-cash portion of the related
financing are not reported in the statement. They are
reported separately in the note.
2. Frank Corporation purchased machinery for $41,000
that was financed with a four-year note payable to the
dealer.
3. Income taxes paid were $9,800. (interest paid was
$12,200)
Income Taxes paid = Income tax expense – Increase in income
taxes payable
 P.13-3 Indirect Method
FRANK CORPORATION
STATEMENT OF CASH FLOW
For the Year Ended December 31, 2004

Cash Flow From Operating Activities

Net Income
Adjustment : 42,000
Depreciation expense 9,200
Change in Account Receivable (17,000-12,000) (5,000)
Change in Account Payable (10,000-7,000) (3,000)
Change in inventory (60,000-52,000) 8,000
Change in wages payable (1,000-800) (200)
Change in tax payable (5,000-3,000) 2,000
Net cash flow from operating activities 53,000
Cash Flow From Investing Activities
Machinery sold 11,000
Machinery purchased (9,000)
Investment purchased (5,000)
Net cash flow from investing activities (3,000)
Cash Flow from financing activities
Borrowed long-term N/P 15,000
Paid cash devidend (10,000)
Net cash flow from financing activities 5,000
Net increase in cash during 2004 55,000
Cash beginning of 2004 21,000
Cash, end of 2004 $ 76,000
- Thank You -