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Equity method

6. Ace purchases 40 percent of Basket! Company on January 1 for $500,000. Although Ace did not
use it, this acquisition gave Ace the ability to apply significant influence to Baskett's operating and
financing policies. Baskett reports assets on that date of $1,400,000 with liabilities of $500,000.
One building with a seven-year life is undervalued on Baskett's books by $140,000. Also, Baskett's
book value for its trademark (10-year life) is undervalued by $210,000. During the year, Baskett re¬
ports net income of $90,000 while paying dividends of $30,000. What is the Investment in Baskett
Company balance (equity method) in Ace's financial records as of December 31 ?
a. $504,000.
b. $507,600.
c. $513,900.
d. $516,000.

7. Goldman Company reports net income of $ 140,000 each year and pays an annual cash dividend of
$50,000. The company holds net assets of $1,200,000 on January 1, 2008. On that date, Wallace
purchases 40 percent of the outstanding stock for $600,000, which gives it the ability to significantly influence Goldman. At the purchase date, the excess of Wallace's cost over its proportionate share of Goldman's book value was assigned to goodwill. On December 31, 2010, what is the

Investment in Goldman Company balance (equity method) in Wallace's financial records?
a. $600,000.
b. $660,000.
c. $690,000.
d. $708,000.

9. Fanner, Inc., owns 30 percent of Watkins and applies the equity method. During the current year, Panner buys inventory costing 554,000 and then sells it to Watkins for 590,000. At the end of the year, Watkins still holds only $20,000 of merchandise. What amount of unrealized grass profit must Panner defer in reporting this investment using the equity method?
a. $2,400. />.
c. $8,000.
el. $10,800.

24. Smith purchased 5 percent of Barker's outstanding stock on October 1, 2007, for $7,475 and ac-quired an additional 10 percent of Barker for $14,900 on July 1,2008. Both of these purchases were accounted for as available-for-sale investments. Smith purchases a final 20 percent on December 31, 2009, for $34,200. With this final acquisition, Smith achieves the ability to significantly influence Barker's decision-making process and employs the equity method.

Barker has a book value of $100,000 as of January 1, 2007. Information follows concerning the operations of this company for the 2007-09 period. Assume that all income was earned uniformly in each year. Assume also that one-fourth of the total annual dividends are paid at the end of each calendar quarter.

year reported income dividends

2007 20000 8000

2008 30000 16000

2009 24000 9000

On Barker's financial records, the book values of all assets and liabilities are the same as their fair values. Any excess cost from either purchase relates to identifiable intangible assets. For each purchase, the excess cost is amortized over 15 years. Amortization for a portion of a year should be based on months.

a. On comparative income statements issued in 2010 for the years of 2007, 2008, and 2009, what
would Smith report as its income derived from this investment in Barker?
b. On a balance sheet as of December 31, 2009, what should Smith report as investment in Barker?

Solution Summary

The solution explains some questions relating to equity method of accounting for investments