Question

The Equity Method of Accounting for Investments 29 8. Franklin purchases 40 percent of Johnson Company on January 1 for $500,000. Although did not use it, this acquisition gave Franklin the ability to apply sinificant influence to Johnson operating and financing policies. Johnson reports assets on that date of $1.400,000 with lat of $500,000. One building with a seven-year remaining life is undervalued on Johnson's books $140,000. Also, Johnson's book value for its trademark (10-year remaining life is undervalued by $210.000. During the year, Johnson reports net income of $90.000 while declaring dividends of $30,000. What is the Investment in Johnson Company balance (equity method) in Franklin's Finan cial records as of December 31? a. 5504.000 b. S507,600 c. $513.900 d. $516,000 9. Evan Company reports net income of $140,000 each year and declares an annual cash dividend of $50,000. The company holds net assets of $1,200,000 on January 1, 2017. On that date. Shalina purchases 40 percent of Evan's outstanding common stock for $600,000, which gives it the ability to significantly influence Evan. At the purchase date, the excess of Shalina's cost over its propor tionate share of Evan's book value was assigned to goodwill. On December 31, 2019. what is the Investment in Evan Company balance (equity method) in Shalina's financial records? a. S600.000 b. $660,000 c. $690,000 d. $708.000 10. Perez, Inc., applies the equity method for its 25 percent investment in Senior, Inc. During 2018, Perez sold goods with a 40 percent gross profit to Senior, which sold all of these goods in 2018. How should Perez report the effect of the intra-entity sale on its 2018 income statement? a. Sales and cost of goods sold should be reduced by the amount of intra-entity sales. b. Sales and cost of goods sold should be reduced by 25 percent of the amount of intra-entity sales. c. Investment income should be reduced by 25 percent of the gross profit on the amount of intra- entity sales. d. No adjustment is necessary. 11. Panner, Inc., owns 30 percent of Watkins and applies the equity method. During the current year. Panner buys inventory costing $54,000 and then sells it to Watkins for $90,000. At the end of the year, Watkins still holds only $20,000 of merchandise. What amount of gross profit must Panner defer in reporting this investment using the equity method? a. $2,400 b. $4,800 c. $8.000 d. $10.800 12. Alex, Inc., buys 40 percent of Steinbart Company on January 1, 2017, for $530,000. The equity method of accounting is to be used. Steinbart's net assets on that date were $1.2 million. Any excess of cost over book value is attributable to a trade name with a 20-year remaining life. Steinbart immediately begins supplying inventory to Alex as follows: Amount Held by Alex at Year-End (at transfer price) Transfer Price Cost to Steinbart $25,000 2017 $70,000 45,000 96,000 150,000 Year $100,000 2018 Inventory held at the end of one year by Alex is sold at the beginning of the next. me of $80,000 in 2017 and $110.000 in 2018 and declares $30,000 in norted by Alex in 2018?

8 to 11? could you also write a solution

Answer 1

8.

Purchase price of Johnson stock	500,000
Less: Book value of Johnson (900,000 * 40%)	360,000
Cost in excess of book value	140,000

	Amount	Remaining life	Annual amortization
Payment identified with undervalued
Building (140,000 * 40%)	56,000	7	8,000
Trademark (210,000 * 40%)	84,000	10	8,400
Total			16,400

Investment purchase price	500,000
Basic income accrual ($90,000 × 40%)	36,000
Amortization (above)	16,400
Dividends declared ($30,000 × 40%)	12,000
Investment in Johnson	507,600

Hence, the correct option is b. $ 507,600

9.

Purchase price of Evan stock	600,000
Book value of Evan stock ($1,200,000 × 40%)	480,000
Goodwill	12,000
Life of goodwill	indefinite
Annual amortization	NIL

Cost on January 1, 2017	600,000
2017 Income accrued ($140,000 × 40%)	56,000
2017 Dividend ($50,000 × 40%)	(20,000)
2018 Income accrued ($140,000 × 40%)	56,000
2018 Dividend ($50,000 × 40%)	(20,000)
2019 Income accrued ($140,000 × 40%)	56,000
2019 Dividend ($50,000 × 40%)	(20,000)
Investment in Evan, 12/31/19	708,000

The investment in Evan company would be d. $ 708,000

10. No adjustment is necessary.

Although this is an intra-entity sale, there is no need to adjust due to the prevalence of equity method applied in investing.

11.

Gross profit rate (GPR): $36,000 ÷ $90,000 = 40%
Inventory remaining at year-end	20,000
GPR	0.40
Gross profit	8,000
Ownership	0.30
Intra-entity gross profit—deferred	2,400

Hence, the correct option is a. $ 2,400

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