On January 1, 2020, Allan acquires 8 percent of Bellevue’s outstanding common stock for $41,110. Allan...
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On January 1, 2020, Allan acquires 8 percent of Bellevue’s outstanding common stock for $41,110. Allan classifies the investment as an available-for-sale security and records any unrealized holding gains or losses directly in owners’ equity. On January 1, 2021, Allan buys an additional 13 percent of Bellevue for $54,560, providing Allan the ability to significantly influence Bellevue’s decisions.
During the next two years, the following information is available for Bellevue:
Income Dividends Common stock fair value (12/31)
2020 $70,000 $30,000 $420,000
2021 80,000 90,000 400,000
In each purchase, Allan attributes any excess of cost over book value to Bellevue’s franchise agreements that had a remaining life of 13 years at January 1, 2020. Also at January 1, 2020, Bellevue reports a net book value of $340,000.
Assume Allan applies the equity method to its investment in Bellevue account:
(A-1) On Allan’s December 31, 2021, balance sheet, what amount is reported for the investment in Bellevue’s account?
(A-2) What amount of equity income should Allan report for 2021?
(A-3) Prepare the January 1, 2021, journal entry to retrospectively adjust the Investment in Bellevue account to the equity method.
Assume Allan elects the fair-value reporting option for its investment in Bellevue:
(B-1) On Allan’s December 31, 2021, balance sheet, what amount is reported for the investment in Bellevue account?
(B-2) What amount of income from its investment in Bellevue should Allan report for 2021?
Homework Answers
Part a-1
|
Investment in Bellevue |
$95000 |
Explanation:
|
Allocation and annual amortization—first purchase 1/1/2020 |
|
|
Purchase price of 8 percent interest |
41110 |
|
Net book value ($340,000 × 8%) |
(27200) |
|
Excess to franchise agreements |
13910 |
|
Life of franchise agreements |
13 |
|
Annual amortization |
$1070 |
|
Allocation and annual amortization—second purchase 1/1/2021 |
|
|
Purchase price of 13 percent interest |
54560 |
|
Net book value $340,000 + $70,000 - $30,000 =$380,000($380000 × 13%) |
(49400) |
|
Excess to franchise agreements |
5160 |
|
Life of franchise agreements |
12 |
|
Annual amortization |
$430 |
|
Investment in Bellevue account |
|
|
January 1, 2020 purchase |
41110 |
|
2020 basic equity income accrual ($70,000 × 8%) |
5600 |
|
2020 amortization on first purchase (above) |
(1070) |
|
2020 dividend payments ($30,000 × 8%) |
(2400) |
|
Equity method balance 12/31/2020 |
43240 |
|
January 1, 2021 purchase |
54560 |
|
2021 basic equity income accrual ($80000 × 13%) |
10400 |
|
2021 amortization on first purchase (above) |
(1070) |
|
2021 amortization on second purchase (above) |
(430) |
|
2021 dividend payments ($90000 × 13%) |
(11700) |
|
Investment in Bellevue—December 31, 2021 |
$95000 |
Part a-2
|
Equity income |
$102500 |
|
Equity income—2021 |
|
|
2013 basic equity income accrual ($80000 × 13%) |
104000 |
|
2013 amortization on first purchase (above) |
(1070) |
|
2013 amortization on second purchase (above) |
(430) |
|
Equity income—2013 |
$102500 |
Part a-3
|
No. |
General journal |
Debit |
Credit |
|
1 |
To eliminate AFS fair value adjustment account. |
||
|
Fair Value Adjustment (Available-for-Sale Securities) |
7510 |
||
|
Unrealized Holding Loss-Shareholders' Equity ((420000*8%)-41110) |
7510 |
||
|
2. |
To record retrospective adjustment |
||
|
Investment in Bellevue (43240-41110) |
2130 |
||
|
Retained Earnings (January 1, 2021) |
2130 |
Part b-1
|
Investment in Bellevue |
$52000 |
Investment in Bellevue = (13% × 400000) = $52000
Part b-2
|
Reported income |
$9100 |
|
Dividend income (13% × 90000) |
11700 |
|
Decrease in fair value (13% × $(420000-400000) |
2600 |
|
Reported income from investment in Bellevue |
$9100 |
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