Assessment 1 Instructions: Accounting for Equity Investments

Assessment 1: Accounting for Equity Investments

Problem 1

Parker, Inc., acquired 10 percent of Simon Corporation on January 1, 2019, for $462,000 although Simon’s book value on that date was $3,740,000. Simon held land that was undervalued by $220,000 on its accounting records. During 2019, Simon earned a net income of $528,000 while paying cash dividends of $198,000. On January 1, 2020, Parker purchased an additional 30 percent of Simon for $1,320,000. Simon’s land is still undervalued on that date, but then by $264,000. Any additional excess cost was attributable to a trademark with a 10-year life for the first purchase and a 9-year life for the second. The initial 10 percent investment had been maintained at cost because fair values were not readily available. The equity method will now be applied. During 2020, Simon reported income of $660,000 and distributed dividends of $242,000.

Prepare all of the 2020 journal entries for Parker. Note: Credits are indicated by parentheses.

Problem 2

Penn Company acquired all of Southern, Inc.’s outstanding shares on December 31, 2018, for $1,089,000 cash. Penn will operate Southern as a wholly owned subsidiary with a separate legal and accounting identity. Although many of Southern’s book values approximate fair values, several of its accounts have fair values that differ from book values. In addition, Southern has internally developed assets that remain unrecorded on its books.

In deriving the acquisition price, Penn assessed Southern’s fair and book value differences as follows:

	Book Values	Fair Values
Computer software	$ 44,000	$154,000
Equipment	88,000	66,000
Client contracts	–0–	220,000
In-process research and development	–0–	88,000
Notes payable	(132,000)	(143,000)

At December 31, 2018, the following financial information is available for consolidation:

	Penn	Southern
Cash	$79,200	$39,600
Receivables	255,200	111,100
Inventory	308,000	198,000
Investment in Spider	1,089,000	–0–
Computer software	462,000	44,000
Buildings (net)	1,309,000	286,000
Equipment (net).	677,600	88,000
Client contracts	–0–	–0–
Goodwill	–0–	–0–
Total assets	$4,180,000	$770,000
Accounts payable	$(193,600)	$(55,000)
Notes payable	(1,122,000)	(132,000)
Common stock	(836,000)	(220,000)
Additional paid-in capital	(374,000)	(55,000)
Retained earnings	(1,654,400)	(308,000)
Total liabilities and equities	$(4,180,000)	$(770,000)

Prepare a consolidated balance sheet for Penn and Southern as of December 31, 2018.

Problem 3

Pueblo Corporation acquired all of Spartan Company’s outstanding stock on January 1, 2018, for $1,320,000 cash. Spartan’s accounting records reflected net assets on that date of $1,034,000, although equipment with a 10-year life was undervalued on the records by $198,000. Any recognized goodwill is considered to have an indefinite life.

Spartan reports net income in 2018 of $198,000 and $220,000 in 2019. The subsidiary paid dividends of $44,000 in each of these two years.

Financial figures for the year ending December 31, 2020, follow. Credit balances are indicated by parentheses.

	Pueblo	Spartan
Revenues.	$(1,760,000)	$(1,320,000)
Cost of goods sold	220,000	330,000
Depreciation expense.	660,000	770,000
Investment income. .	(44,000)	–0–
Net income	$(924,000)	$(220,000)
Retained earnings 1/1/20 . .	$(2,420,000)	$(704,000)
Net income	(924,000)	(220,000)
Dividends paid	264,000	44,000
Retained earnings, 12/31/17	$(3,080,000)	$(880,000)
Current assets.	$660,000	$220,000
Investment in subsidiary	1,320,000	–0–
Equipment (net)	1,980,000	1,320,000
Buildings (net)	1,760,000	880,000
Land.	1,320,000	220,000
Total assets	$7,040,000	$2,640,000
Liabilities.	$(1,980,000)	$(1,100,000)
Common stock.	(1,980,000)	(660,000)
Retained earnings . .	(3,080,000)	(880,000)
Total liabilities and equity.	$(7,040,000)	$(2,640,000)

Complete the following:

a. Determine the December 31, 2020, consolidated balance for each of the following accounts:

· Depreciation Expense

· Dividends Paid

· Revenues

· Equipment

· Buildings

· Goodwill

· Common Stock

b. How does the parent’s choice of an accounting method for its investment affect the balances computed in requirement (a)?

c. Which method of accounting for this subsidiary is the parent actually using for internal reporting purposes?

d. If the parent company had used a different method of accounting for this investment, how could that method have been identified?

e. What would be Pueblo’s balance for retained earnings as of January 1, 2020, if each of the following methods had been in use?

· Initial value method

· Partial equity method

· Equity method

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