Investment Conso=

Corporate Reporting and Financial Analysis

Prof Wang Jiwei

HOMEWORK #4 Suggested Solutions

Question 1 Intercorporate Equity Investments

Revsine et al., Chapter 16, P16-1, P16-3, P16-7, P16-8, P16-11.

P16-1. Equity method accounting

Requirement 1:

Investment income reported by Figland:

Figland’s equity in Irene’s earnings (40% x $600,000) $240,000

Less:

Amortization of excess paid over book value for:

Inventory (50,000)

Depreciable assets ($150,000/10 yrs.) (15,000)

Investment income for 2011 $175,000

Requirement 2:

Balance in investment in Irene Company on 12/31/11:

Cost of initial investment $1,800,000

Investment income [see requirement (1)] 175,000

Less: Dividends received (40% x $325,000) (130,000)

Balance in investment account on 12/31/11 $1,845,000

P16-3. Consolidated balance sheet and income statement under acquisition method.

Requirement 1:

The elimination entries that Pate should make in its consolidated worksheet are given below:

(a) DR Common Stock $ 300,000

DR Retained Earnings 590,000

CR Investment in Starmont (80%) $712,000

CR Noncontrolling interest (20%) 178,000

To eliminate Starmont’s stockholders’ equity accounts against Pate’s Investment in Starmont account and set up Noncontrolling interest in Starmont for 20% x $890,000 = $178,000.

(b) DR Goodwill $188,000

CR Investment in Starmont $188,000

To allocate the excess of the price paid for Starmont’s shares ($900,000) over Pate’s proportionate interest in the book value of Starmont’s net assets (80% x $890,000 = $712,000) to value the controlling interest portion of goodwill. The total excess to allocate is $188,000.

(c) DR Goodwill $47,000

CR Noncontrolling interest $47,000

To reflect the full fair of goodwill at time of acquisition attributable to the noncontrolling interest on the consolidated balance sheet.

Note that total...