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Chapter 22: 22-23E (page 1314)

Dan Aykroyd Corp. was a 30% owner of Steve Martin Company, holding 210,000 shares of Martin’s common stock on December 31, 2016. The investment account had the following entries.

Investment in Martin

1/1/15 Cost \(3,180,000 12/6/15 Dividend received \)150,000

12/31/15 Share of income 390,000 12/5/16 Dividend received 240,000

12/31/16 Share of income 510,000

On January 2, 2017, Aykroyd sold 126,000 shares of Martin for \(3,440,000, thereby losing its significant influence. During the year 2017, Martin experienced the following results of operations and paid the following dividends to Aykroyd.

Martin Dividends Paid Income (Loss) to Aykroyd 2017 \)300,000 \(50,400

At December 31, 2017, the fair value of Martin shares held by Aykroyd is \)1,570,000. This is the first reporting date since the January 2 sale.

Instructions (a) What effect does the January 2, 2017, transaction have upon Aykroyd’s accounting treatment for its investment in Martin?

(b) Compute the carrying amount of the investment in Martin as of December 31, 2017 (prior to any fair value adjustment).

(c) Prepare the adjusting entry on December 31, 2017, applying the fair value method to Aykroyd’s long-term investment in Martin Company securities.

Short Answer

Expert verified

The effect will be the change of the method for accounting of investments, and the Carrying amount will be $2,229,600, and the journal entry will be passed for the adjustment

Step by step solution

01

Effect of January 2, 2017 transaction

The company will lose the significant rights of the company’s shares, which will make the company change the recording method from equity to the fair value method.

02

Computation of carrying amount of investment

Amount ($)

Cost

3,180,000

Share of Income 12/31/2015

390,000

Share of Income 12/31/2016

530,000

4,100,000

Dividends Received on 12/6/2015

150,000

Dividends received on 12/5/2015

240,000

Investment value as of 31/12/2016 for 210,000

3,710,000

The investment value for 126,000 shares

2,226,000

Investment Value as on 01/01/2017

2,226,000

Add: profit for the year 2017 300000*18%

54,000

2,280,000

Less: Dividends received

-50,400

Carrying amount as of December 31, 2017

2,229,600

03

Adjusting journal entry

Date

Particulars

Debit ($)

Credit ($)

Investment In securities

659,600

Capital Reserve

659,600

(Being adjusting entry recorded)

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Most popular questions from this chapter

Which of the following is false?

(a) GAAP and IFRS have the same absolute standard regarding the reporting of error corrections in previously issued financial statements.

(b) The accounting for changes in estimates is similar between GAAP and IFRS.

(c) Under IFRS, the impracticability exception applies both to changes in accounting principles and to the correction of errors.

(d) GAAP has detailed guidance on the accounting and reporting of indirect effects; IFRS does not.

Simms Corp. controlled four domestic subsidiaries and one foreign subsidiary. Prior to the current year, Simms Corp. had excluded the foreign subsidiary from consolidation. During the current year, the foreign subsidiary was included in the financial statements. How should this change in accounting entity be reflected in the financial statements?

Identify and describe the approach the FASB requires for reporting changes in accounting principles.

(Change in Principle—Long-Term Contracts) Cullen Construction Company, which began operations in 2017, changed from the completed-contract to the percentage-of-completion method of accounting for long-term construction contracts during 2018. For tax purposes, the company employs the completed-contract method and will continue this approach in the future. The appropriate information related to this change is as follows.

Pretax Income Percentage-of-Completion Completed-Contract Difference 2017 \(880,000 \)590,000 $290,000 2018 900,000 480,000 420,000

Instructions (a) Assuming that the tax rate is 40%, what is the amount of net income that would be reported in 2018? (b) What entry(ies) are necessary to adjust the accounting records for the change in accounting principle?

On January 3, 2016, Martin Company purchased for \(500,000 cash a 10% interest in Renner Corp. On that date, the net assets of Renner had a book value of \)3,700,000. The excess of cost over the underlying equity in net assets is attributable to undervalued depreciable assets having a remaining life of 10 years from the date of Martin’s purchase.

The fair value of Martin’s investment in Renner securities is as follows: December 31, 2016, \(560,000, and December 31, 2017, \)515,000. On January 2, 2018, Martin purchased an additional 30% of Renner’s stock for \(1,545,000 cash when the book value of Renner’s net assets was \)4,150,000. The excess was attributable to depreciable assets having a remaining life of 8 years. During 2016, 2017, and 2018, the following occurred.

Renner Dividends Paid by

Net Income Renner to Martin

2016 \(350,000 \)15,000

2017 450,000 20,000

2018 550,000 70,000

Instructions On the books of Martin Company,

prepare all journal entries in 2016, 2017, and 2018 that relate to its investment in Renner Corp., reflecting the data above and a change from the fair value method to the equity method.
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