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Chapter 22: Q12BE. (page 1307)

Oliver Corporation has owned stock of Conrad Corporation since 2014. At December 31, 2017, its balances related to this investment were:

Equity Investments \(185,000

Fair Value Adjustment (AFS) 34,000 Dr.

Accumulated Unrealized Holding Gain or Loss—Income (recorded in Retained Earnings) 34,000 Cr.

On January 1, 2018, Oliver purchased additional stock of Conrad Company for \)475,000 and now has significant influence over Conrad. If the equity method had been used in 2014–2017, Oliver’s share of income would have been $33,000 greater than dividends received. Prepare Oliver’s journal entries to record the purchase of the investment and the change to the equity method.

Short Answer

Expert verified

The equity method is used to record the income from investments, and the journal entries to change to the equity method are recorded below.

Step by step solution

01

Definition of equity method

The equity method is an accounting technique used to record the profits or income earned through their investment in the stocks of another company.

02

Journal Entry

Date

Particulars

Debit ($)

Credit ($)

1-1-2018

Equity Investment

508,000

Cash

475,000

Retained Earnings

33,000

(Being investment purchased)

1-1-2018

Retained earnings

34,000

Fair value adjustment

34,000

(To eliminate fair value accounts)

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Most popular questions from this chapter

Which of the following is not classified as an accounting change by IFRS?

(a) Change in accounting policy.

(b) Change in accounting estimate.

(c) Errors in financial statements.

(d) None of the above

The management of Utrillo Instrument Company had concluded, with the concurrence of its independent auditors, that results of operations would be more fairly presented if Utrillo changed its method of pricing inventory from last-in, first-out (LIFO) to average-cost in 2017. Given below is the 5-year summary of income under LIFO and a schedule of what the inventories would be if stated on the average-cost method.

UTRILLO INSTRUMENT COMPANY STATEMENT OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED MAY 31 2013 2014 2015 2016 2017 Sales—net \(13,964 \)15,506 \(16,673 \)18,221 \(18,898 Cost of goods sold Beginning inventory 1,000 1,100 1,000 1,115 1,237 Purchases 13,000 13,900 15,000 15,900 17,100 Ending inventory (1,100) (1,000) (1,115) (1,237) (1,369) Total 12,900 14,000 14,885 15,778 16,968 Gross profi t 1,064 1,506 1,788 2,443 1,930 Administrative expenses 700 763 832 907 989 Income before taxes 364 743 956 1,536 941 Income taxes (50%) 182 372 478 768 471 Net income 182 371 478 768 470 Retained earnings—beginning 1,206 1,388 1,759 2,237 3,005 Retained earnings—ending \) 1,388 \( 1,759 \) 2,237 \( 3,005 \) 3,475 Earnings per share \(1.82 \)3.71 \(4.78 \)7.68 \(4.70 SCHEDULE OF INVENTORY BALANCES USING AVERAGE-COST METHOD FOR THE YEARS ENDED MAY 31 2012 2013 2014 2015 2016 2017 \)1,010 \(1,124 \)1,101 \(1,270 \)1,500 $1,720

Instructions Prepare comparative statements for the 5 years, assuming that Utrillo changed its method of inventory pricing to average-cost. Indicate the effects on net income and earnings per share for the years involved. Utrillo Instruments started business in 2012. (All amounts except EPS are rounded up to the nearest dollar.)

The before-tax income for Lonnie Holdiman Co. for 2017 was \(101,000 and \)77,400 for 2018. However, the accountant noted that the following errors had been made:

1. Sales for 2017 included amounts of \(38,200 which had been received in cash during 2017, but for which the related products were delivered in 2018. Title did not pass to the purchaser until 2018.

2. The inventory on December 31, 2017, was understated by \)8,640.

3. The bookkeeper in recording interest expense for both 2017 and 2018 on bonds payable made the following entry on an annual basis. Interest Expense 15,000 Cash 15,000

The bonds have a face value of \(250,000 and pay a stated interest rate of 6%. They were issued at a discount of \)15,000 on January 1, 2017, to yield an effective-interest rate of 7%. (Assume that the effective-yield method should be used.)

4. Ordinary repairs to equipment had been erroneously charged to the Equipment account during 2017 and 2018. Repairs in the amount of \(8,500 in 2017 and \)9,400 in 2018 were so charged. The company applies a rate of 10% to the balance in the Equipment account at the end of the year in its determination of depreciation charges.

Instructions

Prepare a schedule showing the determination of corrected income before taxes for 2017 and 2018

You have been engaged to review the financial statements of Gottschalk Corporation. In the course of your examination, you conclude that the bookkeeper hired during the current year is not doing a good job. You notice a number of irregularities as follows.

1. Year-end wages payable of \(3,400 were not recorded because the bookkeeper thought that “they were immaterial.”

2. Accrued vacation pay for the year of \)31,100 was not recorded because the bookkeeper “never heard that you had to do it.”

3. Insurance for a 12-month period purchased on November 1 of this year was charged to insurance expense in the amount of \(2,640 because “the amount of the check is about the same every year.” 4. Reported sales revenue for the year is \)2,120,000. This includes all sales taxes collected for the year. The sales tax rate is 6%. Because the sales tax is forwarded to the state’s Department of Revenue, the Sales Tax Expense account is debited. The bookkeeper thought that “the sales tax is a selling expense.” At the end of the current year, the balance in the Sales Tax Expense account is $103,400.

Instructions Prepare the necessary correcting entries, assuming that Gottschalk uses a calendar-year basis.

Discuss how a change in accounting policy is handled when it is impracticable to determine previous amounts
See all solutions

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