Franklin purchases 40 percent of johnson company

Week 2 Chapter I

Ex1

SB Acker Inc. bought 40% of Howell Co. on...

Acker Inc. bought 40% of Howell Co. on January 1, 2017 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows:

Cost to Acker

Transfer Price

Amount Held by Howell at Year-End

2017

$

55,000

$

75,000

$15,000

2018

$

70,000

$

110,000

$55,000

Howell reported net income of $100,000 in 2017 and $120,000 in 2018 while paying $40,000 in dividends each year.

· $8,000.

·

$20,000.

·

$40,000.

·

$15,000.

Ex2

Evan Company reports net income of $231,000 each year and declares an annual cash dividend of $140,000. The company holds net assets of $1,910,000 on January 1, 2017. On that date, Shalina purchases 40 percent of Evan's outstanding common stock for $945,000, which gives it the ability to significantly influence Evan. At the purchase date, the excess of Shalina’s cost over its proportionate share of Evan’s book value was assigned to goodwill. On December 31, 2019, what is the Investment in Evan Company balance (equity method) in Shalina’s financial records?

Top of Form

·

$1,054,200.

·

$1,166,200.

·

$1,129,800.

·

$1,222,200.

Bottom of Form

Ex3

Panner, Inc., owns 35 percent of Watkins and applies the equity method. During the current year, Panner buys inventory costing $125,600 and then sells it to Watkins for $157,000. At the end of the year, Watkins still holds only $22,500 of merchandise. What amount of gross profit must Panner defer in reporting this investment using the equity method?

· $8,475.

·

$12,375.

·

$1,575.

·

$6,675.

Ex4

On January 1, Puckett Company paid $2.73 million for 91,000 shares of Harrison’s voting common stock, which represents a 40 percent investment. No allocation to goodwill or other specific account was made. Significant influence over Harrison is achieved by this acquisition and so Puckett applies the equity method. Harrison distributed a dividend of $2 per share during the year and reported net income of $648,000. What is the balance in the Investment in Harrison account found in Puckett’s financial records as of December 31?

rev: 09_14_2018_QC_CS-138302

· $2,989,200.

·

$3,196,000.

·

$2,807,200.

·

$2,916,400.

Ex5

Problem 1-12 (LO 1-3, 1-4, 1-6)
Alex, Inc., buys 40 percent of Steinbart Company on January 1, 2017, for $1,028,000. The equity method of accounting is to be used. Steinbart’s net assets on that date were $2.40 million. Any excess of cost over book value is attributable to a trade name with a 20-year remaining life. Steinbart immediately begins supplying inventory to Alex as follows:

Year

Cost to Steinbart

Transfer Price

Amount Held by Alex at Year-End (at Transfer Price)

2017

$98,600

$116,000

$29,000

2018

170,820

219,000

68,000

Inventory held at the end of one year by Alex is sold at the beginning of the next.

Steinbart reports net income of $94,750 in 2017 and $128,250 in 2018 and declares $30,000 in dividends each year. What is the equity income in Steinbart to be reported by Alex in 2018?

· $58,956.

·

$43,656.

·

$38,896.

·

$52,056.

Ex.6

Ex7

Ex8
Problem 1-7 (LO 1-3, 1-4)
In January 2017, Domingo, Inc., acquired 20 percent of the outstanding common stock of Martes, Inc., for $823,000. This investment gave Domingo the ability to exercise significant influence over Martes, whose balance sheet on that date showed total assets of $4,467,000 with liabilities of $977,000. Any excess of cost over book value of the investment was attributed to a patent having a remaining useful life of 10 years.

In 2017, Martes reported net income of $247,000. In 2018, Martes reported net income of $291,500. Dividends of $91,000 were declared in each of these two years. What is the equity method balance of Domingo’s Investment in Martes, Inc., at December 31, 2018?

Multiple Choice

Top of Form

·

$894,300.

·

$978,500.

·

$869,300.

·

$991,000.

Bottom of Form

Ex9
Problem 1-8 (LO 1-3, 1-4)
Franklin purchases 40 percent of Johnson Company on January 1 for $576,700. Although Franklin did not use it, this acquisition gave Franklin the ability to apply significant influence to Johnson’s operating and financing policies. Johnson reports assets on that date of $1,484,000 with liabilities of $544,000. One building with a seven-year remaining life life is undervalued on Johnson’s books by $229,250. Also, Johnson’s book value for its trademark (10-year life) is undervalued by $272,500. During the year, Johnson reports net income of $137,000 while declaring dividends of $80,000. What is the Investment in Johnson Company balance (equity method) in Franklin’s financial records as of December 31?

Multiple Choice

Top of Form

·

$599,500.

·

$575,500.

·

$588,600.

·

$630,300.

Bottom of Form

Ex10