a.
Introduction: When related companies trade with each other, sales between them require special accounting treatment, because a business cannot recognize profit through business activities with itself. When an investor company sells inventory to its investee company, the investment company can defer profit on such inventory until it is sold to an unrelated party.
The difference between downstream transfers and upstream transfers.
b.
Introduction: When related companies trade with each other, sales between them require special accounting treatment, because a business cannot recognize profit through business activities with itself. When an investor company sells inventory to its investee company, the investment company can defer profit on such inventory until it is sold to an unrelated party.
If the direction of inter-entity transfer affects the application of the equity method.
c.
Introduction: When related companies trade with each other, sales between them require special accounting treatment, because a business cannot recognize profit through business activities with itself. When an investor company sells inventory to its investee company, the investment company can defer profit on such inventory until it is sold to an unrelated party.
The computation of inter-entity gross profit deferral in the application of the equity method.
d.
Introduction: When related companies trade with each other, sales between them require special accounting treatment, because a business cannot recognize profit through business activities with itself. When an investor company sells inventory to its investee company, the investment company can defer profit on such inventory until it is sold to an unrelated party.
The computation of equity income to be recognized in 2020, and entry made to record this income.
e.
Introduction: When related companies trade with each other, sales between them require special accounting treatment, because a business cannot recognize profit through business activities with itself. When an investor company sells inventory to its investee company, the investment company can defer profit on such inventory until it is sold to an unrelated party.
The computation of equity income to be recognized in 2021.
f.
Introduction: When related companies trade with each other, sales between them require special accounting treatment, because a business cannot recognize profit through business activities with itself. When an investor company sells inventory to its investee company, the investment company can defer profit on such inventory until it is sold to an unrelated party.
The computation of equity income to be recognized in 2021.
g.
Introduction: When related companies trade with each other, sales between them require special accounting treatment, because a business cannot recognize profit through business activities with itself. When an investor company sells inventory to its investee company, the investment company can defer profit on such inventory until it is sold to an unrelated party.
The effect on the application of the equity method if none of the transferred inventory remained at the end of 2020.
h.
Introduction: When related companies trade with each other, sales between them require special accounting treatment, because a business cannot recognize profit through business activities with itself. When an investor company sells inventory to its investee company, the investment company can defer profit on such inventory until it is sold to an unrelated party.
The effect of inter-entity transfers on S’s reporting.
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Advanced Accounting
- Assume that Birch made intra-entity inventory transfers to Aspen that have resulted in the following intra-entity gross profits in inventory at the end of each year: Date Amount 12/31/19 $13,000 12/31/20 23,300 12/31/21 30,200 On January 1, 2019, Aspen Company acquired 80 percent of Birch Company's voting stock for $500,000. Birch reported a $490,000 book value, and the fair value of the noncontrolling interest was $125,000 on that date. Then, on January 1, 2020, Birch acquired 80 percent of Cedar Company for $224,000 when Cedar had a $253,000 book value and the 20 percent noncontrolling interest was valued at $56,000. In each acquisition, the subsidiary's excess acquisition-date fair over book value was assigned to a trade name with a 30-year remaining life. These companies report the following financial information. Investment income figures are not included. 2019 2020 2021 Sales: Aspen Company $ 637,500 $ 650,000 $ 732,500 Birch…arrow_forwardOn April 1, 2021, BBC Co. acquired a 30% stake in LTI Inc. for $ 100,000. This amount includes $ 40,000 that represents the excess of the fair market value over the book value of the identifiable net assets that LTI Inc. had on its books as of that date. Of this difference of $ 40,000, BBC attributes that $ 15,000 is due to inventory that was sold in its entirety during 2021, and the remaining $ 25,000 is due to goodwill. On the other hand, LTI generated a net income of $ 20,000 for 2021, and paid dividends of $ 2,500 for each quarter. As a consequence of these effects on LTI's books and financial statements, BBC will recognize investment income (or loss) for a. $4,500 b. $1,125 c. $3,450 d. ($10,500)arrow_forwardPratt Company acquired all of Spider, Inc.’s outstanding shares on December 31, 2018, for $495,000 cash. Pratt will operate Spider as a wholly owned subsidiary with a separate legal and accounting identity. Although many of Spider’s book values approximate fair values, several of its accounts have fair values that differ from book values. In addition, Spider has internally developed assets that remain unrecorded on its books. In deriving the acquisition price, Pratt assessed Spider’s fair and book value differences as follows: Book Values Fair Values Computer software $ 20,000 $ 70,000 Equipment 40,000 30,000 Client contracts –0– 100,000 In-process research and development –0– 40,000 Notes payable (60,000) (65,000) At December 31, 2018, the following financial information is available for consolidation: Pratt Spider Cash $ 36,000 $ 18,000 Receivables…arrow_forward
- On January 1, 2021, Brooks Corporation exchanged $1,235,000 fair-value consideration for all of the outstanding voting stock of Chandler, Inc. At the acquisition date, Chandler had a book value equal to $1,185,000. Chandler’s individual assets and liabilities had fair values equal to their respective book values except for the patented technology account, which was undervalued by $246,000 with an estimated remaining life of six years. The Chandler acquisition was Brooks’s only business combination for the year. In case expected synergies did not materialize, Brooks Corporation wished to prepare for a potential future spin-off of Chandler, Inc. Therefore, Brooks had Chandler maintain its separate incorporation and independent accounting information system as elements of continuing value. On December 31, 2021, each company submitted the following financial statements for consolidation. Dividends were declared and paid in the same period. Brooks Corp. Chandler Inc. Income…arrow_forwardOn January 1, 2021, Brooks Corporation exchanged $1,259,000 fair-value consideration for all of the outstanding voting stock of Chandler, Inc. At the acquisition date, Chandler had a book value equal to $1,145,000. Chandler’s individual assets and liabilities had fair values equal to their respective book values except for the patented technology account, which was undervalued by $264,000 with an estimated remaining life of six years. The Chandler acquisition was Brooks’s only business combination for the year. In case expected synergies did not materialize, Brooks Corporation wished to prepare for a potential future spin-off of Chandler, Inc. Therefore, Brooks had Chandler maintain its separate incorporation and independent accounting information system as elements of continuing value. On December 31, 2021, each company submitted the following financial statements for consolidation. Dividends were declared and paid in the same period. Brooks Corp. Chandler Inc. Income…arrow_forwardCarson, Inc., acquires 80 percent of the outstaniding common stock of Gardena corporation on January 1, 2020, in exchange for $900,000 cash. At the acquisition date, Gardena's total fair value, including the noncontrolling interest, was assessed at $1,125,000. Also at the acquisition date, Gardena's book value was $690,000. Several individual items on Gardena's financial records had fair values that differed from their book values as follows: Book value Fair value Trademark (indefinite life) $360,000 $383,000 Property and equipment (net, 8-year remaining useful life) 290,000 330,000 Patent (14-year remaining useful life) 132,000 272,000 For internal reporting purposes, Carson, inc., employs the equity method to account for this investment. The following account balances are for the year ending December 31,…arrow_forward
- Carson, Inc., acquires 80 percent of the outstaniding common stock of Gardena corporation on January 1, 2020, in exchange for $900,000 cash. At the acquisition date, Gardena's total fair value, including the noncontrolling interest, was assessed at $1,125,000. Also at the acquisition date, Gardena's book value was $690,000. Several individual items on Gardena's financial records had fair values that differed from their book values as follows: Book value Fair value Trademark (indefinite life) $360,000 $383,000 Property and equipment (net, 8-year remaining useful life) 290,000 330,000 Patent (14-year remaining useful life) 132,000 272,000 For internal reporting purposes, Carson, inc., employs the equity method to account for this investment. The following account balances are for the year ending December 31, 2020, for both companies. At year-end, there…arrow_forwardPlaza, Inc., acquires 80 percent of the outstanding common stock of Stanford Corporation on January 1, 2018, in exchange for $1,079,300 cash. At the acquisition date, Stanford’s total fair value, including the noncontrolling interest, was assessed at $1,349,125. Also at the acquisition date, Stanford's book value was $565,100. Several individual items on Stanford’s financial records had fair values that differed from their book values as follows: Book Value Fair Value Tradenames (indefinite life) $ 292,900 $ 439,200 Property and equipment (net, 8-year remaining life) 241,600 260,000 Patent ( 14-year remaining life) 140,400 182,400 For internal reporting purposes, Plaza, Inc., employs the equity method to account for this investment. The following account balances are for the year ending December 31, 2018, for both companies. Plaza Stanford Revenues $ (938,600) $ (719,900) Cost of Good sold 518,900 322,400 Depreciation Expense 219,900 30,200 Amortization…arrow_forwardEcho, Inc., purchased 10 percent of ProForm Corporation on January 1, 2017, for $345,000 and accounted for the investment using the fair-value method. Echo acquires an additional 15 percent of ProForm on January 1, 2018, for $580,000. The equity method of accounting is now appropriate for this investment. No intra-entity sales have occurred.a. How does Echo initially determine the income to be reported in 2017 in connection with its ownership of ProForm?b. What factors should have influenced Echo in its decision to apply the equity method in 2018?c. What factors could have prevented Echo from adopting the equity method after this second purchase?d. What is the objective of the equity method of accounting?e. What criticisms have been leveled at the equity method? f. In comparative statements for 2017 and 2018, how would Echo determine the income to be reported in 2017 in connection with its ownership of ProForm? Why is this accounting appropriate?g.…arrow_forward
- On March 31, 2020, Gray Company purchased 120,000 ordinary shares of Len Company for P 1,700,000, representing 30% of Len’s outstanding ordinary shares and an underlying equity of P1,400,000 in Len's net assets on January 2, 2020. The excess of the acquisition cost over the equity acquired cannot be attributed to any tangible asset As a result of Gray's 30% ownership of Len, Gray has the ability to exercise significant influence over Len's financial and operating policies.On March 1, June 1. September 1 and December 1, all of 2020, Len paid quarterly dividend of P0.50 per ordinary share on each of these dates. Len's profit for the year ended December 31, 2020 was P1,200,000, that was earned evenly throughout the year. At December 31, 2020, each ordinary share of Len Company was selling at P16.1. What is Gray's income from associates for the year 2020? a. P360,000 b. P330,000 c. P300,000 d. P270,000 2. What is the investment carrying amount at December 31, 2020? a.…arrow_forwardOn March 31, 2020, Gray Company purchased 120,000 ordinary shares of Len Company for P 1,700,000, representing 30% of Len’s outstanding ordinary shares and an underlying equity of P1,400,000 in Len's net assets on January 2, 2020. The excess of the acquisition cost over the equity acquired cannot be attributed to any tangible asset As a result of Gray's 30% ownership of Len, Gray has the ability to exercise significant influence over Len's financial and operating policies.On March 1, June 1. September 1 and December 1, all of 2020, Len paid quarterly dividend of P0.50 per ordinary share on each of these dates. Len's profit for the year ended December 31, 2020 was P1,200,000, that was earned evenly throughout the year. At December 31, 2020, each ordinary share of Len Company was selling at P16. Assuming the excess of acquisition cost over the underlying equity acquired is attributable to a piece of equipment with a remaining life of 5 years on the date of investment acquisition, and…arrow_forwardOn March 31, 2020, Gray Company purchased 120,000 ordinary shares of Len Company for P 1,700,000, representing 30% of Len’s outstanding ordinary shares and an underlying equity of P1,400,000 in Len's net assets on January 2, 2020. The excess of the acquisition cost over the equity acquired cannot be attributed to any tangible asset As a result of Gray's 30% ownership of Len, Gray has the ability to exercise significant influence over Len's financial and operating policies.On March 1, June 1. September 1 and December 1, all of 2020, Len paid quarterly dividend of P0.50 per ordinary share on each of these dates. Len's profit for the year ended December 31, 2020 was P1,200,000, that was earned evenly throughout the year. At December 31, 2020, each ordinary share of Len Company was selling at P16.What is the investment carrying amount at December 31, 2020? a. P1,920,000 b. P1,790,000 c. P1,730,000 d. P1,700,000arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning