Intermediate Accounting, 10 Ed
10th Edition
ISBN: 9781260310177
Author: Mark W. Nelson, Wayne B. Thomas J. David Spiceland
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Question
Chapter 12, Problem 12.17Q
To determine
Equity method: Equity method is the method used for accounting equity investments which claim a significant influence of above 20% but less than 50% in the outstanding stock of the investee company.
To describe: The effect of the given situation on the investment account, when it is accounted by equity method
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
At the beginning of the year 1, Down Under Company raises $60 million of equity and uses the proceeds to buy a fixed asset. Operating profits before depreciation (all received in cash) and dividends for the company are expected to be $40 million in year 1, $50 million in year 2, and $60 million in year 3, ath which point the company terminates. The firms pays no taxes. Assuming stright line depreciation to zero (of 20 million per year) the firm's profits thus equal $20 in year 1, $30 million in year 2 and $40 milion in year 3. If the cost of equity is 6%, the value of the firms equity is:
Use the Discounted Dividend Valuation Method
At the beginning of year 1, ABC Company raises $70 million of equity and uses the proceeds to buy a fixed asset. Operating profits before depreciation (all received in cash) are expected to be $45 million in year 1, $55 million in year 2, and $65 million in year 3. The firm pays out all operating profits as dividends and pays no taxes. At the end of year 3, the company terminates and has no remaining value. If the firm’s shareholders expect to earn a 10 percent return, what is the value of the firm’s equity using Discounted Dividend Approach.
At the beginning of the year 1, Down Under Company raises $60 million of equity and uses the proceeds to buy a fixed asset. Operating profits before depreciation (all received in cash) and dividends for the company are expected to be $40 million in year 1, $50 million in year 2, and $60 million in year 3, ath which point the company terminates. The firsms pays no taxes. Assuming stright line depreciation to zero (of 20 million per year) the firm's profits thus equal $20 in year 1, $30 million in year 2 and $40 milion in year 3. If the cost of equity is 6%, the value of the firms equity is:
Use the Abnormal Earnings Valuation Method
Hint: Book Value per year is affected by the 20 million every year
Chapter 12 Solutions
Intermediate Accounting, 10 Ed
Ch. 12 - All investments in debt securities are classified...Ch. 12 - When market rates of interest rise after a...Ch. 12 - Does GAAP distinguish between fair values that are...Ch. 12 - When a debt investment is acquired to be held for...Ch. 12 - Prob. 12.5QCh. 12 - What is comprehensive income? Its composition...Ch. 12 - Why are holding gains and losses treated...Ch. 12 - Prob. 12.8QCh. 12 - Prob. 12.9QCh. 12 - Prob. 12.10Q
Ch. 12 - Under IFRS No. 9, which reporting categories are...Ch. 12 - Prob. 12.12QCh. 12 - Do U.S. GAAP and IFRS differ in the amount of...Ch. 12 - Under what circumstances is the equity method used...Ch. 12 - The equity method has been referred to as a...Ch. 12 - In the application of the equity method, how...Ch. 12 - Prob. 12.17QCh. 12 - Prob. 12.18QCh. 12 - Prob. 12.19QCh. 12 - How does IFRS differ from U.S. GAAP with respect...Ch. 12 - What is the effect of a company electing the fair...Ch. 12 - Define a financial instrument. Provide three...Ch. 12 - Some financial instruments are called derivatives....Ch. 12 - (Based on Appendix 12A) Northwest Carburetor...Ch. 12 - Prob. 12.25QCh. 12 - Prob. 12.26QCh. 12 - (Based on Appendix 12B) Reporting an investment at...Ch. 12 - Prob. 12.28QCh. 12 - Prob. 12.17BECh. 12 - Prob. 12.18BECh. 12 - Prob. 12.20BECh. 12 - Prob. 12.8ECh. 12 - Prob. 12.15PCh. 12 - Prob. 12.2DMPCh. 12 - Prob. 12.4DMPCh. 12 - Continuing Cases Target Case LO12-4, LO12-6...
Knowledge Booster
Similar questions
- During the past several years the annual net income of Avery Company has averaged $540,000.At the present time the company is being offered for sale. Its accounting records show the bookvalue of net assets (total assets minus all liabilities) to be $2,800,000. The fair value of Avery’s netidentifiable assets, however, is $3,000,000.An investor negotiating to buy the company offers to pay an amount equal to the fair value forthe net identifiable assets and to assume all liabilities. In addition, the investor is willing to pay forgoodwill an amount equal to the above-average earnings for five years.On the basis of this agreement, what price should the investor offer? A normal return on the fairvalue of net assets in this industry is 15 percent.arrow_forwardThis period, Amadeus Co. purchased its only available-forsale investment in the notes of Bach Co. for $83,000. The period-end fair value of these notes is $84,500. Amadeus records a a. Credit to Unrealized Gain—Equity for $1,500. b. Debit to Unrealized Loss—Equity for $1,500. c. Debit to Investment Revenue for $1,500. d. Credit to Fair Value Adjustment—Available-for-Sale for $3,500. e. Credit to Cash for $1,500.arrow_forwardRaleigh Corp. has an investment with a carrying value(equity method) on its books of $170,000 representing a30% interest in Borg Company, which suffered a $620,000loss this year. How should Raleigh Corp. handle its proportionateshare of Borg’s loss?arrow_forward
- Riverbed Corp has income from continuing operations of $394,000 for the year ended December 31, 2022. It also has the following items (before considering income taxes). 1. An unrealized loss of $57,800 on available-for-sale securities. 2. A gain of $24,400 on the discontinuance of a division (comprised of a $5,900 loss from operations and a $30,300 gain on disposal). Assume all items are subject to income taxes at a 20% tax rate.Prepare a partial income statement, beginning with income from continuing operations, and a statement of comprehensive income. RIVERBED CORPPartial Income Statementchoose the accounting period select an income statement item $enter a dollar amount select an income statement item select an income statement item…arrow_forwardLefty's Piranha Farm generates sales revenue of $260,000 and incurs operating expenses of $140,000. The company incurs a gain of $13,000 from selling securities classified as availablefor- sale and records an unrealized holding loss of $17,000 from adjusting securities available-forsale to fair value at the end of the year. Required: 1. What is the meaning of comprehensive income?arrow_forwardPina Colada Corp. has income from continuing operations of $413,000 for the year ended December 31, 2022. It also has the following items (before considering income taxes). 1. An unrealized loss of $64,600 on available-for-sale securities. 2. A gain of $26,400 on the discontinuance of a division (comprised of a $9,100 loss from operations and a $35,500 gain on disposal). Assume all items are subject to income taxes at a 20% tax rate.Prepare a partial income statement, beginning with income from continuing operations, and a statement of comprehensive income. PINA COLADA CORP.Partial Income Statement choose the accounting period select an income statement item $enter a dollar amount select an income statement item select an income statement item…arrow_forward
- Use the following information for the next six questions. You are auditing the financial statements of DISUKO Corporation and obtained the following information. DISUKO acquired an investment for P1,000,000. Transaction costs amount to P10,000. At year-end, the investment has a fair value of P900,000. 1. If the investment is classified as financial asset at fair value through profit or loss, how much would it be recorded upon acquisition? 2. If the investment is classified as financial asset at fair value through profit or loss, what is the amount of unrealized gain or loss to be reported in the statement of comprehensive income? 3. If the investment is classified as financial asset at fair value through other comprehensive income, how much would it be recorded upon acquisition? 4. If the investment is classified as as financial asset at fair value through other comprehensive income, what is the amount of unrealized gain or loss. to be reported in the income statement? 5. If the…arrow_forwardEleven years ago, Lynn, Incorporated purchased a warehouse for $315,000. This year,the corporation sold the warehouse to Firm D for $80,000 cash and D’s assumption ofa $225,000 mortgage. Through date of sale, Lynn deducted $92,300 straight-linedepreciation on the warehouse.Required:b. What is the character of this gain?c. How would your answers change if Lynn was a noncorporate business?arrow_forwardPina Colada Corp. has income from continuing operations of $413,000 for the year ended December 31, 2022. It also has the following items (before considering income taxes). 1. 2. An unrealized loss of $64,600 on available-for-sale securities. A gain of $26,400 on the discontinuance of a division (comprised of a $9,100 loss from operations and a $35,500 gain on disposal). Assume all items are subject to income taxes at a 20% tax rate. Prepare a partial income statement, beginning with income from continuing operations, and a statement of comprehensive income. Income from Continuing Operations Discontinued Operations Loss from Operations Gain on Disposal Net Income /(Loss) PINA COLADA CORP. Partial Income Statement For the Year Ended December 31, 2022 ←► Unrealized Holding Loss of Available-for-Sale Securities $ tA PINA COLADA CORP. Statement of Comprehensive Income For the Year Ended December 31, 2022 $ tA (7280) 28400 LA 413,000 21120 434120arrow_forward
- Southwestern Wear Inc. has the following balance sheet: The trustees costs total 281,250, and the firm has no accrued taxes or wages. The debentures are subordinated only to the notes payable. If the firm goes bankrupt and liquidates, how much will each class of investors receive if a total of 2.5 million is received from sale of the assets?arrow_forwardEleven years ago, Lynn, Incorporated purchased a warehouse for $315,000. This year,the corporation sold the warehouse to Firm D for $80,000 cash and D’s assumption ofa $225,000 mortgage. Through date of sale, Lynn deducted $92,300 straight-linedepreciation on the warehouse.Requiredc. How would your answers change if Lynn was a noncorporate business?arrow_forwardOn December 31, 2020, Petra Company invests $42,000 in Valery, a variable interest entity. In contractual agreements completed on that date, Petra established itself as the primary beneficiary of Valery. Previously, Petra had no equity interest in Valery. Immediately after Petra’s investment, Valery presents the following balance sheet: Cash $ 42,000 Long-term debt $ 98,000 Marketing software 162,000 Noncontrolling interest 126,000 Computer equipment 62,000 Petra equity interest 42,000 Total assets $ 266,000 Total liabilities and equity $ 266,000 Each of the amounts represents an assessed fair value at December 31, 2020, except for the marketing software. The December 31 business fair value of Valery is assessed at $168,000. If the carrying amount of the marketing software was undervalued by $47,000, what amounts for Valery would appear in Petra’s December 31, 2020, consolidated financial statements? If the carrying amount of the…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you