Advanced Financial Accounting
11th Edition
ISBN: 9780078025877
Author: Theodore E. Christensen, David M Cottrell, Cassy JH Budd Advanced Financial Accounting
Publisher: McGraw-Hill Education
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Question
Chapter 4, Problem 4.36P
a.
To determine
Introduction: Investment is the asset that is acquired for the generation of income or return in the long run. Investments are used to create capital for future utilization. The
To prepare:
a.
Expert Solution
Explanation of Solution
In the books of Company J:
Record of investment in Company L by equity method:
| Date | Account | Debit ($) | Credit($) |
| 20XX | Investment in Company L | 203,000 | |
| Cash | 203,000 | ||
| (To record investment in Company L.) |
Table (1)
- Investment in Company L is an asset and it is increased by $203,000. Therefore, Investment in Company L account is debited with $203,000.
- Cash is an asset and it is decreased by $203,000. Therefore, the Cash account is credited with $203,000.
Record of share income:
| Date | Account | Debit ($) | Credit($) |
| 20XX | Investment in Company L Common Stock | 60,000 | |
| Investment in Company L | 60,000 | ||
| (To record share income.) |
Table (2)
- Investment in Company L Common Stock is equity and it is decreased by $60,000. Therefore Investment in Company L Common Stock account is debited with $60,000.
- Investment in Company L is an asset and it is decreased by $60,000. Therefore, Investment in Company L account is credited with $60,000.
Record dividend income received:
| Date | Account | Debit ($) | Credit($) |
| 20XX | Cash | 20,000 | |
| Investment in Company L Common Stock | 20,000 | ||
| (To record dividend income) |
Table (3)
- Cash is an asset and it is increased by $12,000. Therefore, the cash account is debited with $12,000.
- Investment in Company L common stock is an asset and it is decreased by $12,000. Therefore, Investment in Company L common stock account is credited with $12,000.
Record equity-method income:
| Date | Account | Debit ($) | Credit($) |
| 20XX | Investment in Company L Common Stock | 3,000 | |
| Investment in Company L | 3,000 | ||
| (To record equity-method income) |
Table (4)
- Investment in Company L common stock is an asset and it is increased by $3,000. Therefore, Investment in Company L common stock account is debited with $3,000.
- Investment in Company L is income and it is increased by $3,000. Therefore, Investment in Company L account is credited with $3,000.
b.
To determine
Introduction: Investment is the asset that is acquired for the generation of income or return in the long run. Investments are used to create capital for future utilization. The return obtained from investments is used in operations of the business.
To prepare: Journal entries that Company W would record for consolidation to prepare a consolidated financial statement.
b.
Expert Solution
Explanation of Solution
Record of differential reclassification entry:
| Date | Account | Debit ($) | Credit($) |
| 20XX | Common stock | 50,000 | |
| 100,000 | |||
| Income from Company L | 60,000 | ||
| Dividend | 20,000 | ||
| Investment in Company BC | 43,000 | ||
| (To record differential reclassification entry.) |
Table (1)
- Common stock is equity and it is decreased by $50,000. Therefore, the common stock account is debited with $50,000.
- Retained earnings is equity and it is decreased by $100,000. Therefore, Retained earnings account is debited with $100,000.
- Investment in Company L is an asset and it is decreased by $60,000. Therefore, Investment in Company L account is credited with $60,000.
- Dividend income is income and it is increased by $20,000. Therefore, Dividend income account is credited with $20,000.
- Investment in Company L is income and it is increased by $43,000. Therefore, Investment in Company L account is credited with $43,000.
Record amortize differential related to equipment:
| Date | Account | Debit ($) | Credit($) |
| 20XX | 3,000 | ||
| Income from Company L | 3,000 | ||
| (To record amortize differential related to equipment) |
Table (2)
- Differential is an expenses and it is increased by $3,000. Therefore, the differential account is debited with $3,000.
- Income from Company L is an income and it is increased by $3,000. Therefore, Income from Company L account is credited with $3,000.
Record elimination of inter-corporate receivable/ payable:
| Date | Account | Debit ($) | Credit($) |
| 20XX | Accounts Payable | 16,000 | |
| Accounts receivables | 16,000 | ||
| (To record amortize differential) |
Table (3)
- Accounts payable is a current liabilities and it is decreased by $16,000. Therefore, Accounts payable account is debited with $16,000.
Accounts receivable is a current asset and it is decreased by $16,000. Therefore, Cash and receivables account is credited with $16,000.
Record elimination of depreciation:
| Date | Account | Debit ($) | Credit($) |
| 20XX | 60,000 | ||
| Building and Equipment | 60,000 | ||
| (To record elimination of depreciation |
Table (4)
- Accumulated depreciation is a current liability and it is decreased by $60,000. Therefore, the accumulated depreciation account is debited with $60,000.
- Building & Equipment is an asset and it is decreased by $60,000. Therefore, building & equipment account is credited with $60,000.
Working Notes:
1. Computation of original book value:
| Particulars | Amount ($) |
| Common Stock (BV) | 50,000 |
| Retained Earnings (BV) | 100,000 |
| Original Book value | 150,000 |
2. Computation of ending book value:
| Particulars | Amount ($) |
| Original book value | 150,000 |
| Net income | 60,000 |
| Dividend | (20,000) |
| Ending Book value | 190,000 |
c.
To determine
Introduction: Investment is the asset that is acquired for the generation of income or return in the long run. Investments are used to create capital for future utilization. The return obtained from investments is used in operations of the business.
To prepare: The three-part worksheet as of December 31, 20X5.
c.
Expert Solution
Explanation of Solution
Preparation of three-part worksheet:
Amount in ($)
| Company J Consolidation Work paper December 31, 20X5 | |||||
| Particulars | Company J | Company L | Elimination | Consolidation | |
| Income Statement | Debit | Credit | |||
| Sales | 700,000 | 400,000 | 1,100,000 | ||
| Cost of goods sold | (500,000) | (250,000) | (750,000) | ||
| Depreciation | (25,000) | (15,000) | 3,000 | (43,000) | |
| Other expenses | (75,000) | (75,000) | (150,000) | ||
| Income from company L | 57,000 | 60,000 | 3,000 | 0 | |
| Net Income | 157,000 | 60,000 | 63,000 | 3,000 | 157,000 |
| Statement of Retained earnings | |||||
| Beginning balance | 290,000 | 100,000 | 100,000 | 290,000 | |
| Net Income | 157,000 | 60,000 | 63,000 | 3,000 | 157,000 |
| Dividend Declared | (50,000) | (20,000) | 20,000 | (50,000) | |
| Ending Balance | 397,000 | 140,000 | 163,000 | 23,000 | 397,000 |
| Cash | 82,000 | 25,000 | 107,000 | ||
| Accounts Receivables | 50,000 | 55,000 | 16,000 | 89,000 | |
| Inventory | 170,000 | 100,000 | 270,000 | ||
| Land | 80,000 | 20,000 | 100,000 | ||
| Buildings and equipment | 500,000 | 150,000 | 33,000 | 60,000 | 623,000 |
| Accumulated Depreciation | (155,000) | (75,000) | 60,000 | 3,000 | (173,000) |
| Investment in Company L | 240,000 | 190,000 | |||
| 20,000 | 20,000 | ||||
| Total assets | 967,000 | 275,000 | 93,000 | 79,000 | 1,036,000 |
| Accounts payable | 70,000 | 35,000 | 16,000 | 89,000 | |
| Mortgage payable | 200,000 | 50,000 | 250,000 | ||
| Common stock | 300,000 | 50,000 | 50,000 | 300,000 | |
| Retained earnings | 397,000 | 140,000 | 163,000 | 23,000 | 397,000 |
| Total liabilities | 967,000 | 275,000 | 229,000 | 23,000 | 1,036,000 |
Table (1)
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Chapter 4 Solutions
Advanced Financial Accounting
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