Chapter 2 - Textbook Question

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University of Notre Dame **We aren't endorsed by this school
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AA 0P
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Accounting
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Nov 19, 2023
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Problem 2-3 L02, @3, @5 Melville Inc. purchased 2,000 common shares (20%) of Raymore Ltd. on January 1, Year 5 for $42,000. Additional information on Raymore for the two years ending December 31, Year 6, is as follows: Market Value per Share at Year Net Income Dividends Paid end of period Year 5 $25,000 $13,000 $22.00 Year 6 28,000 14,000 22.60 At December 31, Year 6, Raymore had some inventory that was purchased from Melville. Melville had recorded a gross profit of $1,300 on the sale of this inventory. This gross profit should be deducted from Melville's Year 6 profit and investment account under the equity method. On January 1, Year 7, Melville sold its investment in Raymore for $47,000. Required (a) Calculate the balance in the investment account at December 31, Year 6 under each of the cost and equity methods. (b) Calculate the investment income for Year 6 under each of the cost and equity methods. (c) Prepare the journal entries for the sale of the shares on January 1, Year 7 under each of the cost and equity methods. Problem 2-5 @Lo3 Right Company purchased 25,000 common shares (25%) of ON Inc. on January 1, Year 11, for $250,000. Right uses the equity method to report its investment in ON because it has significant influence in the operating and investing decisions made by ON. Right has no legal obligation to pay any of ON's liabilities and has not committed to contribute any more funds to ON. Additional information for ON for the four years ending December 31, Year 14, is as follows: Market Value per Share at Year Net Income Dividends Paid December 31 Year 11 $200,000 $60,000 $12 Year 12 (300,000) 60,000 6 Year 13 (400,000) 0 2 Year 14 (500,000) 0 1 Required (a) Calculate the balance in the investment account for each of the Years 11 through 14. Assume that the market value is used in determining whether the investment is impaired. (b) Determine the total income to be reported by Right from its investment in ON for each of the Years 11 through 14.
Problem 2-6 LO3, Pender Corp. paid $285,000 for a 30% interest in Saltspring Limited on January 1, Year 6. During Year 6, Saltspring paid dividends of $110,000 and reported profit as follows: Profit before discontinued operations $339,000 Discontinued operations loss (net of tax) (33.000) Profit $306.000 Pender's profit for Year 6 is calculated on $990,000 in sales, expenses of $110,000, income tax expense of $352,000, and its investment income from Saltspring. Both companies have an income tax rate of 40%. Required (a) Assume that Pender reports its investment using the equity method. (i) Prepare all journal entries necessary to account for Pender's investment for Year 6. (ii) Determine the correct balance in Pender's investment account at December 31, Year 6. (iii) Prepare an income statement for Pender for Year 6. (b) Assume that Pender uses the cost method. (i) Prepare all journal entries necessary to account for Pender's investment for Year 6. (ii) Determine the correct balance in Pender's investment account at December 31, Year 6. (iii) Prepare an income statement for Pender for Year 6. (c) Which reporting method would Pender want to use if its bias is to report the highest possible return on investment to users of its financial statements? Briefly explain and show supporting calculations. Problem 2-7 L02, @3, @5 Her Company purchased 26,000 common shares (20%) of Him Inc. on January 1, Year 4, for $442,000. Additional information on Him for the three years ending December 31, Year 6, is as follows: 'Market Value per Share at Year Net Income Dividends Paid December 31 Year 4 $260.000 $195,000 $18 Year 5 292,500 208,000 20 Year 6 312,000 227,500 23 On December 31, Year 6, Her sold its investment in Him for $598,000. Required (a) Compute the balance in the investment account at the end of Year 5, assuming that the investment is classified as (i) FVTPL (i) Investment in associate (iii) FVTOCI
(b) Calculate how much income will be reported in net income and other comprehensive income in each of Years 4, S, and 6, and in total for the three years assuming that the investment is classified as (i) FVTPL (ii) Investment in associate (iii) FVTOCI (c) What are the similarities and differences in your answers for the three parts of (b)?
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