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23 Nov 2019

Equity Method for Stock Investment On January 4, 2014, PenmanCompany purchased 124,000 shares of Hi Energy Company directly fromone of the founders for a price of $44 per share. Hi Energy has400,000 shares outstanding, including the Penman shares. On July 2,2014, Hi Energy paid $440,000 in total dividends to itsshareholders. On December 31, 2014, Hi Energy reported a net incomeof $800,000 for the year. Penman uses the equity method inaccounting for its investment in Hi Energy.

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Jean Keeling
Jean KeelingLv2
5 Apr 2019
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Related questions

Gant Company purchased 30 percent of the outstanding shares of Temp Company for $82,000 on January 1, 20X6. The following results are reported for Temp Company:

20X6 20X7 20X8
Net income $ 44,000 $ 39,000 $ 64,000
Dividends paid 12,000 30,000 17,000
Fair value of shares held by Gant:
January 1 82,000 101,000 98,000
December 31 101,000 98,000 109,000

Required:

Determine the amounts reported by Gant as income from its investment in Temp for each year and the balance in Gant’s investment in Temp at the end of each year assuming that Gant uses the following methods in accounting for its investment in Temp:

a. Cost method.

b. Equity method.

c. Fair value method.

Problem 15-3

Hatch Company has two classes of capital stock outstanding: 7%,$20 par preferred and $5 par common. At December 31, 2014, thefollowing accounts were iHatch Company has two classes of capitalstock outstanding: 7%, $20 par preferred and $5 par common. AtDecember 31, 2014, the following accounts were included instockholders’ equity.

Preferred Stock, 151,800 shares $ 3,036,000
Common Stock, 2,120,000 shares 10,600,000
Paid-in Capital in Excess of Par—Preferred Stock 203,700
Paid-in Capital in Excess of Par—Common Stock 27,240,000
Retained Earnings 4,547,000


The following transactions affected stockholders’ equity during2015.

Jan. 1 40,300 shares of preferred stock issued at $22 per share.
Feb. 1 53,500 shares of common stock issued at $21 per share.
June 1 2-for-1 stock split (par value reduced to $2.50).
July 1 39,700 shares of common treasury stock purchased at $9 pershare. Hatch uses the cost method.
Sept. 15 10,600 shares of treasury stock reissued at $11 per share.
Dec. 31 The preferred dividend is declared, and a common dividend of55¢ per share is declared.
Dec. 31 Net income is $2,279,000.


Prepare the stockholders’ equity section for Hatch Company atDecember 31, 2015.

Selected transactions completed by Equinox Products Inc. duringthe fiscal year ended December 31, 2016, were as follows:

Record on journal page 10:

Jan. 3 Issued 15,000 shares of $20 parcommon stock at $30, receiving cash.
Feb. 15 Issued 4,000 shares of $80 parpreferred 5% stock at $100, receiving cash.
May 1 Issued $500,000 of 10-year, 5%bonds at 104, with interest payable semiannually.
16 Declared a dividend of $0.50 pershare on common stock and $1.00 per share on preferred stock. Onthe date of record, 100,000 shares of common stock wereoutstanding, no treasury shares were held, and 20,000 shares ofpreferred stock were outstanding. Journalize this transactionas a single entry.
26 Paid the cash dividends declared onMay 16.
Jun. 1 Purchased 7,500 shares of SolsticeCorp. at $40 per share, plus a $150 brokerage commission. Theinvestment is classified as an available-for-sale investment.
8 Purchased 8,000 shares of treasurycommon stock at $33 per share.
22 Purchased 40,000 shares ofPinkberry Co. stock directly from the founders for $24 per share.Pinkberry has 125,000 shares issued and outstanding. EquinoxProducts Inc. treated the investment as an equity methodinvestment.
30 Declared a $1.00 cash dividend pershare on preferred stock. On the date of record, 20,000 shares ofpreferred stock were outstanding.
Jul. 11 Paid the cash dividends declared onJul. 11 to the preferred stockholders.
Aug. 27 Received $27,500 dividend fromPinkberry Co. investment of Jun. 22.

Record on journal page 11:

Oct. 1 Purchased $90,000 of Dream Inc.10-year, 5% bonds, directly from the issuing company, at their faceamount plus accrued interest of $375. The bonds are classified as aheld-to-maturity long-term investment.
7 Sold, at $38 per share, 2,600shares of treasury common stock purchased on Jun. 8.
14 Received a dividend of $0.60 pershare from the Solstice Corp. investment on Jun. 1.
29 Sold 1,000 shares of Solstice Corp.at $45, including commission.
31 Recorded the payment of semiannualinterest on the bonds issued on May 1 and the amortization of thepremium for six months. The amortization is determined using thestraight-line method.
Dec. 31 Accrued interest for three monthson the Dream Inc. bonds purchased on Oct. 1.
31 Pinkberry Co. recorded totalearnings of $240,000. Equinox Products recorded equity earnings forits share of Pinkberry Co. net income.
31 The fair value for Solstice Corp.stock was $39.02 per share on December 31, 2016. The investment isadjusted to fair value, using a valuation allowance account. AssumeValuation Allowance for Available-for-Sale Investments had abeginning balance of zero.
Required:
1. Journalize the selectedtransactions. Refer to the Chart of Accounts for exact wording ofaccount titles.
2. After all of the transactionsfor the year ended December 31, 2016, had been posted [includingthe transactions recorded in part (1) and all adjusting entries],the data that follows were taken from the records of EquinoxProducts Inc.
A. Prepare a multiple-step incomestatement for the year ended December 31, 2016, concluding withearnings per share. In computing earnings per share, assume thatthe average number of common shares outstanding was 100,000 andpreferred dividends were $100,000. (Round earnings per share to thenearest cent.)*
B. Prepare a retained earningsstatement for the year ended December 31, 2016.*
C. Prepare a balance sheet inreport form as of December 31, 2016. *
* Read the instructions aboveeach financial statement carefully. They may contain specificinstructions for completing the statement.
Income Statementdata:
Advertising expense $150,000
Cost of merchandise sold 3,700,000
Delivery expense 30,000
Depreciation expense-officebuildings and equipment 30,000
Depreciation expense-storebuildings and equipment 100,000
Dividend revenue 4,500
Gain on sale of investments 4,980
Income from Pinkberry Co.investment 76,800
Income tax expense 140,500
Interest expense 21,000
Interest revenue 2,720
Miscellaneous administrativeexpense 7,500
Miscellaneous selling expense 14,000
Office rent expense 50,000
Office salaries expense 170,000
Office supplies expense 10,000
Sales 5,254,000
Sales commissions 185,000
Sales salaries expense 385,000
Store supplies expense 21,000
Retainedearnings and balance sheet data:
Accounts payable $194,300
Accounts receivable 545,000
Accumulated depreciation—officebuildings and equipment 1,580,000
Accumulated depreciation—storebuildings and equipment 4,126,000
Allowance for doubtfulaccounts 8,450
Available-for-sale investments (atcost) 260,130
Bonds payable, 5%, due 2024 500,000
Cash 246,000
Common stock, $20 par
(400,000 shares authorized; 100,000shares issued, 94,600 outstanding) 2,000,000
Dividends:
Cash dividends for commonstock 155,120
Cash dividends for preferredstock 100,000
Goodwill 500,000
Income tax payable 44,000
Interest receivable 1,125
Investment in Pinkberry Co. stock(equity method) 1,009,300
Investment in Dream Inc. bonds(long term) 90,000
Merchandise inventory (December 31,2016),
at lower of cost (FIFO) ormarket 778,000
Office buildings and equipment 4,320,000
Paid-in capital from sale oftreasury stock 13,000
Excess of issue price overpar:
-Common 886,800
-Preferred 150,000
Preferred 5% stock, $80 par
(30,000 shares authorized; 20,000shares issued) 1,600,000
Premium on bonds payable 19,000
Prepaid expenses 27,400
Retained earnings, January 1,2016 9,319,725
Store buildings and equipment 12,560,000
Treasury stock
(5,400 shares of common stock atcost of $33 per share) 178,200
Unrealized gain (loss) onavailable-for-sale investments (6,500)
Valuation allowance foravailable-for-sale investments

(6,500)

CHART OF ACCOUNTSEquinox Products Inc.General Ledger

ASSETS
110 Cash
121 Accounts Receivable
122 Allowance for DoubtfulAccounts
131 Merchandise Inventory
132 Interest Receivable
133 Prepaid Expenses
141 Investments-Solstice Corp.
142 Investment in Pinkberry Co.Stock
143 Investment in Dream Inc. Bonds
144 Valuation Allowance forAvailable-for-Sale Investments
181 Store Buildings and Equipment
182 Accumulated Depreciation-StoreBuildings and Equipment
183 Office Buildings and Equipment
184 Accumulated Depreciation-OfficeBuildings and Equipment
191 Goodwill
LIABILITIES
211 Accounts Payable
221 Income Tax Payable
225 Cash Dividends Payable
251 Bonds Payable
252 Discount on Bonds Payable
253 Premium on Bonds Payable
EQUITY
311 Preferred Stock
312 Paid-in Capital in Excess ofPar-Preferred Stock
321 Common Stock
322 Paid-in Capital in Excess ofPar-Common Stock
331 Retained Earnings
341 Cash Dividends
351 Treasury Stock
352 Paid-in Capital from Sale ofTreasury Stock
361 Unrealized Gain (Loss) onAvailable-for-Sale Investments
REVENUE
410 Sales
611 Dividend Revenue
621 Interest Revenue
631 Income from Pinkberry Co.
641 Gain on Sale of Investments
EXPENSES
511 Cost of Merchandise Sold
512 Bad Debt Expense
520 Sales Salaries Expense
521 Sales Commissions
522 Office Salaries Expense
531 Advertising Expense
532 Delivery Expense
537 Store Supplies Expense
538 Office Supplies Expense
539 Office Rent Expense
541 Income Tax Expense
551 Depreciation Expense-StoreEquipment
552 Depreciation Expense-OfficeEquipment
591 Miscellaneous Selling Expense
592 Miscellaneous AdministrativeExpense
710 Interest Expense
731

Loss on Sale of Investments
Labels
Current assets
Current liabilities
December 31, 2016
For the Year Ended December 31,2016
Intangible assets
Investments
Less dividends
Long-term liabilities
Operating expenses
Other income and expenses
Paid-in capital
Add dividends
Property, plant, and equipment
AmountDescriptions
Available-for-sale investments
Decrease in retained earnings
Excess of issue price over par
Gross profit
Income before income tax
Income from operations
Increase in retained earnings
Miscellaneous selling expense
Net income
Net loss
Retained earnings, January 1,2016
Retained earnings, December 31,2016
Sales commissions
Sales salaries expense
Store supplies expense
Total administrative expenses
Total assets
Total (before treasury stock)
Total current assets
Total current liabilities
Total liabilities
Total liabilities and stockholders’equity
Total long-term liabilities
Total investments
Total operating expenses
Total paid-in capital
Total property, plant, andequipment
Total selling expenses
Total stockholders’ equity
Unamortized premium
Unamortized discount

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