CASE 10‐3 Equity Method and Disclosures On July 1, 2017, Dynamic Company purchased for cash 40...

CASE 10‐3 Equity Method and Disclosures

On July 1, 2017, Dynamic Company purchased for cash 40 percent of the outstanding capital stock of Cart Company. Both Dynamic and Cart have a December 31 year‐end. Cart, whose common stock is actively traded in the over‐the‐counter market, reported its total net income for the year to Dynamic and also paid cash dividends on November 15, 2017, to Dynamic and its other stockholders.

Required:

How should Dynamic report the foregoing facts in its December 31, 2017, balance sheet and its income statement for the year then ended? Discuss the rationale for your answer.
If Dynamic should elect to report its investment at fair value, how would its balance sheet and income statement differ from your answer to part (a)?

Expert Solution

Part A

Considering the size of investment for exercising significant influence over the operating and financial policies of Cart Company, the equity method of accounting for investment in Cart Company should be followed by the Dynamic Company. The interest in outstanding capital stock of Cart Company as a long-term investment should be reported in 2017. The cash paid to purchase 40% of Cart Company should be recorded. Investment in Dynamic Company's balance sheet should be increased by the 40% Cart Company's total net income from July 1, 2017 to December 31, 2017. The proportionate is shown as revenue in the income statement of Dynamic Company and it is recognized as its share of Cart Company’s net income after acquisition. The carrying value of investment in Dynamic Company’s balance sheet is reduced by the amount of cash dividends declared by Cart Company. However the cash payment has no effect on the income statement. The reporting of deferred income taxes in balance sheet and income statement are required in case of the equity method of accounting.

Part B

If the fair value accounting method is elected by Dynamic Company, then the investment in the balance is reported at the fair value. According to SFAS No. 159, the reporting entity would get the fair value for selling assets and paying liabilities, as if it the exchange is being undertaken in the market place. Earnings should be reported considering all unrealized holding gains or losses. The assets and liabilities which would be treated using the fair value method should be present separately. Due to the implementation of SFAS No. 159 and fair value option together, it is important to record the available-for-sale and/or held-to-maturity as trading securities. Any gains and losses associated with these securities are to be reported as an adjustment to retained earnings.

ekkarill92 answered 2 years ago

On July 1, 2020, Dynamic Company purchased for cash 40% of the outstanding capital stock of...

On July 1, 2020, Dynamic Company purchased for cash 40% of the outstanding capital stock of Cart Company. Both Dynamic and Cart have a December 31 year-end. Cart, whose common stock is actively traded in the over-the-counter market, reported its total net income for the year to Dynamic and also paid cash dividends on November 15, 2020, to Dynamic and its other stockholders. Required: a. How should Dynamic report the foregoing facts in its December 31, 2020, balance sheet and...

2. On July 1, 2018, Dynamic Corporation purchased for cash 40% of the outstanding capital stock...

2. On July 1, 2018, Dynamic Corporation purchased for cash 40% of the outstanding capital stock of Cart Company. Dynamic has a fiscal year end of October 31st and Cart has a fiscal year end of March 31st. On October 31st, it has not yet been determined by Dynamic conclusively whether it has the ability to significantly influence Cart’s business operation. Cart Company’s stock is actively traded on the NASDAQ exchange reported its net income for the period ended October...

On July 1, 2017, Blue Corporation purchased Crane Company by paying $225,000 cash and issuing a...

On July 1, 2017, Blue Corporation purchased Crane Company by paying $225,000 cash and issuing a $168,750 note payable to Jay Crane. At July 1, 2017, the balance sheet of Crane Company was as follows. Cash $26,700 Accounts payable $219,500 Accounts receivable 89,700 Stockholders’ equity 219,200 Inventory 122,700 $438,700 Land 31,500 Buildings (net) 71,500 Equipment (net) 74,900 Trademarks 21,700 $438,700 The recorded amounts all approximate current values except for land (fair value of $58,100), inventory (fair value of $131,500), and...

On July 1, 2016, Gissel Corporation purchased Mills Company by paying $525,000 cash. At July 1,...

On July 1, 2016, Gissel Corporation purchased Mills Company by paying $525,000 cash. At July 1, 2016, the balance sheet of Mills Company was as follows. Cash $50,000 Accounts Payable $200,000 Accounts Receivable $90,000 Stockholder’s Equity $225,000 Inventory $100,000 Land $40,000 Buildiings 75,000 Equipment $70,000 Total $425,000 Total $425,000 The recorded amounts all approximate current values except for land (fair value of $60,000) and inventory (fair value of $110,000). They also acquired a patent from Mills company with a fair...

Property purchased for ?$3 million was revalued on 1 July 2017 to ?$4.5 million. Accumulated depreciation...

Property purchased for ?$3 million was revalued on 1 July 2017 to ?$4.5 million. Accumulated depreciation at the time of revaluation was $ 500 000. The property? hadn't previously been revalued. At the time of the? revaluation, the property was expected to have a further useful life of 25 years with no residual value. On 1 July 2021 the property was again? revalued, to ?$3.3 million. Requirement Show the journal entries to? record: (a) the initial? revaluation, (b) depreciation for...

On January 1, Kingman Corporation purchased a 40% equity in Lewis Company for $360,000. At December...

On January 1, Kingman Corporation purchased a 40% equity in Lewis Company for $360,000. At December 31, Lewis declared and paid a $40,000 cash dividend and reported net income of $98,000. Prepare the necessary journal entries for Kingman Corporation.

Exercise 17-3 On January 1, 2017, Cullumber Company purchased 10% bonds having a maturity value of...

Exercise 17-3 On January 1, 2017, Cullumber Company purchased 10% bonds having a maturity value of $220,000, for $237,567.22. The bonds provide the bondholders with a 8% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest receivable January 1 of each year. Cullumber Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified in the held-to-maturity category. Prepare the journal entry at the date of the bond purchase. (Enter answers...

Alex, Inc., buys 40 percent of Steinbart Company on January 1, 2017, for $530,000. The equity...

Alex, Inc., buys 40 percent of Steinbart Company on January 1, 2017, for $530,000. The equity method of accounting is to be used. Steinbart's net assets on that date were $1.2 million. Any excess of cost over book value is attributable to a trade name with a 20-year remaining life. Steinbart immediately begins supplying inventory to Alex as follows: Amount Held by Alex at Year-End (at Transfer Price) 2017 $70,000 $100,000 $25,000 2018 96,000 150,000 45,000 Inventory held at the...

Alex, Inc., buys 40 percent of Steinbart Company on January 1, 2017, for $1,028,000. The equity...

Alex, Inc., buys 40 percent of Steinbart Company on January 1, 2017, for $1,028,000. The equity method of accounting is to be used. Steinbart’s net assets on that date were $2.40 million. Any excess of cost over book value is attributable to a trade name with a 20-year remaining life. Steinbart immediately begins supplying inventory to Alex as follows: Year Cost to Steinbart Transfer Price Amount Held by Alex at Year-End (at Transfer Price) 2017 $98,600 $116,000 $29,000 2018 170,820...

On July 1, 2017, Sparks Company purchased for $4,300,000 an equipment having an estimated useful life...

On July 1, 2017, Sparks Company purchased for $4,300,000 an equipment having an estimated useful life of 5 years with an estimated residual value of $200,000. Depreciation is taken for the portion of the year the asset is used. Instructions (a) Complete the form below by determining the depreciation expense and year-end book values for 2017and 2018 using the 1. sum-of-the-years'-digits method. 2. double-declining balance method. Sum-of-the-Years'-Digits Method 2017 2018 Equipment $4,300,000 $4,300,000 Less: Accumulated Depreciation ...

Question