Question

14.       Cleaverland purchased 100% of Omaha on January 1, 2019 for $650,000. On that date, Omaha's stockholders' equity was $650,000, and the recognized book values of Ottowa’s individual net assets approximated their fair values. Omaha had net incomes of $150,000 and $190,000 for 2019 and 2020, respectively. The subsidiary paid dividends amounting to $30,000 in both years. Cleaverland uses the equity method to account for its pre-consolidation investment in Omaha.

What was the balance in Equity Investment at December 31, 2020?

a. $650,000

b. $710,000

c. $990,000

d. $930,000

15.       Brendon, Inc. acquired 100% of Weston Enterprises on January 2, 2020. During 2020, Brendon sold Weston for $700,000 goods which had cost $500,000. Weston still owned 40% of the goods at the end of the year. In 2021, Brendon sold goods with a cost of $500,000 to Weston for $700,000, and the buyer still owned 40% of the goods at year-end. For 2021, cost of goods sold was $1,000,000 for Brendon and $990,000 for Weston.

What was consolidated cost of goods sold for 2021?

a.   $1,370,000

b.   $1,290,000

c.   $1,870,000

d.   $1,990,000

Clearwater Co. owned all of the voting common stock of Kelley, Inc. On January 2, 2020 Clearwater sold equipment to Kelley for $350,000. The equipment had cost Clearwater $425,000. At the time of the sale, the balance in accumulated depreciation was $125,000. The equipment had a remaining useful life of eight years and no salvage value.

16.       For the consolidated balance sheet at December 31, 2021, at would amount would the equipment (net) be included?

a.   $225,000

b. $262,500

c.   $306,250

d. $-0-

On April 1, 2020, Republic Company sold equipment to its wholly owned subsidiary, Barre Corporation, for $40,000. At the time of the transfer, the asset had an original cost (to Republic) of $60,000 and accumulated depreciation of $25,000. The equipment has a five year estimated remaining life.Barre reported net income of $250,000, $270,000 and $310,000 in 2020, 2021, and 2022, respectively. Republic received dividends from Barre of $90,000, $105,000 and $120,000 for 2020, 2021, and 2022, respectively.

17.        What was the amount of the gain or loss on the sale of equipment reported by Republic on its pre-consolidation income statement in 2020?

a. $-0-

b. $ 5,000 gain

c.    $20,000 loss

d. $35,000 gain

18.       What was the amount of the credit to depreciation expense on the 2021 consolidation worksheet?

a. $   750

b.   $-0-

c.   $1,000

d.   $1,600

Answer 1

Computation of balance in equity investments at December 31,2020:

Equity method will be used when investor holds more than 20% or significant influence over the other company.

Investor will increase value of investment by share of income in the investment company.

Investor will reduce value of investment by dividend paid by the investment company because it will reduce net asset of investment company and increase cash of investor.

The following information has been given in the question:

Cleaverland purchased 100% of  Omaha on January 1,2019 that means total income earned by Omaha will be of Cleaverland.

Net Income for the year 2019 and 2010 of Omaha is $150,000 and $190,000 respectively which will increase carrying value of investment of Cleaverland.

Dividend paid by Omaha for the year 2019 and 2010 is $30,000 and $30,000 respectively. which will decrease carrying value of investment of Cleaverland.

Therefore, using the above information,

Balance in equity investment at December 31,2020 is: