Stuart Manufacturing Company (CMC) was started when it acquired $90,000 by issuing common stock. During the first year of operations, the company incurred specifically identifiable product costs (materials, labor, and overhead) amounting to $63,700. CMC also incurred $88,200 of engineering design and planning costs. There was a debate regarding how the design and planning costs should be classified. Advocates of Option 1 believe that the costs should be classified as general, selling, and administrative costs. Advocates of Option 2 believe it is more appropriate to classify the design and planning costs as product costs. During the year, CMC made 4,900 units of product and sold 4,300 units at a price of $38.00 each. All transactions were cash transactions.

Prepare a GAAP-based income statement for Option 1.

Prepare a GAAP-based balance sheet for Option 1.

Prepare a GAAP-based income statement for Option 2.

Prepare a balance sheet for Option 2.

Identify the option that results in financial statements that are more likely to leave a favorable impression on investors and creditors.

Assume that CMC provides an incentive bonus to the company president equal to 14 percent of net income. Compute the amount of the bonus under each of the two options. Identify the option that provides the president with the higher bonus. (Round your answers to the nearest whole dollar.)

Assume a 30 percent income tax rate. Determine the amount of income tax expense under each of the two options. Identify the option that minimizes the amount of the company’s income tax expense. (Round your answers to the nearest whole dollar.)

Vernon Manufacturing Company was started on January 1, 2018, when it acquired $83,000 cash by issuing common stock. Vernon immediately purchased office furniture and manufacturing equipment costing $9,100 and $24,700, respectively. The office furniture had an eight-year useful life and a zero salvage value. The manufacturing equipment had a $3,400 salvage value and an expected useful life of three years. The company paid $11,500 for salaries of administrative personnel and $15,800 for wages to production personnel. Finally, the company paid $10,720 for raw materials that were used to make inventory. All inventory was started and completed during the year. Vernon completed production on 4,100 units of product and sold 3,190 units at a price of $15 each in 2018. (Assume that all transactions are cash transactions and that product costs are computed in accordance with GAAP.)

1. Determine the amount of net income that would appear on the 2018 income statement. (Round your answer to the nearest dollar amount.)

2. Determine the amount of retained earnings that would appear on the December 31, 2018, balance sheet. (Round your answer to the nearest dollar amount.)

3. Determine the amount of total assets that would appear on the December 31, 2018, balance sheet. (Round your answer to the nearest dollar amount.)

Francisco Inc. acquired 100 percent of the voting shares of Beltran Company on January 1, 2017. In exchange, Francisco paid $795,250 in cash and issued 108,000 shares of its own $1 par value common stock. On this date, Francisco’s stock had a fair value of $12 per share. The combination is a statutory merger with Beltran subsequently dissolved as a legal corporation. Beltran’s assets and liabilities are assigned to a new reporting unit.

The following reports the fair values for the Beltran reporting unit for January 1, 2017, and December 31, 2018, along with their respective book values on December 31, 2018.

Rooney Manufacturing Company was started on January 1, 2018, when it acquired $75,000 cash by issuing common stock. Rooney immediately purchased office furniture and manufacturing equipment costing $9,100 and $26,600, respectively. The office furniture had an eight-year useful life and a zero salvage value. The manufacturing equipment had a $3,500 salvage value and an expected useful life of three years. The company paid $11,500 for salaries of administrative personnel and $15,400 for wages to production personnel. Finally, the company paid $9,580 for raw materials that were used to make inventory. All inventory was started and completed during the year. Rooney completed production on 4,300 units of product and sold 3,320 units at a price of $15 each in 2018. (Assume that all transactions are cash transactions and that product costs are computed in accordance with GAAP.)

On October 30, 2016, Sanchez Company acquired a piece of machinery and signed a 12-month note for $24,000. The face value of the note includes the price of the machinery and interest. The note is to be paid in four $6,000 quarterly installments. The value of the machinery is the present value of the four quarterly payments discounted at an annual interest rate of 16%.

Required:

Prepare all the journal entries required to record the information given including the year-end adjusting entry and any payments. Payments are made at month-end on January 31, April 30, July 31 and October 31. Present value techniques should be used.

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GENERAL JOURNAL

Show how the items would be reported on the December 31, 2016, balance sheet. Additional Instructions

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FO,n,i=(1 + i)n−1i

pn,i=1(1 + i)n

pO,n,i=1−1(1 + i)ni

pD,n,i=1−1(1 + i)n-1i+1

Francisco Inc. acquired 100 percent of the voting shares of Beltran Company on January 1, 2017. In exchange, Francisco paid $657,500 in cash and issued 110,000 shares of its own $1 par value common stock. On this date, Francisco’s stock had a fair value of $12 per share. The combination is a statutory merger with Beltran subsequently dissolved as a legal corporation. Beltran’s assets and liabilities are assigned to a new reporting unit.

The following reports the fair values for the Beltran reporting unit for January 1, 2017, and December 31, 2018, along with their respective book values on December 31, 2018.

1. Prepare Francisco’s journal entry to record the assets acquired and the liabilities assumed in the Beltran merger on January 1, 2017.

2. On December 31, 2018, Francisco opts to forgo any goodwill impairment qualitative assessment and estimates that the total fair value of the entire Beltran reporting unit is $1,740,250. What amount of goodwill impairment, if any, should Francisco recognize on its 2018 income statement?

On December 18, 2017, Stephanie Corporation acquired 100 percent of a Swiss company for 4.0 million Swiss francs (CHF), which is indicative of book and fair value. At the acquisition date, the exchange rate was $1.00 = CHF 1. On December 18, 2017, the book and fair values of the subsidiary’s assets and liabilities were:

Stephanie prepares consolidated financial statements on December 31, 2017. By that date, the Swiss franc has appreciated to $1.10 = CHF 1. Because of the year-end holidays, no transactions took place prior to consolidation.

1. Determine the translation adjustment to be reported on Stephanie’s December 31, 2017, consolidated balance sheet, assuming that the Swiss franc is the Swiss subsidiary’s functional currency. What is the economic relevance of this translation adjustment?

2. Determine the remeasurement gain or loss to be reported in Stephanie’s 2017 consolidated net income, assuming that the U.S. dollar is the functional currency. What is the economic relevance of this remeasurement gain or loss?

Consolidation several years subsequent to date of acquisition—Equity method
Assume that a parent company acquired a subsidiary on January 1, 2014. The purchase price was $785,000 in excess of the subsidiary’s book value of Stockholders’ Equity on the acquisition date, and that excess was assigned to the following [A] assets:

The [A] assets with definite useful lives have been depreciated or amortized as part of the parent’s preconsolidation equity method accounting. The Goodwill asset has been tested annually for impairment, and has not been found to be impaired. The financial statements of the parent and its subsidiary for the year ended December 31, 2016, are as follows:

a. Compute the Equity Investment balance as of January 1, 2016.

$Answer

b. Show the computation to yield the $159,150 equity income reported by the parent for the year ended December 31, 2016.

Do not use negative signs with your answers.

c. Show the computation to yield the $1,650,550 Equity Investment account balance reported by the parent at December 31, 2016.

Do not use negative signs with your answers.

Anxiety Company acquired three items of machinery. ▪ On January 1,2017,the entity purchased a machine for P500,000 down and four monthly installments of P1,250,000.The cash price of the machine was P4,700,000. ▪ On December 31,2017,the entity purchased a machine in exchange for a noninterest bearing note requiring ten payments of P500,000. ▪ The first payment was made on December 31,2018, and the others are due annually on December 31. ▪ The prevailing rate of interest for this type of note at date of issuance was 12%. ▪ The present value of an ordinary annuity of 1 at 12% is 5.33 for nine periods and 5.65 for ten periods.▪ On December 31,2017,the entity acquired used machinery by issuing the seller a two-ear, noninterest- bearing note for P3,000,000.In recent borrowing, the entity has paid a 12% interest for this type of note. ▪ The present value of 1 at 12% for 2 years is.80 and the present value of an ordinary annuity of 1 at 12% for 2 years is 1.69. Required: Prepare journal entries for 2017,2018 and 2019.

On December 18, 2017, Stephanie Corporation acquired 100 percent of a Swiss company for 4.0 million Swiss francs (CHF), which is indicative of book and fair value. At the acquisition date, the exchange rate was $1.00 = CHF 1. On December 18, 2017, the book and fair values of the subsidiary’s assets and liabilities were:

Stephanie prepares consolidated financial statements on December 31, 2017. By that date, the Swiss franc has appreciated to $1.10 = CHF 1. Because of the year-end holidays, no transactions took place prior to consolidation.

Determine the translation adjustment to be reported on Stephanie’s December 31, 2017, consolidated balance sheet, assuming that the Swiss franc is the Swiss subsidiary’s functional currency. What is the economic relevance of this translation adjustment?

Determine the remeasurement gain or loss to be reported in Stephanie’s 2017 consolidated net income, assuming that the U.S. dollar is the functional currency. What is the economic relevance of this remeasurement gain or loss?

a.Translation adjustment positive: ?

b.Remeasurement loss: ?