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You have recently become the controller of Precision Corporation, a manufacturing enterprise that has begun a program of expansion through business combinations. On February 1, 2005, two weeks prior to your controllership appointment, Precision had completed the acquisition of 85% of the outstanding common stock of Sloan Company for $255,000 cash, including out-of-pocket costs. You are engaged in a discussion with Precision’s chief accountant concerning the appropriate accounting method for Precision’s interest in Sloan Company’s operating results. The chief accountant strongly supports the cost method of accounting, offering the following arguments:
The cost method recognizes that Precision and Sloan are separate legal entities. The existence of a 15% minority interest in Sloan requires emphasis on the legal separateness of the two companies. A parent company recognizes revenue under the cost method only when the subsidiary declares dividends. Such dividend revenue is consistent with the revenue realization principle of financial accounting. The Intercompany Investment Income account recorded in the equity method of accounting does not fit the definition of realized revenue. Use of the equity method of accounting might result in Precision’s declaring dividends to its shareholders out of “paper”
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prepare a rebuttal to each of the chief accountant’s arguments.
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- You have recently become the controller of Pair Corporation, a manufacturing enterprise that has begun a program of expansion through business combinations. On February 1, 2020, two weeks prior to your controllership appointment, Pair had completed the acquisition of 85% of the outstanding common stock of Sole Company for $225,000 cash, including out-of-pocket costs. You are engaged in a discussion with Pair's chief accountant concerning the appropriate accounting method for Pair's interest in Sole Company's operating results. The chief accountant strongly supports the accounting, offering the following arguments: cost method of 3. A parent company recognizes revenue under the cost method only when the subsidiary declares dividends. Such dividend revenue is consistent with the revenue realization principle of financial accounting. The Investment Income account recorded in the equity method of accounting does not fit the definition of realized revenue. 4. Use of the equity method of…The ink-jet printing division of Environmental Printing has grown tremendously in recent years. Assume the following transactions related to the ink-jet division occur during the year ended December 31, 2021. Required: Record any amounts as a result of each of these contingencies.1. Environmental Printing is being sued for $11 million by Addamax. Plaintiff alleges that the defendants formed an unlawful joint venture and drove it out of business. The case is expected to go to trial later this year. The likelihood of payment is reasonably possible. 2. Environmental Printing is the plaintiff in an $9 million lawsuit filed against a competitor in the high-end color-printer market. Environmental Printing expects to win the case and be awarded between $6.5 and $9 million. 3. Environmental Printing recently became aware of a design flaw in one of its ink-jet printers. A product recall appears probable. Such an action would likely cost the company between $500,000 and $900,000.Concord Corporation purchased for $288,000 a 25% interest in Murphy, Inc. This investment enables Concord to exert significant influence over Murphy. During the year, Murphy earned net income of $173,000 and paid dividends of $54,000. Prepare Concord's journal entries related to this investment. (List all debit entries before credit entries. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter O for the amounts.) Account Titles and Explanation Debit Credit (To record the purchase.) (To record the net income.) (To record the dividend.)
- Concord Corporation purchased for $285,000 a 25% interest in Murphy, Inc. This investment enables Concord to exert significant influence over Murphy. During the year, Murphy earned net income of $185,000 and paid dividends of $54,000.Prepare Concord’s journal entries related to this investment. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Account Titles and Explanation Debit Credit enter an account title to record the purchase enter a debit amount enter a credit amount enter an account title to record the purchase enter a debit amount enter a credit amount (To record the purchase.) enter an account title to record the net income enter a debit amount enter a credit amount enter an account title to record the net income enter a debit amount enter a credit amount (To record the net income.)…You work for an accountancy firm. You have been asked to provide advice to clients about the following transactions:On 1 October 2022, Shikipisha, a listed company, purchased 90% of the ordinary shares of Allan. Allan, which ceased trading one week prior to the share purchase, owns a manufacturing facility comprising of land and buildings as well as related equipment.The fair value of the land and buildings is similar to the fair value of the equipment. The acquisition of Allan only gained legal approval on the basis that all employees who worked at the facility are retained. There are no other assets, including any inventories, or processes transferred as part of the sale.Shikipisha proposes to account for the purchase of Allan as a business combination.Required:Advise whether the proposed treatments of the above two transactions are in accordance with IFS Standards.Sage Corporation purchased for $319,000 a 30% interest in Murphy, Inc. This investment enables Sage to exert significant influence over Murphy. During the year, Murphy earned net income of $193,000 and paid dividends of $54,000.Prepare Sage’s journal entries related to this investment. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
- Risk Capital Limited, a publicly held Delaware corporation, was considering the purchase of a substantial amount of the treasury stock held by Florida Sunshine Corporation, a closely held corporation. Initial discussions with the Florida Sunshine Corporation began late in 20X0. Wilson and Wyatt, CPAs, Florida Sunshine’s public accountants, regularly prepared quarterly and annual unaudited financial statements. The most recently prepared unaudited financial statements were for the fiscal year ended September 30, 20X0. On November 15, 20X0, after protracted negotiations, Risk Capital agreed to purchase 100,000 shares of no-par Class A treasury stock of Florida Sunshine at $12.50 per share. However, Risk Capital insisted upon audited statements for the calendar year 20X0. The contract specifically provided: “Risk Capital shall have the right to rescind the purchase of said stock if the audited financial statements of Florida Sunshine for calendar year 20X0 show a material adverse change…Risk Capital Limited, a publicly held Delaware corporation, was considering the purchase of a substantial amount of the treasury stock held by Florida Sunshine Corporation, a closely held corporation. Initial discussions with the Florida Sunshine Corporation began late in 20X0. Wilson and Wyatt, CPAs, Florida Sunshine’s public accountants, regularly prepared quarterly and annual unaudited financial statements. The most recently prepared unaudited financial statements were for the fiscal year ended September 30, 20X0. On November 15, 20X0, after protracted negotiations, Risk Capital agreed to purchase 100,000 shares of no-par Class A treasury stock of Florida Sunshine at $12.50 per share. However, Risk Capital insisted upon audited statements for the calendar year 20X0. The contract specifically provided: “Risk Capital shall have the right to rescind the purchase of said stock if the audited financial statements of Florida Sunshine for calendar year 20X0 show a material adverse change…Dunbrook Travel, Inc. acquired an 80% interest in Ocean Cruises on December 31 for $970,000. Dunbrook has the ability to exercise significant influence on management decisions. The Ocean Cruises stock is publically traded. During the year, Ocean Cruises reported net income of $160,000 and paid cash dividends of $40,000. (I asked this question earlier and "EXPERT" just copy-pasted from somewhere without looking at the figures mentioned in this question, so I am asking this question again) How should DunbrookTravel account for its investment in Ocean Cruises? A. Apply the equity method and report the investment at market value at year end. B. Apply the equity method and perform a full consolidation. C. Apply mark-to-market accounting and consolidate the statements at year end. D. Account for the investment as a special purpose entity.
- On January 1, 2023, Ridge Road Company acquired 30 percent of the voting shares of Sauk Trail, Incorporated, for $4,500,000 in cash. Both companies provide commercial Internet support services but serve markets in different industries. Ridge Road made the investment to gain access to Sauk Trail's board of directors and thus facilitate future cooperative agreements between the two firms. Ridge Road quickly obtained several seats on Sauk Trail's board, which gave it the ability to significantly influence Sauk Trail's operating and investing activities. The January 1, 2023, carrying amounts and corresponding fair values for Sauk Trail's assets and liabilities follow: Carrying Amount $ 200,000 5,810,000 Fair Value $ 200,000 7,140,000 4,180,000 2,180,000 (275,000) Assets and Liabilities Cash and Receivables Computing Equipment Patented Technology Trademark Liabilities Also, as of January 1, 2023, Sauk Trail's computing equipment had a seven-year remaining estimated useful life. The patented…Sandhill Corporation purchased for $288,000 a 25% interest in Murphy, Inc. This investment enables Sandhill to exert significant influence over Murphy. During the year, Murphy earned net income of $173,000 and paid dividends of $54,000. Prepare Sandhill's journal entries related to this investment. (List all debit entries before credit entries. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter O for the amounts.)Pronghorn Corporation purchased for $ 322,000 a 30% interest in Murphy, Inc. This investment enables Pronghorn to exert significant influence over Murphy. During the year, Murphy earned net income of $ 183,000 and paid dividends of $ 60,000.Prepare Pronghorn’s journal entries related to this investment. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Account Titles and Explanation Debit Credit enter an account title to record the purchase enter a debit amount enter a credit amount enter an account title to record the purchase enter a debit amount enter a credit amount (To record the purchase.) enter an account title to record the net income enter a debit amount enter a credit amount enter an account title to record the net income enter a debit amount enter a credit amount (To record the…