Mcgraw-Hill/Irwin: © The Mcgraw-Hill Companies, Inc., 2007 Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/E 1-1

Accrualfirst purchase ($30,000 x 5%)...........................
Accrualsecond purchase ($30,000 x 6/12 x 10%)........

Amortization on first purchase.........................................
Amortization on second purchase ($200 x 6/12)............
Equity Income2007....................................................
1,500
1,500
(135)
(100)
$2,765
Reported for 2008 (15% for entire year; since final

acquisition was made on last day of year, neither
income nor amortization are recognized):
Accrual ($24,000 x 15%)....................................................
Amortization on first purchase.........................................
Amortization on second purchase...................................
Equity income2008....................................................
$3,600
(135)
(200)
$3,265
b. Investment in Barker
Costfirst purchase..................................................................... $7,475.00
Costsecond purchase............................................................... 14,900.00
Costthird purchase................................................................... 34,200.00
Equity Income (above)
2006.............................................................................................
216.25
2007............................................................................................. 2,765.00
2008............................................................................................. 3,265.00
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
The McGraw-Hill Companies, Inc., 2007

1-1
24. b (continued)
Less: dividends received
2006 ($8,000 x 3/12 x 5%)..........................................................
(100.00)
2007 ($16,000 x 5% and $16,000 x 2/4 x 10%).........................
(1,600.00)
2008 ($9,000 x 15%)...................................................................
(1,350.00)
Balance........................................................................................... $59,771.25
25. (25 Minutes) (Preparation of journal entries for two years, includes losses and
intercompany transfers of inventory)
Journal Entries for Hobson Co.
1/1/07
During
2007
12/31/07
12/31/07
McGraw-Hill/Irwin
1-2
Investment in Stokes Co...............

Cash..........................................
(To record initial investment)
Cash................................................
Investment in Stokes Co.........
(To record receipt of dividend)
210,000
210,000
4,000
Equity in Stokes IncomeLoss...

16,000
Extraordinary Loss of Stokes......
8,000
(To record accrual of income as earned by
equity investee, 40% of reported balances)
Equity in Stokes IncomeLoss...
3,300
(To record amortization relating to acquisition
of Stokessee Schedule 1 below)
4,000
24,000
3,300

Solutions Manual
25. (continued)
12/31/07
During
2008
12/31/08
12/31/08
12/31/08
12/31/08
Equity in Stokes Income-Loss.....

2,000
(To defer unrealized gain on intercompany
sale see Schedule 2 below)
Cash................................................
(To record receipt of dividend)
2,000
4,800

16,000
Equity in Stokes Income.........
(To record 40% accrual of income as earned by
equity investee)
Equity in Stokes Income...............
3,300
(To record amortization relating to acquisition
of Stokes)
2,000
Equity in Stokes Income.........
(To recognize income deferred from 2007)
Equity in Stokes Income...............
3,600
(To defer unrealized gain on intercompany
salesee Schedule 3 below)
4,800
16,000
3,300
2,000
3,600
Schedule 1Allocation of Acquisition Price and Related Amortization

Acquisition price .........................................................
$210,000
Percentage of book value acquired
($400,000 x 40%)......................................................
(160,000)
Payment in excess of book value...............................
$50,000
McGraw-Hill/Irwin
The McGraw- Hill Companies, Inc., 2007

1-3
25. (continued)
Annual
Excess payment identified with specific
assets
Building ($40,000 x 40%)
Royalty agreement ($85,000 x 40%)
Total annual amortization
Life
Amortization
16,000
10 yrs.
$1,600
$34,000
20 yrs.
1,700
$3,300
Schedule 2Deferral of Unrealized Gain2007

Inventory remaining at end of year...................................................
$15,000
Gross profit percentage ($30,000/$90,000)...................................... x 33 1/3%
Gross profit remaining in inventory............................................
$5,000
Ownership percentage.......................................................................
x 40%
Unrealized gain to be deferred until 2008..................................
$2,000
Schedule 3Deferral of Unrealized Gain2008
Inventory remaining at end of year (30%)........................................
$24,000
Gross profit percentage ($30,000/$80,000)...................................... x 37 1/2%
Gross profit remaining in inventory............................................
$9,000
Ownership percentage.......................................................................
x 40%
Unrealized gain to be deferred until 2009..................................
$3,600
McGraw-Hill/Irwin
1-4

Solutions Manual
26. (35 Minutes) (Reporting of investment sale with equity method applied both
before and after. Includes intercompany inventory transfers)
Income effects for year ending December 31, 2007
Equity income in Scranton, Inc. (Schedule 1)............................
$107,774
Extraordinary LossScranton, Inc. ($120,000 x 32 percent)........
$(38,400)
Gain on sale of Investment in Scranton, Inc. (Schedule 2)............
$30,579
Schedule 1Equity Income in Scranton, Inc.

Investee income accrualoperations
$320,000 x 40 percent x 7/12 year.........................
$320,000 x 32 percent x 5/12 year.........................
Amortization
$12,000 x 7/12 year..................................................
After 20 percent of stock is sold (8,000/40,000
shares): $12,000 x 80 percent x 5/12 year.......
Recognition of unrealized gain
Remaining inventory12/31/06.............................
Gross profit percentage on original sale
($20,000/$50,000)...............................................
Gross profit remaining in inventory......................
Ownership percentage...........................................
Intercompany gain recognized in 2007.................
Equity income in Scranton, Inc........................
McGraw-Hill/Irwin
$74,667
42,667
$117,334
$7,000
4,000
(11,000)
$9,000
x 40%
$3,600
x 40%
1,440
$107,774

1-5
26. (continued)
Schedule 2Gain on Sale of Investment in Scranton, Inc.
Book valueinvestment in Scranton, Inc.1/1/07
(given).......................................................................
$248,000
Investee Income accrual1/1/07 8/1/07 (Schedule 1)
74,667
Amortization1/1/07 8/1/07 (Schedule 1)...............
(7,000)
Recognition of deferred gain (Schedule 1)................
1,440
Book valueInvestment in Scranton, Inc.8/1/07...
$317,107
Percentage of investment sold (8,000/40,000
shares)......................................................................
x 20%
Book value of shares being sold................................
$63,421 (rounded)
Sales price.....................................................................
94,000
Gain on sale of investment in Scranton, Inc........
$30,579
27. (30 Minutes) (Compute equity balances for three years. Includes
intercompany inventory transfer)
Part a
Equity Income 2006
Basic equity accrual ($280,000 x year x 25%)........................
Amortization (1/2 yearsee Schedule 1)...................................
Equity income2006..............................................................
$35,000
(14,375)
$20,625
Equity Income 2007

Basic equity accrual ($360,000 x 25%)......................................
Amortization (see Schedule 1)...................................................
Deferral of unrealized gain (see Schedule 2)............................
Equity Income2007.............................................................
$90,000
(28,750)
(6,000)
$55,250
Equity Income 2008

Basic equity accrual ($380,000 x 25%)......................................
Amortization (see Schedule 1)...................................................
Recognition of deferred gain (see Schedule 2)........................
Equity Income2008.............................................................
$95,000
(28,750)
6,000
$72,250
McGraw-Hill/Irwin
1-6

Solutions Manual
27. (continued)
Schedule 1Acquisition Price Allocation and Amortization
Acquisition price (65,000 shares x $13)
Book value equivalency ($1,600,000 x 25%)
Payment in excess of book value
Excess payment identified with specific
assets
Equipment ($120,000 x 25%)
Land ($160,000 x 25%)
Copyright
Total annual amortization (full year)
$845,000
400,000
$445,000
$30,000
40,000
375,000
Annual
Life Amortization
8 yrs.
$3,750
15 yrs.
25,000
$28,750
Schedule 2Deferral of Unrealized Intercompany Gain

Inventory remaining at December 31, 2007...................................
Markup percentage ($60,000/$150,000).........................................
Total markup.....................................................................................
Investor ownership percentage.....................................................
Unrealized intercompany gain (recognized deferral from
2007 until 2008)...........................................................................
$60,000
x 40%
$24,000
x 25%
$6,000
Part b
Investment in ChapmanDecember 31, 2008 balance
Acquisition price..............................................................................
2006 Equity income (above)...........................................................
2006 Dividends received during half year (65,000 shares x $.50)
2007 Dividends received (65,000 shares x $1.00)........................
2008 Dividends received (65,000 shares x $1.00)........................
Investment in Chapman12/31/08.......................................
McGraw-Hill/Irwin
$845,000
20,625
(32,500)
55,250
(65,000)
72,250
(65,000)
$830,625

1-7
28. (65 Minutes) (Journal entries for several years. Includes conversion to
equity method and a sale of a portion of the investment)
1/1/06
9/15/06
9/15/07
1/1/08
1/1/08
McGraw-Hill/Irwin
1-8
Investment in Sumter.......................
192,000
Cash.............................................
(To record cost of 16,000 shares of Sumter
Company.)
Cash...................................................
8,000
Dividend Income.........................
(Annual dividends received from Sumter
Company.)
Cash...................................................
8,000
Dividend Income.........................
(Annual dividends received from Sumter
Company.)
965,750
Cash.............................................
(To record cost of 64,000 additional shares of
Sumter Company.)
36,800
Retained EarningsPrior Period
AdjustmentEquity in Investee Income
(Retroactive adjustment necessitated by change
to equity method. Change in figures previously
reported for 2006 and 2007 are calculated as
follows.)
192,000
8,000
8,000
965,750
36,800

Solutions Manual
28. (continued)
2006 as reported
2006equity method (as restated)
Income (dividends)..........$8,000
Income (8% of $300,000

reported income)...............................$24,000
Change in investment balance (equity
income less dividends)....................$16,000
Change in investment
Balance....................................-02007 as reported
Income (dividends)..........$8,000
Change in investment
Balance....................................-0-
2007equity method (as restated)

Income (8% of $360,000
reported income)...............................$28,800
Change in investment balance (equity
income less dividends)....................$20,800
2006 increase in reported income ($24,000 $8,000).................

2007 increase in reported income ($28,800 $8,000).................
Retroactive adjustmentincome (above).....................................
$16,000
20,800
$36,800
2006 increase in investment in Sumter balanceequity method

2007 increase in investment in Sumter balanceequity method
Retroactive adjustmentInvestment in Sumter (above).......
$16,000
20,800
$36,800
9/15/08
12/31/08
12/31/08
Cash..............................................................
Investment in Sumter............................
(Annual dividend received from Sumter
[40% of $100,000])
40,000
Investment in Sumter..................................
Equity in Investee Income.....................
(To accrue 2008 income based on 40%
ownership of Sumter)
160,000
Equity in Investee Income..........................

(Amortization of $50,550 patent
[indicated in problem] over 15 years)
3,370
40,000
160,000
3,370
28. (continued)
McGraw-Hill/Irwin

1-9
7/1/09
7/1/09
7/1/09
Investment in Sumter..................................
Equity in Investee Income.....................
(To accrue 1/2 year income of 40% ownership$380,000 x 6/12 x 40%)
76,000
Equity in Investee Income..........................

(To record 1/2 year amortization of patent
to establish correct book value for investment as of 7/1/09)
1,685
Cash .............................................................
Investment in Sumter (rounded)..........
Gain on Sale of Investment..................
(20,000 shares of Sumter Company sold;
write-off of investment computed below.)
76,000
1,685
425,000
346,374
78,626
Investment in Sumter and cost of shares sold

1/1/06 Acquisition ......................................................................
1/1/08 Acquisition.......................................................................
1/1/08 Retroactive adjustment..................................................
9/15/08 Dividends.......................................................................
12/31/08 Equity accrual..............................................................
12/31/08 Amortization................................................................
7/1/09 Equity accrual..................................................................
7/1/09 Amortization.....................................................................
Investment in Sumter7/1/09 balance...............................
Percentage of shares sold (20,000/80,000)........................
Cost of shares sold (rounded)............................................
9/15/09
Cash............................................................
Investment in Sumter...........................
(To record annual dividend received)
McGraw-Hill/Irwin
1-10
$192,000
965,750
36,800
(40,000)
160,000
(3,370)
76,000
(1,685)
$1,385,495
x 25%
$346,374
30,000
30,000

Solutions Manual
28. (continued)
12/31/09
12/31/09
Equity in Sumter..........................................
Equity in Investee income....................
(To record 1/2 year income based on
remaining 30% ownership $380,000 x
6/12 x 30%)
57,000
57,000
Equity in Investee Income.......................... 1,264 (rounded)

1,264
(To record 1/2 year of patent amortizationcomputation presented below)
Annual patent amortizationoriginal computation.....................

Percentage of shares retained (60,000/80,000)............................
Annual patent amortizationcurrent ...........................................
Patent amortization for half year....................................................
$3,370
x 75%
$2,527.50
$1,263.75
29. (25 Minutes) (Equity income balances for two years, includes intercompany
transfers)
Equity Income 2007
Basic equity accrual ($250,000 x 40%).....................................
Amortization (see Schedule 1)..................................................
Deferral of unrealized gain (see Schedule 2)..........................
Equity Income2007............................................................
$100,000
(5,000)
(3,000)
$92,000
Equity Income (Loss2008)

Basic equity accrual ($100,000 [loss] x 40%)..........................
Amortization (see Schedule 1)..................................................
Realization of deferred gain (see Schedule 2)........................
Deferral of unrealized gain (see Schedule 3)..........................
Equity Loss2008................................................................
$(40,000)
(5,000)
3,000
(8,000)
$(50,000)
McGraw-Hill/Irwin

1-11
29. (continued)
Schedule 1
Acquisition price.................................................$600,000
Book value equivalency ($1,200,000 x 40%).... 480,000
Payment in excess of book value.....................$120,000
Excess payment identified with specific assets
Building ($150,000 x 40%)
60,000
Excess payment not identified with
specific accounts
Goodwill
Total annual amortization
Annual
Life Amortization
12 yrs.
$5,000
$60,000 indefinite
Schedule 2
Markup percentage ($30,000/$80,000)...........................................
Total markup.....................................................................................
Unrealized intercompany gain12/31/07
(To be deferred until realized in 2008).....................................
Schedule 3
Markup percentage ($60,000/$150,000).........................................
Total markup.....................................................................................
Unrealized intercompany gain12/31/08
(To be deferred until realized in 2009).....................................
McGraw-Hill/Irwin
1-12
-0$5,000
$20,000
x 37.5%
$7,500
x 40%
$3,000
$50,000
x 40%
$20,000
x 40%
$8,000

Solutions Manual
Solutions to Develop Your Skills

Excel Assignment No. 1 (less difficult)see textbook Website for the Excel file solution
Parts 1, 2 and 3
Growth rate in income
dividends
Cost
Annual amortization
1st year PHC income
Percentage owned
PHC reported income
Amortization
Equity earnings
Beginning Balance
Equity earnings
Dividends
Ending Balance
ROI
Average
10%
$30,000
$700,000 (given in problem)
$15,000
$185,000
40%
2007
$74,000
15,000
$59,000
2008
$81,400
15,000
$66,400
2009
$89,540
15,000
$74,540
$700,000
59,000
(12,000)
$747,000
$747,000
66,400
(12,000)
$801,400
$801,400
74,540
(12,000)
$863,940
8.43%
9.25%
8.89%
9.30%
2010
$98,494
15,000
$83,494
2011
$108,343
15,000
$93,343
$863,940
$935,434
83,494
93,343
(12,000)
(12,000)
$935,434 $1,016,777
9.66%
9.98%
Part 3
Growth rate in income
Dividends
Cost
10%
$30,000
$639,794
Annual amortization
1st year PHC income
Percentage owned
$15,000
$185,000
40%
PHC reported income

Amortization
Equity earnings
Beginning Balance
Equity earnings
Dividends
Ending Balance
ROI
Average
(Determined through Solver

under Tools command)
$74,000
15,000
$59,000
$81,400
15,000
$66,400
$89,540
15,000
$74,540
$98,494
15,000
$83,494
$108,343
15,000
$93,343
$639,794
59,000
(12,000)
$686,794
$686,794
66,400
(12,000)
$741,194
$741,194
74,540
(12,000)
$803,734
$803,734
83,494
(12,000)
$875,228
$875,228
93,343
(12,000)
$956,571
10.06%
10.39%
10.67%
9.22%
10.00%
9.67%
McGraw-Hill/Irwin

1-13
Excel Assignment No. 2 (more difficult)see textbook Website for the Excel file solution
Intergens ownership percentage of Ryan
40%
Intercompany Transfer Price = $1,025,000
Cell F4
Ryan's Income Statement
Sales
$900,000
Beginning inventory
$
-0Purchases from Intergen $1,025,000
Inventory remaining
25%
Ending inventory
$ 256,250
Cost of goods sold
$768,750
Net income
$131,250
Income to Intergen40%
Income to two equity partners60%
Intergen's Income Statement

Sales
$1,025,000
Cost of goods sold
$850,000
Gross profit
$175,000
Equity in Ryan's earnings
$35,000*
Net income
$210,000
*(52,500 (40% x 256,250 x
175,000/1,025,000))
$ 52,500
$78,750
Rate of Return Analysis

Intergen
Two outside equity partners
Difference
Investment Base
$1,000,000
$300,000
Rate of Return
21.00%
26.25%
-5.25%
Use Goal Seek or

Solver under the
Tools command to
set Cell D20 to
zero by changing
Cell F4
Intergens ownership percentage of Ryan40% Intercompany Transfer Price = $1,050,000

Ryan's Income Statement
Sales
$900,000
Beginning inventory
$
-0Purchases from Intergen $1,050,000
Inventory
25%
Ending inventory
$ 262,500
Cost of goods sold
$787,500
Net income
$112,500
Income to Intergen40%
Income to two equity partners60%
Intergen's Income Statement

Sales
$1,050,000
Cost of goods sold
$ 850,000
Gross profit
$ 200,000
Equity in Ryan's earnings $ 25,000*
Net income
$ 225,000
*[45,000 (40% x 262,500 x 200,000/
1,050,000)]
$ 45,000
$67,500
Rate of Return Analysis

Intergen
Two outside equity partners
Difference
McGraw-Hill/Irwin
1-14
Investment Base
$1,000,000
$300,000
Rate of Return
22.50%
22.50%
0.00%

Solutions Manual

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Accrualfirst purchase ($30,000 x 5%)...........................

Accrualsecond purchase ($30,000 x 6/12 x 10%)........

Reported for 2008 (15% for entire year; since final

The McGraw-Hill Companies, Inc., 2007

Investment in Stokes Co...............

Equity in Stokes IncomeLoss...

The McGraw-Hill Companies, Inc., 2007

Equity in Stokes Income-Loss.....

Investment in Stokes Co...............

Schedule 1Allocation of Acquisition Price and Related Amortization

The McGraw- Hill Companies, Inc., 2007

Schedule 2Deferral of Unrealized Gain2007

The McGraw-Hill Companies, Inc., 2007

Extraordinary LossScranton, Inc. ($120,000 x 32 percent)........

Gain on sale of Investment in Scranton, Inc. (Schedule 2)............

Schedule 1Equity Income in Scranton, Inc.

The McGraw- Hill Companies, Inc., 2007

Equity Income 2007

Equity Income 2008

The McGraw-Hill Companies, Inc., 2007

Schedule 2Deferral of Unrealized Intercompany Gain

The McGraw- Hill Companies, Inc., 2007

The McGraw-Hill Companies, Inc., 2007

2006equity method (as restated)

Income (8% of $300,000

2007equity method (as restated)

2006 increase in reported income ($24,000 $8,000).................

2006 increase in investment in Sumter balanceequity method

Equity in Investee Income..........................

The McGraw- Hill Companies, Inc., 2007

Equity in Investee Income..........................

Investment in Sumter and cost of shares sold

The McGraw-Hill Companies, Inc., 2007

Equity in Investee Income.......................... 1,264 (rounded)

Annual patent amortizationoriginal computation.....................

Equity Income (Loss2008)

The McGraw- Hill Companies, Inc., 2007

The McGraw-Hill Companies, Inc., 2007

Solutions to Develop Your Skills

PHC reported income

(Determined through Solver

The McGraw- Hill Companies, Inc., 2007

Intercompany Transfer Price = $1,025,000

Intergen's Income Statement

Rate of Return Analysis

Use Goal Seek or

Intergens ownership percentage of Ryan40% Intercompany Transfer Price = $1,050,000

Intergen's Income Statement

Rate of Return Analysis

The McGraw-Hill Companies, Inc., 2007

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