Chapter 2 Test Bank

STOCK INVESTMENTS-INVESTOR ACCOUNTING AND REPORTING

Mult ple Ch! "e #uest !ns $O% 1

When Eagle Company has less than 50% of the voting stock of Fish Corporation which of the following applies? a. Only the fair val e metho! may ". Only the e# ity metho! may "e c. Either the fair val e metho! se!. !. $either the fair val e metho! se!. "e se!. se!. or the e# ity metho! may "e or the e# ity metho! may "e

$O% %

Which one of the following items& originally recor!e! in the Investment in Falcon Co. acco nt n!er the e# ity metho!& wo l! not "e systematically charge! to income on a perio!ic "asis? a. 'morti(ation e)pense of goo!will. ". *epreciation e)pense on the e)cess fair val e attri" te! to machinery. c. 'morti(ation e)pense on the e)cess fair val e attri" te! to lease agreements. !. +nterest e)pense on the e)cess fair val e attri" te! to long,term "on!s paya"le.

$O2 -

Which one of the investor company?

following

statements

is

correct

for

an

a. Once the "alance in the Investment in Osprey Co. acco nt reaches (ero& it will not "e re! ce! any f rther. ". .n!er the e# ity metho!& the "alance in the Investment in Osprey Co. acco nt can "e negative if the investee corporation operates at a loss. c. 'pplication of the e# ity metho! is !iscontin e! when the investor/s share of losses re! ces the carrying amo nt of the investment to (ero. !. .n!er the e# ity metho!& any goo!will inherent or containe! in the Investment in Osprey Co. acco nt will "e amorti(e! to the income earne! from the investee.

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$O2 0

1estral +nc. owns 10% of 2o se Company. +n the most recent year& 2o se ha! net earnings of 340&000 an! pai! !ivi!en!s of 35&000. 1estral/s acco ntant mistakenly ass me! consi!era"le infl ence an! se! the e# ity metho! instea! of the cost metho!. What is the impact on the investment acco nt an! net earnings& respectively? a. 6y the ". 6y the c. 6y the !. 6y the sing the e# ity metho!& the acco ntant has n!erstate! investment acco nt an! overstate! the net earnings. sing the e# ity metho!& the acco ntant has overstate! investment acco nt an! n!erstate! the net earnings. sing the e# ity metho!& the acco ntant has n!erstate! investment acco nt an! n!erstate! the net earnings. sing the e# ity metho!& the acco ntant has overstate! investment acco nt an! overstate! the net earnings.

$O2 5

7riffon +ncorporate! hol!s a -0% ownership in * ck Corporation. 7riffon sho l! se the e# ity metho! n!er which of the following circ mstances? a. 7riffon has s rren!ere! significant stockhol!er rights "y agreement "etween 7riffon an! * ck. ". 7riffon has "een na"le to sec re a position on the * ck Corporation 6oar! of *irectors. c. 7riffon/s ownership is temporary. !. 8he ownership of * ck Corporation is !iverse. 9wan Corporation ses the fair val e metho! of acco nting for its investment in :on! Company. Which one of the following events wo l! affect the Investment in Pond Co. acco nt? a. ". c. !. +nvestee losses +nvestee !ivi!en! payments 'n increase in the investee/s share price from last perio!. all of the a"ove wo l! affect the Investment in Pond Co. acco nt

$O2 4

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$O/ ;

2 !flat Corporation/s stockhol!er/s e# ity at *ecem"er -1& %000 incl !e! the following< 5% :referre! stock& 310 par val e Common stock& no par '!!itional pai!,in capital =etaine! earnings 3 %&000&000 %0&000&000 5&000&000 5&000&000 -5&000&000

6rolga Corporation p rchase! a -0% interest in 2 !flat/s common stock from other sharehol!ers on >an ary 1& %005 for 311&400&000. What was the "ook val e of 6rolga/s investment in 2 !flat? a. ". c. !. $O/ 5 310&500&000 311&000&000 310&%00&000 310&550&000

>a"ir Corporation p rchase! a %0% interest in Fish Company common stock on >an ary 1& %00% for 3-00&000. 8his investment was acco nte! for sing the complete e# ity metho! an! the correct "alance in the Investment in Fish acco nt on *ecem"er -1& %000 was 3000&000. 8he original e)cess p rchase transaction incl !e! 340&000 for a patent amorti(e! at a rate of 34&000 per year. +n %005& Fish Corporation ha! net income of 30&000 per month earne! niformly thro gho t the year an! pai! 3%0&000 of !ivi!en!s in 2ay. +f >a"ir sol! one,half of its investment in Fish on ' g st 1& %005 for 3500&000& how m ch gain was recogni(e! on this transaction? a. ". c. !. 3%;5&?50 3%50&000 3%50&?50 3%5%&000

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$O/ ?

'n investor ses the cost metho! of acco nting for its investment in common stock. * ring the c rrent year& the investor receive! 3%5&000 in !ivi!en!s& an amo nt that e)cee!e! the investor/s share of the investee company/s n!istri" te! income since the investment was ac# ire!. 8he investor sho l! report !ivi!en! income of what amo nt? a. 3%5&000. ". 3%5&000 less the amo nt in e)cess of its share of n!istri" te! income since the investment was ac# ire!. c. 3%5&000 less the amo nt that is not in e)cess of its share of n!istri" te! income since the investment was ac# ire!. !. $one of the a"ove is correct.

.se the following information in answering # estions 10 an! 11. On >an ary 1& %005& Coot Company ac# ire! a 15% interest in =oost Corporation for 31%0&000 when =oost/s stockhol!er/s e# ity consiste! of 3400&000 capital stock an! 3%00&000 retaine! earnings. 6ook val es of =oost/s net assets e# ale! their fair val es on this !ate. =oost/s net income an! !ivi!en!s for %005 thro gh %00; was as follows< Net n"!0e D 2 )en)s pa ) $O/ 10 1 %005 1%&000 10&000 3 %004 15&000 10&000 3 %00; %5&000 10&000

'ss me that Coot +ncorporate! se! the cost metho! of acco nting for its investment in =oost. 8he "alance in the Investment in Roost acco nt at *ecem"er -1& %00; was a. ". c. !. 3115&000. 31%0&000. 31%1&500. 31-0&500.

$O/ 11

'ss me that Coot has significant infl ence an! ses the e# ity metho! of acco nting for its investment in =oost. 8he "alance in the Investment in Roost acco nt at *ecem"er -1& %00; was a. ". c. !. 3115&000. 31%0&000. 31%1&500. 31%-&-00.

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$O/ 1%

9wamphen Corporation acco nts for its -0% investment in Frog Company sing the e# ity metho!. On the !ate of the original investment& fair val es were e# al to the "ook val es e)cept for a patent& which cost 9wamphen an a!!itional 300&000. 8he patent ha! an estimate! life of 10 years. Frog has a stea!y net income of 3%0&000 per year an! its !ivi!en! payo t ratio is 00%. Which one of the following statements is correct? a. 8he net will "e ". 8he net will "e c. 8he net will "e !. 8he net will "e change in the investment a !e"it of 3000. change in the investment a !e"it of 3-&400. change in the investment a cre!it of 3000. change in the investment a cre!it of 3-&400. acco nt for each f ll year acco nt for each f ll year acco nt for each f ll year acco nt for each f ll year

$O3 1-

>acana Corporation pai! 3%00&000 for a %5% interest in @ilypa! Corporation/s common stock on >an ary 1& %005& " t was not a"le to e)ercise significant infl ence over @ilypa!. * ring %004& >acana reporte! income of 31%0&000& e)cl !ing its income from @ilypa!& an! pai! !ivi!en!s of 350&000. @ilypa! reporte! net income of 300&000 ! ring %004 an! pai! !ivi!en!s of 3%0&000. >acana sho l! report net income for %004 in the amo nt of a. ". c. !. 3115&000. 31%0&000. 31%5&000. 31-0&000.

$O3 10

=o"in Corporation p rchase! 150&000 previo sly niss e! shares of $est Company/s 310 par val e common stock !irectly from $est for 3-&000&000. $est/s stockhol!er/s e# ity imme!iately "efore the investment "y =o"in consiste! of 3-&000&000 of capital stock an! 3%&400&000 in retaine! earnings. What is the "ook val e of =o"in/s investment in $est? a. ". c. !. 31&500&000. 31&450&000. 3%&500&000. 3-&000&000.

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$O3 15

8he income from an e# ity investee is reporte! on one line of the investor company/s income statement e)cept when a. the cost metho! is se!. ". the investee has e)traor!inary or other A"elow the lineB items. c. the investor company is amorti(ing cost,"ook val e !ifferentials. !. the investor company changes from the cost to the e# ity metho!.

$O4 14

6art Company p rchase! a -0% interest in 9impson Corporation on >an ary 1& %000& an! 6art acco nte! for its investment in 9impson n!er the e# ity metho! for the ne)t - years. On >an ary 1& %00;& 6art sol! one,half of its interest in 9impson after which it co l! no longer e)ercise significant infl ence over 9impson. 6art sho l! a. contin e to acco nt for its remaining investment in *ak n!er the e# ity metho! for the sake of consistency. ". a!C st the investment in 9impson acco nt to one,half of its original amo nt an! acco nt for the remaining 15% interest sing the e# ity metho!. c. acco nt for the remaining investment n!er the cost metho!& sing the investment in 9impson acco nt "alance imme!iately after the sale as the new cost "asis. !. a!C st the investment acco nt to one,half of its original amo nt Done,half of the p rchase price in %000E& an! acco nt for the remaining 15% investment n!er the cost metho!.

$O4 1;

:elican Corporation ac# ire! a -0% interest in Cr stacean +ncorporate! at "ook val e several years ago. Cr stacean !eclare! 3100&000 !ivi!en!s in %005 an! reporte! its income for the year as follows< +ncome from contin ing operations @oss on !iscontin e! !ivision $et income :elican/s Investment increase "y a. ". c. !. 3 3 3 3 150&000 140&000 150&000 %10&000 2-5 in Crustacean acco nt 3;00&000 D100&000E 3400&000 for %00sho l!

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$O4 15

Cormorant Corporation pai! 3500&000 for a 00% interest in :l mage Company on >an ary 1& %005 when :l mage/s stockhol!er/s e# ity was as follows< 10% c m lative preferre! stock& 3100 par Common stock& 310 par val e Other pai!,in capital =etaine! earnings 8otal stockhol!ers/ e# ity 3 500&000 -00&000 000&000 500&000 3%&000&000

On this !ate& the "ook val es of :l mage/s assets an! lia"ilities e# ale! their fair val es an! there were no !ivi!en!s in arrears. 7oo!will from the investment is a. ". c. !. $O4 1? 30. 3150&000. 3%00&000. $one of the a"ove is correct.

+n reference to material transactions "etween an investor an! an investee& when the investor can significantly infl ence the investee& which of the following statements is correct& ass ming that the investor is sing the e# ity metho!? a. 8here is the pres mption of arms,length "argaining "etween the relate! parties. ". 's long as the investor recogni(es the effects of the transaction in its financial statements& it is not re# ire! to provi!e any a!!itional !isclos res. c. +n reporting its share of earnings an! losses of an investee& the investor m st eliminate the effect of profits an! losses on the transactions ntil they are reali(e!. !. $one of the a"ove is correct.

$O5 %0

+n reference to the !etermination of goo!will impairment& which of the following statements is correct? a. 8he goo!will impairment test n!er F'96 10% is a three,step process. ". +f the reporting nit/s fair val e e)cee!s its carrying val e& goo!will is nimpaire!. c. .n!er F'96 10% firms m st first compare carrying val es D"ook val esE at the firm level. !. 'll of the a"ove are correct.

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$O5 %1

Firms m st con! ct ann ally when

impairment

tests

more

fre# ently

than

a. other sharehol!ers hol! more than 50% interest ". a more,likely,than,not e)pectations e)ists that a nit will "e sol! or !ispose! of c. a specific nit !oes not have p "licly tra!e! stock !. sing the e# ity metho!.

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E8er" ses $O/ E)ercise 1 Crake Corporation pai! 350&000 for a 10% interest in @agoon Corp. on >an ary 1& %000& when @agoon/s stockhol!ers/ e# ity consiste! of 3000&000 of 310 par val e common stock an! 3100&000 retaine! earnings. On *ecem"er -1& %005& Crake pai! 3?4&000 for an a!!itional %0% interest in @agoon Corp. 6oth of Crake/s investments were ma!e when @agoon/s "ook val es e# ale! their fair val es. @agoon/s net income an! !ivi!en!s for %000 an! %005 were as follows< $et income *ivi!en!s =e# ire!< 1. :repare Co rnal entries for 6en!er Corporation to acco nt for its investment in 'n!y Corporation for %000 an! %005. %. Calc late the "alance of 6en!er/s investment in 'n!y at *ecem"er -1& %005. %000 3-0&000 310&000 %005 3;0&000 3%0&000

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$O/ E)ercise % Wa!er/s Corporation pai! 31%0&000 for a %5% interest in 9hell Company on > ly 1& %005. $o information is availa"le on the fair val e of 9hell/s assets an! lia"ilities. 'ss me the e# ity metho!. 9hell/s trail "alances were as follows<

*e"its C rrent assets $onc rrent assets E)penses *ivi!en!s Dpai! in > neE 8otal Cre!its C rrent @ia"ilities Capital stock Dno changeE =etaine! earnings >an. 1 9ales 8otal

*ecem"er -1 3 100&000 -00&000 140&000 00&000 3 400&000

> ly 1 3 50&000 -10&000 1%0&000 00&000 3 5%0&000

40&000 %00&000 100&000 %00&000 3 400&000

00&000 %00&000 100&000 150&000 5%0&000

=e# ire!< 1. What is Wa!er/s investment income from 9hell for the year en!ing *ecem"er -1& %005? %. Calc late Wa!er/s investment in 9hell at year en! *ecem"er -1& %005.

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$O4 E8er" se / D!tterel C!rp!rat !n pa ) 12''*''' "ash 9!r 3': !9 the 2!t n- "!00!n st!"k !9 S;a0p $an) In"+ !n <anuar= %* 2''4+ B!!k 2alue an) 9a r 2alue n9!r0at !n 9!r S;a0p !n th s )ate s as 9!ll!;s>

Assets Cash A""!unts re"e 2a,le In2ent!r es E@u p0ent

B!!k Values 1 5'*''' %2'*''' 7'*''' /3'*''' 1 5''*'''

?a r Values 1 5'*''' %2'*''' %''*''' 3''*''' 1 57'*'''

$ a, l t es A E@u t es A""!unts pa=a,le N!te pa=a,le Cap tal st!"k Reta ne) earn n-s

1 2''*''' %2'*''' 2''*''' 7'*''' 1 5''*'''

1 2''*''' %''*''' 1 /''*'''

Re@u re)> Prepare an all!"at !n s"he)ule 9!r D!tterelBs $an)+ n2est0ent n S;a0p

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$O4 E8er" se 3 San)p per In"+ a"@u re) a /': nterest n Sh!re C!rp!rat !n 9!r 126*''' "ash !n <anuar= %* 2''4* ;hen Sh!reBs st!"kh!l)ersB e@u t= "!ns ste) !9 1/'*''' !9 "ap tal st!"k an) 12'*''' !9 reta ne) earn n-s+ Sh!re C!rp!rat !n rep!rte) net n"!0e !9 1%7*''' 9!r 2''4+ The all!"at !n !9 the 1%2*''' e8"ess !9 "!st !2er ,!!k 2alue a"@u re) !n <anuar= % s sh!;n ,el!;* al!n- ; th n9!r0at !n relat n- t! the use9ul l 2es !9 the te0s> O2er2alue) re"e 2a,les C"!lle"te) n 2''4D Un)er2alue) n2ent!r es Cs!l) n 2''4D Un)er2alue) ,u l) n- C5 =earsB use9ul l 9e re0a n n- at <anuar= %* 2''4D Un)er2alue) lan) Unre"!r)e) patent C7 =earsB e"!n!0 " l 9e re0a n n- at <anuar= %* 2''4D Un)er2alue) a""!unts pa=a,le Cpa ) n 2''4D T!tal !9 e8"ess all!"ate) t! )ent 9 a,le assets an) l a, l t es G!!); ll E8"ess "!st !2er ,!!k 2alue a"@u re) Re@u re)> Deter0 ne San)p perBs n2est0ent n"!0e 9r!0 Sh!re 9!r 2''4+ 1 C 5'' D 2*3'' /*5'' ('' /*2'' C /'' D 6*2'' 2*7'' %2*'''

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$O4 E)ercise 5 9tilt Corporation p rchase! a 00% interest in the common stock of 9hallow Company for 3%&440&000 on >an ary 1& %005& when the "ook val e of 9hallow/s net e# ity was 34&000&000. 9hallow/s "ook val es e# ale! their fair val es e)cept for the following items< 6ook Fal e 050&000 100&000 000&000 -50&000 Fair Fal e 500&000 050&000 %00&000 000&000 *ifference 50&000 -50&000 D %00&000 E 50&000

+nventories @an! 6 il!ing,net E# ipment,net =e# ire!<

:repare a sche! le to allocate any e)cess p rchase cost to i!entifia"le assets an! goo!will.

$O4 E)ercise 4 C rlew Corporation pai! 350&000 on >an ary 1& %005 for a %0% interest in Waterway +nc. On >an ary 1& %005& Waterway/s stockhol!ers/ e# ity consiste! of 3100&000 of common stock an! 3100&000 of retaine! earnings. 'll the e)cess p rchase cost over "ook val e was attri" ta"le to a patent with an estimate! life of 5 years. * ring %005 an! %004& Waterway pai! 3%&500 of !ivi!en!s each # arter an! reporte! net income of 3-0&000 for %005 an! 3%0&000 for %004. C rlew se! the e# ity metho!. =e# ire!< 1. Calc late C rlew/s income from Waterway for %005. %. Calc late C rlew/s income from Waterway for %004. -. *etermine the "alance of C rlew/s Investment in Waterway acco nt on *ecem"er -1& %004.

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$O4 E8er" se 6 $!;t )e C!rp!rat !n ha) 1/''*''' !9 1%' par 2alue "!00!n st!"k !utstan) n- !n <anuar= %* 2''3* an) reta ne) earn n-s !9 1%''*''' !n the sa0e )ate+ Dur n- 2''3* 2''4* an) 2''5* $!;t )e earne) net n"!0es !9 13'*'''* 16'*'''* an) 1/'*'''* respe"t 2el=* an) pa ) ) 2 )en)s !9 1/'*'''* 144*'''* an) 1%'*'''* respe"t 2el=+ On <anuar= %* 2''3* A2!"et pur"hase) 2%: !9 $!;t )eBs !utstan) n"!00!n st!"k 9!r 1%23*'''+ On <anuar= %* 2''4* A2!"et pur"hase) (: !9 $!;t )eBs !utstan) n- st!"k 9!r 14%*'''* an) !n <anuar= %* 2''5* A2!"et pur"hase) an!ther 4: !9 $!;t )eBs !utstan) n- st!"k 9!r 1/2*'''+ All pa=0ents 0a)e ,= A2!"et that are n e8"ess !9 the appr!pr ate ,!!k 2alues ;ere attr ,ute) t! e@u p0ent* ; th ea"h ,l!"k )epre" a,le !2er %' =ears un)er the stra -ht-l ne 0eth!)+ Re@u re)> %+ .!; 0u"h )epre" at !n e8pense ; ll A2!"et re"!r) an) 2''5E n 2''3* 2''4*

2+ Fhat ; ll ,e the De"e0,er /%* 2''5 ,alan"e n the Investment in Lowtide a""!unt a9ter all a)Gust0ents ha2e ,een 0a)eE

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$O4 E)ercise 5 For %00-& %000& an! %005& 9# i! Corporation earne! net incomes of 300&000& 3;0&000& an! 3100&000& respectively& an! pai! !ivi!en!s of 3%0&000& 3-%&000& an! 300&000& respectively. 't the "eginning of %00-& 9# i! ha! 3500&000 of 310 par val e common stock o tstan!ing an! 3100&000 of retaine! earnings. On >an ary 1 of each of these years& 'l"atross Corporation "o ght 5% of the o tstan!ing common stock of 9# i! paying 3-;&000 per 5% "lock on >an ary 1& %00-& %000& an! %005. 'll payments ma!e "y 'l"atross in e)cess of "ook val e were attri" ta"le to e# ipment& which is !epreciate! over five years on a straight,line "asis. =e# ire!< 1. 'ss ming that 'l"atross ses the cost metho! of acco nting for its investment in 'l"atross& how m ch !ivi!en! income will 8ripp recogni(e for each of the three years an! what will "e the "alance in the investment acco nt at the en! of each year? %. 'ss ming that 'l"atross has significant infl ence an! ses the e# ity metho! of acco nting Deven tho gh its ownership percentage is less than %0%E& how m ch net investee income will 'l"atross recogni(e for each of the three years? $O4 E)ercise ? On >an ary 1& %005& :etrel& +nc. p rchase! ;0% of the o tstan!ing voting common stock of Ocean& +nc.& for 3%&400&000. 8he "ook val e of Ocean/s net e# ity on that !ate was 3-&100&000. 6ook val es were e# al to fair val es e)cept as follows< 6ook Fal es 3 %50&000 400&000 %;0&000 Fair Fal es 3 1?0&000 ;00&000 %00&000

'ssets G @ia"ilities E# ipment 6 il!ing $ote paya"le =e# ire!<

:repare a sche! le to allocate any e)cess p rchase cost to specific assets an! lia"ilities.

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$O4 E)ercise 10 On >an ary 1& %005& 9hearwater& Co. p rchase! 40% of the o tstan!ing voting common stock of Colony& +nc.& for 31&500&000. 8he "ook val e of Colony/s net e# ity on that !ate was 3-&000&000. 6ook val es were e# al to fair val es e)cept as follows< 6ook Fal es 3 %00&000 550&000 -00&000 Fair Fal es 3 %%5&000 ;50&000 -%0&000

'ssets G @ia"ilities +nventory 6 il!ing $ote paya"le =e# ire!<

:repare a sche! le to allocate any e)cess p rchase cost to specific assets an! lia"ilities.

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SO$UTIONS
Mult ple Ch! "e #uest !ns % 2 / 3 4 5 6 C A C D D C A T!tal st!"kh!l)ersB e@u t= $ess> pre9erre) e@u t= E@uals> "!00!n e@u t= 8 Br!l-aBs per"enta-e B!!k 2alue !9 Br!l-a n2est0ent De" /%* 2''2 n2est0ent ,alan"e <ar ,uBs nterest n ? shBs n"!0e 9r!0 <an %-<ul= /%> C13*''' 8 6 0!nths 8 2':D H $ess> D 2 )en)s C12'*''' 8 2':D H $ess> Se2en 0!nths !9 patent a0!rt Iat !n> 14'' 8 6 H In2est0ent a""!unt ,alan"e at <ul= /%* 2''/ A0!unt re"e 2e) 9r!0 sale> B!!k 2alue !9 !ne-hal9 nterest Ga n !n sale 1
/7*'''*''' 2*'''*''' /5*'''*''' /': %'*7''*'''

33'*''' 4*5'' 3*''' D /*4'' D 3/7*%'' 4''*''' 2%(*'4' 27'*(4'

C C 1 1

%'

In"!0e an) ) 2 )en)s are n!t a))e) !r )e)u"te) 9r!0 the n2est0ent a""!unt un)er the "!st 0eth!) unless l @u )at n- ) 2 )en)s are re"e 2e)

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%%

In t al In2est0ent n R!!st a)Gust0ents> 2''/> %4: 8 C1%2*'''-1%'*'''DH 2''3> %4: 8 C1%4*'''-1%'*'''DH 2''4> %4: 8 C124*'''-1%'*'''DH In2est0ent ,alan"e at %2J/%J2''4>

%2'*''' /'' 64' 2*24' %2/*/''

%2 %/

C C <a"anaBs separate n"!0e D 2 )en) n"!0e 9r!0 $ l=pa) e@uals 12'*''' 8 24: H <a"anaBs net n"!0e H Shares !utstan) n- ,e9!re ne; shares are ssue) Shares ssue) t! R!, n T!tal shares !utstan) nPer"enta-e !;ne) ,= R!, n e@uals %4'*'''J34'*'''H St!"kh!l)ersB e@u t= ,e9!re ne; shares are ssue) KIn2est0ent ,= R!, n HSt!"kh!l)ersB e@u t= a9ter R!, n n2est0ent 8 R!, nBs per"enta-e !;nersh p HB!!k 2alue !9 R!, nBs nterest 1 1 %2'*''' 4*''' %24*''' /''*''' %4'*''' 34'*''' //+//: 4*5''*''' /*3''*''' (*'''*''' //+//: /*'''*'''

%3

%4 %5 %6

B C A Pel "anBs share !9 n"!0e E@uals 15''*''' 8 /': H Pel "anBs share !9 ) 2 )en)s H 1%''*''' 8 /': In"rease n n2est0ent a""!unt 1 1 %7'*''' C/'*'''D %4'*'''

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2-%7

%7

C!st !9 C!r0!rantBs n2est0ent> $ess> ,!!k 2alue a"@u re)> T!tal e@u t= 1 $ess> Pre9erre) e@u t= Net "!00!n e@u t= 8 per"ent a"@u re) H Plu0a-e ,!!k 2alue G!!); ll

7''*'''

2*'''*''' 4''*''' %*4''*''' 3': 5''*''' 1

5''*''' 2''*'''

%( 2' 2% E8er" ses E8er" se %

C B B

Re@u re0ent % Date '%J'%J'3 %2J/%J'3 A""!unts In2est0ent Cash n $a-!!n De, t 4'*''' %*''' Cre) t 4'*''' %*'''

Cash D 2 )en) In"!0e Cash D 2 )en) In"!0e In2est0ent Cash n $a-!!n

%2J/%J'4 %2J/%J'4

2*''' (5*'''

2*''' (5*'''

Re@u re0ent 2 Cal"ulat !n !9 n2est0ent ,alan"e C!st !9 n t al pur"hase !9 a %': nterest C!st !9 se"!n) pur"hase !9 a 2': nterest In2est0ent ,alan"e* De"e0,er /%* 2''4 1 1 4'*''' (5*''' %35*'''

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E8er" se 2 Re@u re0ent % Sales C n"rease n tr al ,alan"eD $ess> E8pense C n"rease n tr al ,alan"eD Net In"!0e H Fa)erBs !;nersh p !9 24: Re@u re0ent 2 De, t %2'*''' 4*''' %24*''' Cre) t = el)s 4*''' n2est0ent n"!0e 1 C 1 5'*''' 3'*'''D 2'*'''

In t al In2est0ent In2est0ent In"!0e T!tal

E8er" se / In2est0ent "!st B!!k 2alue a"@u re)> 127'*''' 8 3': H E8"ess "!st !2er ,!!k 2alue a"@u re) H S"he)ule t! All!"ate C!st-B!!k Value D 99erent als ?a r 2alueB!!k 2alue In2ent!r es 12'*''' E@u p0ent 5'*''' N!tes pa=a,le 2'*''' All!"ate) t! spe" 9 " assets Re0a n)er all!"ate) t! -!!); ll Interest 3': 3': 3': A0!unt Ass -ne) 7*''' 23*''' 7*''' 3'*''' 37*''' 77*''' 1 2''*''' %%2*''' 77*'''

1 1

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2-2'

E8er" se 3 San)p A))> A))> $ess> $ess> $ess> perBs share !9 Sh!re net n"!0e C1%7*''' 8 /':D O2er2alue) a""!unts re"e 2a,le "!lle"te) n 2''4 Un)er2alue) a""!unts pa=a,le pa ) n 2''4 Un)er2alue) n2ent!r es s!l) n 2''4 Depre" at !n !n ,u l) n- un)er2aluat !n 1/*5''J5 A0!rt Iat !n !n patent 1/*2''J7 =ears 1 4*3'' 5'' /'' 2*3''D 5''D 3''D 2*(''

C C C 1

In"!0e 9r!0 Sh!re

E8er" se 4 Cost of 9tilt/s 00% investment in 9hallow @ess< Fal e of net assets ac# ire!< 00% ) 34&000&000 of net e# ity H E)cess cost over "ook val e ac# ire! H 9che! le to 'llocate Cost,6ook Fal e *ifferentials Fair val e, 6ook val e +nterest +nventories 3 50&000 ) 00% @an! -50&000 ) 00% 6 il!ing,net D %00&000E ) 00% E# ipment,net 50&000 ) 00% E)cess allocate! to specific assets an! lia"ilities E)cess allocate! to goo!will Calc late! e)cess of cost over "ook val e 'mo nt 'ssigne! %0&000 100&000 D 50&000E %0&000 100&000 140&000 %40&000 3 %&440&000 %&000&000 %40&000

3 3 3

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2-2%

E8er" se 5 Cost of C rlew/s %0% investment in Waterway @ess< Fal e of net assets ac# ire!< %0% ) 3000&000 of net assets H E)cess cost over "ook val e ac# ire! H =e# irement 1< C rlew/s %005 income from Waterway e# als< D%0% ) 3-0&000E , 31&%50 of patent amorti(ation =e# irement %< C rlew/s %004 income from Waterway e# als< D%0% ) 3%0&000E , patent amorti(ation of 31&%50 H 3 %&;50 3 50&000 00&000 10&000

0&;50

=e# irement -< +nitial investment in Waterway :l s< $et change for %005< D+ncome of 30&;50 I *ivi!en!s of 3%&000E :l s< $et change for %004< D+ncome of 3%&;50 I *ivi!en!s of 3%&000E +nvestment "alance at *ecem"er -1& %004< 3 50&000 %&;50 ;50 3 5-&500

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2-22

E8er" se 6 Cal"ulat !n !9 $!;t )eBs net assets at the en) !9 ea"h =ear> $!;t )eBs net assets !n <anuar= %* 2''3 1 Plus> 2''% net n"!0e 0 nus ) 2 )en)s C13'*'''L1/'*'''D $!;t )eBs net assets at De"e0,er /%* 2''3 1 Plus> 2''2 net n"!0e 0 nus ) 2 )en)s C16'*'''-144*'''D $!;t )eBs net assets at De"e0,er /%* 2''4 Plus> 2''/ net n"!0e 0 nus ) 2 )en)s C1/'*'''-1%'*'''D 1 $!;t )eBs net assets at De"e0,er /%* 2''5 1 3''*''' %'*''' 3%'*''' %4*''' 324*''' 2'*''' 334*'''

A2!"etBs a)Guste) 9a r 2alue pa=0ents 9!r e@u p0ent A2!"etBs <anuar= %* 2''3 n t al n2est0ent "!st 1 $ess> A2!"etBs share !9 $!;t )eBs net assets !n th s )ate H C2%: 8 13''*'''D H E@uals> 9a r 2alue a)Gust0ent 9!r e@u p0ent 1 A2!"etBs <anuar= %* 2''4 n2est0ent "!st 1 $ess> Al, !nBs share !9 $!;t )eBs net assets !n th s )ate H C(: 8 13%'*'''D H E@uals> 9a r 2alue a)Gust0ent 9!r e@u p0ent 1 A2!"etBs <anuar= %* 2''5 n2est0ent "!st 1 $ess> A2!"etBs share !9 $!;t )eBs net assets !n th s )ate H C4: 8 1324*'''D H E@uals> 9a r 2alue a)Gust0ent 9!r e@u p0ent 1 Re@u re0ent % 2''3 e@u p0ent )epre" at !n C13'*'''J%' =earsDH 2''4 e@u p0ent )epre" at !n C13'*'''J%' =earsD K C1%3*%''J%' =earsDH 2''5 e@u p0ent )epre" at !n C13'*'''J%' =earsD K C1%3*%''J%' =earsD K C1%'*64'J%' =earsDH

%23*''' 73*''' 3'*''' 4%*''' /5*('' %3*%'' /2*''' 2%*24' %'*64'

1 1 1

3*''' 4*3%' 5*374 2'6*''' %*(''D (%'D 4%4 2'3*6'4

Re@u re0ent 2> D re"t n2est0ent "!sts C1%23*'''K14%*'''K1/2*'''DH 1 Plus> 2''% a)Gust0ents C2%:D8C13'*'''-1/'*'''D-13*''' H Plus> 2''2 a)Gust0ents C/':D8C16'*'''-144*'''D-14*3%' H Plus> 2''/ a)Gust0ents C/4:D8C1/'*'''-1%'*'''D-15*374 H E@uals> De"e0,er /%* 2''5 n2est0ent a""!unt ,alan"e 1

C C

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2-2/

E8er" se 7 Cal"ulat !n !9 S@u )B net assets at the en) !9 ea"h =ear> S@u ) net assets !n <anuar= %* 2''/ Plus> 2''/ net n"!0e 0 nus ) 2 )en)s C13'*'''L123*'''D S@u ) net assets at De"e0,er /%* 2''/ Plus> 2''3 net n"!0e 0 nus ) 2 )en)s C16'*'''-1/2*'''D S@u ) net assets at De"e0,er /%* 2''3 Plus> 2''4 net n"!0e 0 nus ) 2 )en)s C1%''*'''-133*'''D S@u ) net assets at De"e0,er /%* 2''4 Al,atr!ssB a)Guste) 9a r 2alue pa=0ents 9!r e@u p0ent Al,atr!ssB <anuar= %* 2''/ n t al n2est0ent "!st $ess> Al,atr!ssB share !9 S@u )B net assets !n th s )ate H C4: 8 15''*'''D H E@uals> 9a r 2alue a)Gust0ent 9!r e@u p0ent Al,atr!ssB <anuar= %* 2''3 n2est0ent "!st $ess> Al,atr!ssB 4: share !9 S@u ) net assets !n th s )ate H C4: 8 15%5*'''D H E@uals> 9a r 2alue a)Gust0ent 9!r e@u p0ent 1 1 1 1 5''*''' %5*''' 5%5*''' /7*''' 543*''' 45*''' 6%'*'''

/6*''' /'*''' 6*''' /6*''' /'*7'' 5*2'' /6*''' /2*6'' 3*/''

1 1

Al,atr!ssB <anuar= %* 2''4 n2est0ent "!st 1 $ess> Al,atr!ssB share !9 S@u ) net assets !n th s )ate H C4: 8 1543*'''D H E@uals> 9a r 2alue a)Gust0ent 9!r e@u p0ent 1 Re@u re0ent % 2''/ ) 2 )en) 2''3 ) 2 )en) 2''4 ) 2 )en)

n"!0e H 4:

8 123*''' !9 ) 2 )en)s H

1 1 1

%*2'' /*2'' 5*5''

n"!0e H %': 8 1/2*''' !9 ) 2 )en)s H n"!0e H %4: 8 133*''' !9 ) 2 )en)s H

In2est0ent a""!unt <an %* 2''/ pur"hase De" /%* 2''/ ,alan"e <an %* 2''3 pur"hase De" /%* 2''3 ,alan"e <an %* 2''4 pur"hase De" /%* 2''4 ,alan"e

H H H H H H

1 1 1 1 1 1

/6*''' /6*''' /6*''' 63*''' /6*''' %%%*'''

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2-23

Re@u re0ent 2> 2''/ net n"!0e 9r!0 S@u , C n2esteeD H C4: 8 3'*'''D L Depre" at !n !9 1%*3'' C16*'''J4 =earsD H

1 C

5''

2''3 net n"!0e 9r!0 S@u , C n2esteeD H C%': 8 6'*'''D L )epre" at !n !9 1%*3'' 9r!0 the 2''/ pur"hase an) L )epre" at !n !9 1%*23' 9r!0 the 2''3 pur"hase C15*2''J4 1 =earsD 9!r a t!tal )epre" at !n !9 12*53'+ 2''4 net n"!0e 9r!0 S@u , C n2esteeD H C%4: 8 %''*'''D L )epre" at !n !9 1%*3'' 9r!0 the 2''/ pur"hase an) L )epre" at !n !9 1%*23' 9r!0 the 2''3 pur"hase an) - 1 )epre" at !n !9 175' 9r!0 the 2''4 pur"hase C13*/''J4 =earsD9!r a t!tal )epre" at !n !9 1/*4''+

3*/5'

%%*4''

E8er" se ( Cost of :etrel/s 50% investment in Ocean @ess< Fal e of net assets ac# ire!< ;0% ) -&100&000 of net assets H E)cess cost over "ook val e ac# ire! H 9che! le to 'llocate Cost,6ook Fal e *ifferentials Fair val e, 6ook val e +nterest E# ipment 3 D40&000E ) ;0% 6 il!ing 100&000 ) ;0% $ote paya"le -0&000 ) ;0% E)cess allocate! to specific assets an! lia"ilities E)cess allocate! to goo!will Calc late! e)cess of cost over "ook val e 'mo nt 'ssigne! D0%&000E ;0&000 %1&000 0?&000 -51&000 0-0&000 3 %&400&000 %&1;0&000 0-0&000

3 3

&2''( Pears!n E)u"at !n* In"+ pu,l sh n- as Prent "e .all

2-24

E8er" se %' C!st !9 B!s"!Bs 5': n2est0ent n Els e $ess> Value !9 net assets a"@u re)> 5': 8 /*'''*''' !9 net assets H E8"ess "!st !2er ,!!k 2alue a"@u re) H S"he)ule t! All!"ate C!st-B!!k Value D 99erent als ?a r 2alueB!!k 2alue Interest In2ent!r= 1 24*''' 8 5': Bu l) nC%''*'''D 8 5': N!te pa=a,le C2'*'''D 8 5': E8"ess all!"ate) t! spe" 9 " assets an) l a, l t es E8"ess all!"ate) t! -!!); ll Cal"ulate) e8"ess !9 "!st !2er ,!!k 2alue A0!unt Ass -ne) %4*''' C 5'*'''D C %2*'''D C 46*'''D 46*''' ' 1 %*7''*''' %*7''*''' '

1 1

&2''( Pears!n E)u"at !n* In"+ pu,l sh n- as Prent "e .all

2-25