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Fsa 2 PDF
Fsa 2 PDF
SUPPLEMENT MATERIAL
FOR
CHAPTER 5 – ANALYZING INVESTING ACTIVITIES – Inter corporate Investments
Required:
(a) Show how each of these investments are reported on the Burger Corp. balance sheet.
(b) For assets that are marked to market, indicate where the unrealized value fluctuation is reported (in net income
and/or in comprehensive income).
Problem 5 – Analyzing Investment Securities Transactions
The following data are taken from the December 31 annual report of Bailey Company:
($ in thousands) 2004 2005 2006
Sales. . . . . . . . . . . . . $50,000 $60,000 $70,000
Net income. . . . . . . . 2,000 2,200 2,500
Dividends paid. . . . . 1,000 1,200 1,500
Bailey had 1,000,000 common shares outstanding during this entire period and there is no public market for Bailey
Company shares. Also during this period, Simpson Corp. bought Bailey shares for cash, as follows:
January 1, 2004 10,000 shares at $10 per share
January 1, 2005 290,000 shares at $11 per share, increasing ownership to 300,000 shares
January 1, 2006 700,000 shares at $15 per share, resulting in 100% ownership of Bailey Company
Simpson assumed significant influence over Bailey’s management in 2005. Ignore income tax effects and the
opportunity costs of making investments in Bailey for the requirements listed here.
Required:
(a) Compute the effects of these investments on Simpson’s reported sales, net income, and cash flows for each
of the years 2004 and 2005.
(b) Compute the carrying (book) value of Simpson’s investment in Bailey as of December 31, 2004, and
December31, 2005.
(c) Identify the U.S. GAAP-based accounting method Simpson would use to account for its inter corporate
investment in Bailey for 2006. Give two reasons this accounting method must/should be used.
Axel Corporation issues $110,000 par value ($350,000 market value on December 31, Year 4) of its own stock to the
shareholders of Wheal Company to consummate the transaction, and Wheal Company becomes a wholly owned,
consolidated subsidiary of Axel Corporation.
Required:
(a) Prepare journal entries for Axel Corp. to record the acquisition of Wheal Company stock assuming purchase
accounting.
(b) Prepare the worksheet entries for Axel Corp. to eliminate the investment in Wheal Company stock in
preparation for a consolidated balance sheet at December 31, Year 4, assuming (1) pooling accounting and
(2) purchase accounting.
(c) Calculate consolidated retained earnings at December 31, Year 4 (Axel’s retained earnings at this date are
$150,000), assuming:
(1) Axel Corp. uses the pooling method for this business combination.
(2) Axel Corp. uses the purchase method for acquisition of Wheal Company.