Problem 1 - On January 1, 2014, Allan acquires 15 percent of Bellevue's outstanding common stock for $62,000. Allan classifies the investment as an available-for-sale security and records any unrealized holding gains or losses directly in owners' equity. On January 1, 2015, Allan buys an additional 10 percent of Bellevue for $43,800, providing Allan the ability to significantly influence Bellevue's decisions. During the next two years, the following information is available for Bellevue:
2014 Income $80,000 Dividends $30,000 Common Stock Fair Value (12/31) $438,000
2015 Income $100,000 Dividends $40,000 Common Stock Fair Value (12/31) $468,000
In each purchase, Allan attributes any excess of cost over book value to Bellevue's franchise agreements that had a remaining life of 10 years at January 1, 2014. Also at January 1, 2014, Bellevue reports a net book value of $280,000.
a. Assume Allan applies the equity method to its Investment in Bellevue account:
1. On Allan's December 31, 2015, balance sheet, what amount is reported for the Investment in Bellevue account?
2. What amount of equity income should Allan report for 2015?
3. Prepare the January 1, 2015, journal entry to retrospectively adjust the Investment in Bellevue account to the equity method. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)
Transaction List
1. Record the eliminate AFS fair value adjustment account balances for the investment in Bellevue.
2. Record the retrospective adjustment.
b. Assume Allan uses fair-value accounting for its investment in Bellevue:
1. On Allan's December 31, 2015, balance sheet, what amount is reported for the Investment in Bellevue account?
2. What amount of income from its investment in Bellevue should Allan report for 2015?
Problem 2 - Smith purchased 5 percent of Barker's outstanding stock on October 1, 2013, for $7,475 and acquired an additional 10 percent of Barker for $14,900 on July 1, 2014. Both of these purchases were accounted for as available-for-sale investment. Smith purchases a final 20 percent on December 31, 2015, for $34,200. With this final acquisition, Smith achieves the ability to significantly influence Barker's decision-making process and employs the equity method.
Barker has a book value of $100,000 as of January 1, 2013. Information follows concerning the operations of this company for the 2013-2015 period. Assume that all income was earned uniformly in each year. Assume also that one-fourth of the total annual dividends are paid at the end of each calendar quarter.
2013 Reported income $20,000 Dividends $8,000
2014 Reported income $30,000 Dividends $16,000
2015 Report income $24,000 Dividends $9,000
On Barker's financial records, the book values of all assets and liabilities are the same as their fair values. Any excess cost from either purchase relates to identifiable intangible assets. For each purchase, the excess cost is amortized over 15 years. Amortization for a portion of a year should be based on months.
a. On comparative income statements issued in 2016 for the years of 2013, 2014, and 2015, what would Smith report as its income derived from this investment in Barker? (Do not round intermediate calculations. Round "Equity income 2013" to two decimal places.)
b. On a balance sheet as of December 31, 2015, what should Smith report as its investment in Barker? (Do not round intermediate calculations. Round your final answer to two decimal places)