Reporting & Interpreting Investments in Other Corporations

Reporting & Interpreting Investments in other corporations (Chap.12)

P.12-6

1. Identify the accounting Method• Case A

The Market Value Method,

Because :

According to accounting method, the Market Value method must be used when the investment company owns less than 20% of the outstanding stock.

(Shore Company holds 10.000/100.000 = 10% of shares).

P.12-6

• Case BThe Equity Method,

Because :

According to accounting method, the Equity method must be used when the investment company owns at least 20% but not more than 50% of the outstanding stock.

(Shore Company holds 40.000/100.000 = 40% of shares).

P.12-6

a J an 10, 2004 Stock Acquisition :

Investment in Ship Co. (AFS) 200,000 800,000 Cash 200,000 800,000

b Revenue recognitionInvestment in Ship Co. 120,000 Equity in investee earning 120,000

c Dividends receivedCash 6,000 Investment income 6,000

Cash 24,000 Investment in Ship Co. 24,000

(40,000 shares x $ 0.6)d Market value effect

Net unrealized loss 20,000 Allowance to value at market 20,000

[10,000 shares x ($ 18 - $ 20)]

No entry

Case B (40%)Case A (10%)

(10,000 shares x $20) (40,000 shares x $20)

No entry

(40% x $ 300,000)

(10,000 shares x $ 0.6)

2.

P.12-6Case A Case B

a Balance SheetLong-term investments: Investment in AFS $180,000

($ 200,000 - $ 20,000) Investment in Ship Co. $896,000

($ 800,000 - $ 24,000)

b Stockholder's equityNet unrealized loss - AFS ($20,000)

c Income Statement Investment income 6,000 Equity in investee earning 120,000

P.12-6

4. The amounts reported are different

1) different approached are used in recognizing

investment revenue

2) adjustment for changes in market value are only made for market value method (owning less than 20%)

Statement of Cash Flow (Chap.13)

P.13-3 Direct Method

Cash flows from operating activities :Cash collected from customers (400,000 - 5,000) $395,000Cash paid to suppliers (268,000 + 3,000 - 8,000) (263,000) Cash paid to employees (51,000 + 200) (51,200) Cash paid for rent (5,800) Cash paid for interest (12,200) Cash paid for income taxes (11,000 - 2,000) (9,800)

Net cash flow from operating activities $53,000Cash flows from investing activities :

Machinery sold 11,000 Machinery purchased1 (9,000) Investment purchased (5,000)

Net cash flow from investing activities (3,000) Cash flows from financing activities :

Borrowed on long term note payable 15,000 Paid a cash dividend (10,000)

Net cash flow financing activities 5,000

Net increase in cash during 2004 55,000 Cash, beginning of 2004 21,000

Cash, end of 2004 $76,000

Statement Of Cash FlowsEnded 31 Dec 2004

Frank Corporation

P.13-3 Direct Method

Additional Information :1. Note that the $41,000 non-cash portion of the related

financing are not reported in the statement. They are reported separately in the note.

2. Frank Corporation purchased machinery for $41,000 that was financed with a four-year note payable to the dealer.

3. Income taxes paid were $9,800. (interest paid was $12,200)

Income Taxes paid = Income tax expense – Increase in income

taxes payable

P.13-3 Indirect Method

Cash Flow From Operating ActivitiesNet IncomeAdjustment : 42,000Depreciation expense 9,200Change in Account Receivable (17,000-12,000) (5,000)Change in Account Payable (10,000-7,000) (3,000)Change in inventory (60,000-52,000) 8,000Change in wages payable (1,000-800) (200)Change in tax payable (5,000-3,000) 2,000 Net cash flow from operating activities 53,000Cash Flow From Investing ActivitiesMachinery sold 11,000Machinery purchased (9,000)Investment purchased (5,000) Net cash flow from investing activities (3,000)Cash Flow from financing activitiesBorrowed long-term N/P 15,000Paid cash devidend (10,000) Net cash flow from financing activities 5,000Net increase in cash during 2004 55,000Cash beginning of 2004 21,000Cash, end of 2004 $ 76,000

FRANK CORPORATION STATEMENT OF CASH FLOW

For the Year Ended December 31, 2004

- Thank You -