Question 1 - On January 1, 2017, Martinez Co. purchased 25,000 shares (a 10% interest) in Elton John Corp. for $1,520,000. At the time, the book value and the fair value of John's net assets were $13,400,000.
On July 1, 2018, Martinez paid $2,900,000 for 50,000 additional shares of John common stock, which represented a 20% investment in John. The fair value of John's identifiable assets net of liabilities was equal to their carrying amount of $14,600,000. As a result of this transaction, Martinez owns 30% of John and can exercise significant influence over John's operating and financial policies. (Any excess fair value is attributed to goodwill.)
John reported the following net income and declared and paid the following dividends.
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Net Income
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Dividend per Share
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Year ended 12/31/17
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$720,000
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None
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Six months ended 6/30/18
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450,000
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None
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Six months ended 12/31/18
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801,000
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$1.60
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Determine the ending balance that Martinez Co. should report as its investment in John Corp. at the end of 2018.
Question 2 - The reported net incomes for the first 2 years of Ayayai Products, Inc., were as follows: 2017, $156,100; 2018, $196,600. Early in 2019, the following errors were discovered.
1. Depreciation of equipment for 2017 was overstated $16,400.
2. Depreciation of equipment for 2018 was understated $36,400.
3. December 31, 2017, inventory was understated $45,100.
4. December 31, 2018, inventory was overstated $16,100.
Prepare the correcting entry necessary when these errors are discovered. Assume that the books are closed. (Ignore income tax considerations.)
Question 3 - You have been engaged to review the financial statements of Splish Corporation. In the course of your examination, you conclude that the bookkeeper hired during the current year is not doing a good job. You notice a number of irregularities as follows.
1. Year-end wages payable of $3,570 were not recorded because the bookkeeper thought that "they were immaterial."
2. Accrued vacation pay for the year of $29,500 was not recorded because the bookkeeper "never heard that you had to do it."
3. Insurance for a 12-month period purchased on November 1 of this year was charged to insurance expense in the amount of $2,628 because "the amount of the check is about the same every year."
4. Reported sales revenue for the year is $1,954,640. This includes all sales taxes collected for the year. The sales tax rate is 6%. Because the sales tax is forwarded to the state's Department of Revenue, the Sales Tax Expense account is debited. The bookkeeper thought that "the sales tax is a selling expense." At the end of the current year, the balance in the Sales Tax Expense account is $93,140.
Prepare the necessary correcting entries, assuming that Splish uses a calendar-year basis.
Question 4 - Ayayai Co. purchased a equipment on January 1, 2015, for $506,000. At that time, it was estimated that the equipment would have a 10-year life and no salvage value. On December 31, 2018, the firm's accountant found that the entry for depreciation expense had been omitted in 2016. In addition, management has informed the accountant that the company plans to switch to straight-line depreciation, starting with the year 2018. At present, the company uses the sum-of-the-years'-digits method for depreciating equipment.
Prepare the general journal entries that should be made at December 31, 2018, to record these events.
Question 5 - Monty Company began operations on January 1, 2015, and uses the average-cost method of pricing inventory. Management is contemplating a change in inventory methods for 2018. The following information is available for the years 2015-2017.
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Net Income Computed Using
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Average-Cost Method
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FIFO Method
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LIFO Method
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2015
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$15,950
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$19,110
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$11,970
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2016
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18,040
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20,800
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14,130
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2017
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20,110
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25,000
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16,930
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(a) Prepare the journal entry necessary to record a change from the average cost method to the FIFO method in 2018.
(b) Determine net income to be reported for 2015, 2016, and 2017, after giving effect to the change in accounting principle.
(c) Assume Monty Company used the LIFO method instead of the average cost method during the years 2015-2017. In 2018, Monty changed to the FIFO method. Prepare the journal entry necessary to record the change in principle.