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 B The 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 2.

Case A (10%) a Jan 10, 2004 Stock Acquisition : Investment in Ship Co. (AFS) Cash b Revenue recognition Investment in Ship Co. Equity in investee earning c Dividends received Cash Investment income

Case B (40%)

200,000

800,000

200,000 (10,000 shares x $20)

120,000 No entry

120,000 (40% x $ 300,000)

6,000 6,000 (10,000 shares x $ 0.6)

Cash Investment in Ship Co. d Market value effect Net unrealized loss Allowance to value at market

800,000 (40,000 shares x $20)

24,000 24,000 (40,000 shares x $ 0.6) 20,000 20,000 [10,000 shares x ($ 18 - $ 20)]

No entry

P.12-6 Case A a Balance Sheet Long-term investments: Investment in AFS

Case B

$180,000 ($ 200,000 - $ 20,000)

Investment in Ship Co.

b Stockholder's equity Net unrealized loss - AFS c Income Statement Investment income Equity in investee earning

$896,000 ($ 800,000 - $ 24,000)

($20,000)

6,000 120,000

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 Frank Corporation Statement Of Cash Flows Ended 31 Dec 2004 Cash flows from operating activities : Cash collected from customers (400,000 - 5,000) Cash paid to suppliers (268,000 + 3,000 - 8,000) Cash paid to employees (51,000 + 200) Cash paid for rent Cash paid for interest Cash paid for income taxes (11,000 - 2,000) Net cash flow from operating activities Cash flows from investing activities : Machinery sold Machinery purchased1 Investment purchased Net cash flow from investing activities Cash flows from financing activities : Borrowed on long term note payable Paid a cash dividend Net cash flow financing activities Net increase in cash during 2004 Cash, beginning of 2004 Cash, end of 2004

$395,000 (263,000) (51,200) (5,800) (12,200) (9,800) $53,000 11,000 (9,000) (5,000) (3,000) 15,000 (10,000) 5,000 55,000 21,000 $76,000

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 FRANK CORPORATION STATEMENT OF CASH FLOW For the Year Ended December 31, 2004 Cash Flow From Operating Activities Net Income Adjustment : Depreciation expense Change in Account Receivable Change in Account Payable Change in inventory Change in wages payable Change in tax payable Net cash flow from operating activities Cash Flow From Investing Activities Machinery sold Machinery purchased Investment purchased Net cash flow from investing activities Cash Flow from financing activities Borrowed long-term N/P Paid cash devidend Net cash flow from financing activities Net increase in cash during 2004 Cash beginning of 2004 Cash, end of 2004

(17,000-12,000) (10,000-7,000) (60,000-52,000) (1,000-800) (5,000-3,000)

42,000 9,200 (5,000) (3,000) 8,000 (200) 2,000 53,000 11,000 (9,000) (5,000) (3,000) 15,000 (10,000) 5,000 55,000 21,000 $ 76,000

- Thank You -