On January 1, 2013, Plano Company acquired 8 percent (16,000 shares) of the outs

Question

On January 1, 2013, Plano Company acquired 8 percent (16,000 shares) of the outstanding voting shares of the Sumter Company for $192,000, an amount equal to Sumter’s underlying book and fair value. Sumter declares and pays a cash dividend to its stockholders each year of $100,000 on September 15. Sumter reported net income of $300,000 in 2013, $360,000 in 2014, $400,000 in 2015, and $380,000 in 2016. Each income figure can be assumed to have been earned evenly throughout its respective year. In addition, the fair value of these 16,000 shares was indeterminate, and therefore the investment account remained at cost.

On January 1, 2015, Plano purchased an additional 32 percent (64,000 shares) of Sumter for $965,750 in cash and began to use the equity method. This price represented a $50,550 payment in excess of the book value of Sumter’s underlying net assets. Plano was willing to make this extra payment because of a recently developed patent held by Sumter with a 15-year remaining life. All other assets were considered appropriately valued on Sumter’s books.

On July 1, 2016, Plano sold 10 percent (20,000 shares) of Sumter’s outstanding shares for $425,000 in cash. Although it sold this interest, Plano maintained the ability to significantly influence Sumter’s decision-making process. Assume that Plano uses a weighted average costing system.

Prepare the journal entries for Plano for the years of 2013 through 2016.

Journal entries for several years. Includes conversion to equity method and a sale of a portion of the investment

Explanation / Answer

Prepare the journal entries for Plano for the years of 2013 through 2016. Date Account Title Debit Credit Jan 1, 2013 Investment in Sumter $288,000 Cash $288,000 (To record cost of 24,000 shares of Sumter Company.) Sep 15, 2013 Cash $12,000 Dividend Income ($150,000 x 8%) $12,000 (Annual dividends received from Sumter Company. Sep 15, 2014 Cash $12,000 Dividend Income ($150,000 x 8%) $12,000 (Annual dividends received from Sumter Company. Jan 1, 2015 Investment in Sumter $1,445,750 Cash $1,445,750 (To record cost of 96,000 additional shares of Sumter Company.) Jan 1, 2015 Investment in Sumter $31,072 Retained Earnings—Prior PeriodAdjustment—Equity in Investee Income $31,072 (Retroactive adjustment necessitated by changeto equity method. Change in figures previously reported for 2013 and 2014 are calculated as follows.) 2013 increase in reported income & investment in Sumter ($307,000 x 8% ) – $12,000) $12,560 2010 increase in reported income & investment in Sumter ($381,400 x 8% – $12,000) $18,512 Retroactive adjustment—income & investment in Sumter $31,072 Sep 15, 2015 Cash $60,000 Investment in Sumter $60,000 (Annual dividend received from Sumter [8% + 32% × $150,000]) Dec 31, 2015 Investment in Sumter $169,200 Equity in Investee Income ($423,000 x 40%) $169,200 (To accrue 2015 income based on 40%ownership of Sumter) Equity in Investee Income $3,450 Investment in Sumter $3,450 Amortization of $51,750 patent over 15 years) Jul 1, 2016 Investment in Sumter $80,440 Equity in Investee Income ($402,200 x 40% x 1/2 year) $80,440 (To accrue ½ year income of 40% ownership) Jul 1, 2016 Equity in Investee Income $1,725 Investment in Sumter $1,725 (To record ½ year amortization of patentto establish correct book value for invest-ment as of 7/1/16 Jul 1, 2016 Cash $630,000 Investment in Sumter (computed below) $487,321.75 Gain on Sale of Investment $142,678.25 Jan 1, 2013 Acquisition $288,000 Jan 1, 2015 Acquisition $1,445,750 Jan 1, 2015 Retrospective adjustment $31,072 Sep 15, 2015 Dividend -$60,000 Dec 31, 2015 Basic equity accrual $169,200 Dec 31, 2015 Amortization -$3,450 Jul 1, 2016 Basic equity accrual $80,440 Jul 1, 2016 Amortization -$1,725 Investment in Sumter—7/1/16 balance $1,949,287 Percentage of shares sold (30,000 ÷ (96,000 + 24,000) 25.00% Cost of shares sold $487,322 Sep 15, 2016 Cash $45,000 Investment in Sumter $45,000 (Annual dividend received from Sumter [8% + 32% -10% × $150,000]) Dec 31, 2016 Investment in Sumter $60,330 Equity in Investee Income ($402,200 x 30% x 1/2 year) $60,330 (To accrue ½ year income of 40% ownership) Dec 31, 2016 Equity in Investee Income $1,293.75 Investment in Sumter $1,293.75 (To record ½ year of patent amortization—computation presented below Annual patent amortization—original computation $3,450 Percentage of shares retained (90,000 ÷ 120,000) 75.00% Annual patent amortization—current $2,587.5 Patent amortization for half year $1,293.75

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