Asked by Lily Nyarko on Jul 07, 2024
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In 20X5, Bing created a wholly owned subsidiary called Bango Limited. Bing is a private company and reports under ASPE. Bing is currently using the cost method to record its investment in Bango, but is trying to decide if it should report using the equity method or the consolidation method. This is the only subsidiary that Bing has.
Separate Statements of Earnings and Retained Earnings for Bing and Bango
Year Ended December 31, 20X5.
Bing Bango Sales of merchandise $6,000,000$1,000,000 Other revenues 200,00020,000‾ Total revenues $6,200,000$1,020,000 Cost of goods sold $2,500,000$400,000 Depreciation expense 500,00080,000 Interest expense 400,00020,000 Other expenses (including income tax) 1,300,000‾190,000‾ Total expenses $4,700,000$690,000 Net income $1,500,000$330,000 Retained earnings, Januar’y 1, 20X5 4,200,0000 Dividends declared (200,000)‾(50,000) Retained earnings, December 31, 20X5 $5,500,000$280,000\begin{array}{|l|r|r|}\hline & \text { Bing } & \text { Bango } \\\hline \text { Sales of merchandise } & \$ 6,000,000 & \$ 1,000,000 \\\hline \text { Other revenues } & 200,000 & \underline{20,000} \\\hline \text { Total revenues } & \$ 6,200,000 & \$ 1,020,000 \\\hline\\\hline \text { Cost of goods sold } & \$ 2,500,000 & \$ 400,000 \\\hline \text { Depreciation expense } & 500,000 & 80,000 \\\hline \text { Interest expense } & 400,000 & 20,000 \\\hline \text { Other expenses (including income tax) } & \underline{1,300,000} & \underline{190,000} \\\hline \text { Total expenses } & \$ 4,700,000 & \$ 690,000 \\\hline \text { Net income } & \$ 1,500,000 & \$ 330,000 \\\hline \text { Retained earnings, Januar'y 1, 20X5 } & 4,200,000 & 0 \\\hline \text { Dividends declared } & \underline{(200,000)} & (50,000) \\\hline \text { Retained earnings, December 31, 20X5 } & \$ 5,500,000 & \$ 280,000 \\\hline\end{array} Sales of merchandise Other revenues Total revenues Cost of goods sold Depreciation expense Interest expense Other expenses (including income tax) Total expenses Net income Retained earnings, Januar’y 1, 20X5 Dividends declared Retained earnings, December 31, 20X5 Bing $6,000,000200,000$6,200,000$2,500,000500,000400,0001,300,000$4,700,000$1,500,0004,200,000(200,000)$5,500,000 Bango $1,000,00020,000$1,020,000$400,00080,00020,000190,000$690,000$330,0000(50,000)$280,000 Other Information
During the year, the following transactions occurred between the two companies:
1. Bing sold merchandise to Bango for $560,000. At the end of the year, Bango still owed Bing $25,000 for this merchandise, although Bango had sold this entire inventory to outside customers.
2. Bango charged rent of $20,000 to Bing for office space.
3. Licensing fees were paid by Bango to Bing in the amount of $150,000.
Required:
(a)Prepare the statement of earnings and retained earnings for Bing using the equity method of reporting its investment in Bango.
(b)Prepare the consolidated statement of earnings and retained earnings for Bing.
(c)Compare the equity method and the consolidation method and discuss any similarities and differences.
(d)If Bing had other subsidiary investments, what other factors would be considered in trying to decide if the consolidation or equity method should be used?
Equity Method
An accounting technique used to record investments in other companies where the investor has significant influence but does not control the company outright.
Consolidation Method
An accounting technique used for combining the financial statements of subsidiary companies with the parent company.
Statement of Earnings
A financial document that provides an account of a company's revenue, expenses, and profit over a specific period, also known as an income statement.
- Identify the differences in accounting practices for investments, such as the cost method, equity method, and consolidation.
- Identify key indicators of influence and control in investment relationships.
- Employ the equity approach for investments when considerable influence is evident.
Verified Answer
HA
Hossam AbdeenJul 12, 2024
Final Answer :
Part A-Equity method
Under the equity method, Bing will include in its net earnings its proportionate share of the earnings from Bango. Any dividends received from Bango during the year would be reported as a reduction of the investment account and not as income.
The proportionate share of earnings will be:
100% × $330,000 = $330,000.
Dividends of $50,000 must be eliminated from Other Revenue. Statement of Earnings and Retained Earnings for Bing
Year Ended December 31, 20X5
Bing $6,000,000150,000‾ Total revenues $6,150,000 Cost of goods sold $2,500,000 Depreciation expense 500,000 Interest expense 400,000 Other expenses (including income tax) 1,300,000 Total expenses $4,700,000$1,450,000330,000‾ Net earnings $1,780,000 Retained earnings, January 1, 20X5 4,200,000 Dividends 200,000‾ Retained earnings, December 31, 20X5 $5,780,000\begin{array}{|l|r|}\hline &{\text { Bing }} \\\hline & \$ 6,000,000 \\\hline & \underline{150,000} \\\hline \text { Total revenues } & \$ 6,150,000 \\\hline\\\hline \text { Cost of goods sold } & \$ 2,500,000 \\\hline \text { Depreciation expense } & 500,000 \\\hline \text { Interest expense } & 400,000 \\\hline \text { Other expenses (including income tax) } & 1,300,000 \\\hline \text { Total expenses } & \$ 4,700,000 \\\hline & \$ 1,450,000 \\\hline & \underline{330,000} \\\hline \text { Net earnings } & \$ 1,780,000 \\\hline \text { Retained earnings, January 1, 20X5 } & 4,200,000 \\\hline \text { Dividends } & \underline{200,000} \\\hline \text { Retained earnings, December 31, 20X5 } & \$ 5,780,000 \\\hline\end{array} Total revenues Cost of goods sold Depreciation expense Interest expense Other expenses (including income tax) Total expenses Net earnings Retained earnings, January 1, 20X5 Dividends Retained earnings, December 31, 20X5 Bing $6,000,000150,000$6,150,000$2,500,000500,000400,0001,300,000$4,700,000$1,450,000330,000$1,780,0004,200,000200,000$5,780,000 Part B-Consolidation method Consolidated Statement of Earnings and Retained Earnings for Bing
Year Ended December 31, 20X5
Sales of merchandise (6,000+1,000−560)6,440,000 Other revenues (200+20−20−50−150)0 Total revenues 6,440,000‾ Cost of goods sold (2,500+400−560)2,340,000 Depreciationexpense (500+80)580,000 Interest expense (400+20)420,000 Other expenses (including income tax )(1,300+190−20−150)1,320,000‾ Total expenses 4,660,000‾ Net income 1,780,000 Retained earnings, January 1,20X54,200,000 Dividends 200+50−50(200,000)‾ Retained earnings, December 31,20X55,780,000‾\begin{array}{|l|r|}\hline & \\\hline & \\\hline \text { Sales of merchandise }(6,000+1,000-560) & 6,440,000 \\\hline \text { Other revenues }(200+20-20-50-150) & 0 \\\hline \text { Total revenues } & \underline{6,440,000} \\\hline\\\hline \text { Cost of goods sold }(2,500+400-560) & 2,340,000 \\\hline \text { Depreciationexpense }(500+80) & 580,000 \\\hline \text { Interest expense }(400+20) & 420,000 \\\hline \text { Other expenses (including income tax })(1,300+190-20-150) & \underline{1,320,000} \\\hline \text { Total expenses } & \underline{4,660,000} \\\hline \text { Net income } & 1,780,000 \\\hline \text { Retained earnings, January } 1,20 X 5 & 4,200,000 \\\hline \text { Dividends } 200+50-50 & \underline{(200,000)} \\\hline \text { Retained earnings, December } 31,20 X 5 & \underline{5,780,000} \\\hline\end{array} Sales of merchandise (6,000+1,000−560) Other revenues (200+20−20−50−150) Total revenues Cost of goods sold (2,500+400−560) Depreciationexpense (500+80) Interest expense (400+20) Other expenses (including income tax )(1,300+190−20−150) Total expenses Net income Retained earnings, January 1,20X5 Dividends 200+50−50 Retained earnings, December 31,20X56,440,00006,440,0002,340,000580,000420,0001,320,0004,660,0001,780,0004,200,000(200,000)5,780,000 Part C
The consolidation and equity methods will result in the same net earnings and retained earnings of the parent as can be seen above. That is why the equity method is often called the single line consolidation: All of the earnings of the subsidiary are reported as a single line item on the statement of earnings for the parent. The consolidation method will combine the revenues and expenses of the parent and its subsidiaries on a line-by-line basis.
Part D
Under ASPE, although there is choice in reporting subsidiaries of using the cost, equity, or consolidation methods, the same method must be used for all similar types of investments. Consequently, if Bing already had some subsidiaries, then the same accounting policy that was currently being used by the company for its other subsidiaries would have to be used for its Bango investment. Alternatively, Bing could make an accounting policy change and apply a different method, but this method would have to be applied for all subsidiaries. As a result, the prior year's statements would have to be restated to show this change in accounting policy.
Under the equity method, Bing will include in its net earnings its proportionate share of the earnings from Bango. Any dividends received from Bango during the year would be reported as a reduction of the investment account and not as income.
The proportionate share of earnings will be:
100% × $330,000 = $330,000.
Dividends of $50,000 must be eliminated from Other Revenue. Statement of Earnings and Retained Earnings for Bing
Year Ended December 31, 20X5
Bing $6,000,000150,000‾ Total revenues $6,150,000 Cost of goods sold $2,500,000 Depreciation expense 500,000 Interest expense 400,000 Other expenses (including income tax) 1,300,000 Total expenses $4,700,000$1,450,000330,000‾ Net earnings $1,780,000 Retained earnings, January 1, 20X5 4,200,000 Dividends 200,000‾ Retained earnings, December 31, 20X5 $5,780,000\begin{array}{|l|r|}\hline &{\text { Bing }} \\\hline & \$ 6,000,000 \\\hline & \underline{150,000} \\\hline \text { Total revenues } & \$ 6,150,000 \\\hline\\\hline \text { Cost of goods sold } & \$ 2,500,000 \\\hline \text { Depreciation expense } & 500,000 \\\hline \text { Interest expense } & 400,000 \\\hline \text { Other expenses (including income tax) } & 1,300,000 \\\hline \text { Total expenses } & \$ 4,700,000 \\\hline & \$ 1,450,000 \\\hline & \underline{330,000} \\\hline \text { Net earnings } & \$ 1,780,000 \\\hline \text { Retained earnings, January 1, 20X5 } & 4,200,000 \\\hline \text { Dividends } & \underline{200,000} \\\hline \text { Retained earnings, December 31, 20X5 } & \$ 5,780,000 \\\hline\end{array} Total revenues Cost of goods sold Depreciation expense Interest expense Other expenses (including income tax) Total expenses Net earnings Retained earnings, January 1, 20X5 Dividends Retained earnings, December 31, 20X5 Bing $6,000,000150,000$6,150,000$2,500,000500,000400,0001,300,000$4,700,000$1,450,000330,000$1,780,0004,200,000200,000$5,780,000 Part B-Consolidation method Consolidated Statement of Earnings and Retained Earnings for Bing
Year Ended December 31, 20X5
Sales of merchandise (6,000+1,000−560)6,440,000 Other revenues (200+20−20−50−150)0 Total revenues 6,440,000‾ Cost of goods sold (2,500+400−560)2,340,000 Depreciationexpense (500+80)580,000 Interest expense (400+20)420,000 Other expenses (including income tax )(1,300+190−20−150)1,320,000‾ Total expenses 4,660,000‾ Net income 1,780,000 Retained earnings, January 1,20X54,200,000 Dividends 200+50−50(200,000)‾ Retained earnings, December 31,20X55,780,000‾\begin{array}{|l|r|}\hline & \\\hline & \\\hline \text { Sales of merchandise }(6,000+1,000-560) & 6,440,000 \\\hline \text { Other revenues }(200+20-20-50-150) & 0 \\\hline \text { Total revenues } & \underline{6,440,000} \\\hline\\\hline \text { Cost of goods sold }(2,500+400-560) & 2,340,000 \\\hline \text { Depreciationexpense }(500+80) & 580,000 \\\hline \text { Interest expense }(400+20) & 420,000 \\\hline \text { Other expenses (including income tax })(1,300+190-20-150) & \underline{1,320,000} \\\hline \text { Total expenses } & \underline{4,660,000} \\\hline \text { Net income } & 1,780,000 \\\hline \text { Retained earnings, January } 1,20 X 5 & 4,200,000 \\\hline \text { Dividends } 200+50-50 & \underline{(200,000)} \\\hline \text { Retained earnings, December } 31,20 X 5 & \underline{5,780,000} \\\hline\end{array} Sales of merchandise (6,000+1,000−560) Other revenues (200+20−20−50−150) Total revenues Cost of goods sold (2,500+400−560) Depreciationexpense (500+80) Interest expense (400+20) Other expenses (including income tax )(1,300+190−20−150) Total expenses Net income Retained earnings, January 1,20X5 Dividends 200+50−50 Retained earnings, December 31,20X56,440,00006,440,0002,340,000580,000420,0001,320,0004,660,0001,780,0004,200,000(200,000)5,780,000 Part C
The consolidation and equity methods will result in the same net earnings and retained earnings of the parent as can be seen above. That is why the equity method is often called the single line consolidation: All of the earnings of the subsidiary are reported as a single line item on the statement of earnings for the parent. The consolidation method will combine the revenues and expenses of the parent and its subsidiaries on a line-by-line basis.
Part D
Under ASPE, although there is choice in reporting subsidiaries of using the cost, equity, or consolidation methods, the same method must be used for all similar types of investments. Consequently, if Bing already had some subsidiaries, then the same accounting policy that was currently being used by the company for its other subsidiaries would have to be used for its Bango investment. Alternatively, Bing could make an accounting policy change and apply a different method, but this method would have to be applied for all subsidiaries. As a result, the prior year's statements would have to be restated to show this change in accounting policy.
Learning Objectives
- Identify the differences in accounting practices for investments, such as the cost method, equity method, and consolidation.
- Identify key indicators of influence and control in investment relationships.
- Employ the equity approach for investments when considerable influence is evident.
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