Soft Bound Version for Advanced Accounting 13th Edition
13th Edition
ISBN: 9781260110579
Author: Hoyle
Publisher: McGraw Hill Education
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Textbook Question
Chapter 1, Problem 1DYS
EXCEL CASE 1
On January 1, 2018, Acme Co. is considering purchasing a 40 percent ownership interest in PHC Co., a privately held enterprise, for $700,000. PHC predicts its profit will be $185,000 in 2018, projects a 10 percent annual increase in profits in each of the next four years, and expects to pay a steady annual dividend of $30,000 for the foreseeable future. Because PHC has on its books a patent that is undervalued by $375,000, Acme realizes that it will have an additional amortization expense of $15,000 per year over the next 10 years—the patent’s estimated remaining useful life. All of PHC’s other assets and liabilities have book values that approximate market values. Acme uses the equity method for its investment in PHC.
Required
- 1. Using an Excel spreadsheet, set the following values in cells:
- Acme’s cost of investment in PHC.
- Percentage acquired.
- First-year PHC reported income.
- Projected growth rate in income.
- PHC annual dividends.
- Annual excess patent amortization.
- 2. Referring to the values in (1), prepare the following schedules using columns for the years 2018 through 2022.
- Acme’s equity in PHC earnings with rows showing these:
- Acme’s share of PHC reported income.
- Amortization expense.
- Acme’s equity in PHC earnings.
- Acme’s Investment in PHC balance with rows showing the following:
- Beginning balance.
- Equity earnings.
- Dividends.
- Ending balance.
- Return on beginning investment balance = Equity earnings/Beginning investment balance in each year.
- Acme’s equity in PHC earnings with rows showing these:
- 3. Given the preceding values, compute the average of the projected returns on beginning investment balances for the first five years of Acme’s investment in PHC. What is the maximum Acme can pay for PHC if it wishes to earn at least a 10 percent average return on beginning investment balance? (Hint: Under Excel’s Data tab, select What-If Analysis, and the Goal Seek capability to produce a 10 percent average return on beginning investment balance by changing the cell that contains Acme’s cost of investment in PHC. Excel’s Solver should produce an exact answer while Goal Seek should produce a close approximation. You may need to first add in the Solver capability under Excel’s Tools menu.)
1.
Expert Solution
To determine
Using an Excel spreadsheet, set the following values in cells:
- Acme’s cost of investment in PHC.
- Percentage acquired.
- First-year PHC reported income.
- Projected growth rate in income.
- PHC annual dividends.
- Annual excess patent amortization.
Explanation of Solution
The required values are presented in excel sheet as follows:
| Growth rate in income | 10% | ||||
| Dividends | 30000 | ||||
| Cost | 700000 | ||||
| Annual amortization | $ 15,000 | ||||
| 1st year PHC income | $ 185,000 | ||||
| Percentage owned | 40% | ||||
| 2018 | 2019 | 2020 | 2021 | 2022 | |
| PHC reported income | $ 74,000 | $ 81,400 | $ 89,540 | $ 98,494 | $ 108,343 |
| Amortization | $ 15,000 | $ 15,000 | $ 15,000 | $ 15,000 | $ 15,000 |
| Equity earnings | $ 59,000 | $ 66,400 | $ 74,540 | $ 83,494 | $ 93,343 |
| Beginning balance | $ 700,000 | $ 747,000 | $ 801,400 | $ 863,940 | $ 935,434 |
| Equity earnings | $ 59,000 | $ 66,400 | $ 74,540 | $ 83,494 | $ 93,343 |
| Dividends | $ (12,000) | $ (12,000) | $ (12,000) | $ (12,000) | $ (12,000) |
| Ending balance | $ 747,000 | $ 801,400 | $ 863,940 | $ 935,434 | $ 1,016,777 |
| ROI | 8.43% | 8.89% | 9.30% | 9.66% | 9.98% |
| Average | 9.25% |
2.
Expert Solution
To determine
Referring to the values in (1), prepare the following schedules using columns for the years 2018 through 2022.
Acme’s equity in PHC earnings with rows showing these:
- Acme’s share of PHC reported income.
- Amortization expense.
- Acme’s equity in PHC earnings.
Acme’s Investment in PHC balance with rows showing the following:
- Beginning balance.
- Equity earnings.
- Dividends.
- Ending balance.
Explanation of Solution
| Growth rate in income | 10% | ||||
| Dividends | 30000 | ||||
| Cost | 700000 | ||||
| Annual amortization | $ 15,000 | ||||
| 1st year PHC income | $ 185,000 | ||||
| Percentage owned | 40% | ||||
| 2018 | 2019 | 2020 | 2021 | 2022 | |
| PHC reported income | $ 74,000 | $ 81,400 | $ 89,540 | $ 98,494 | $ 108,343 |
| Amortization | $ 15,000 | $ 15,000 | $ 15,000 | $ 15,000 | $ 15,000 |
| Equity earnings | $ 59,000 | $ 66,400 | $ 74,540 | $ 83,494 | $ 93,343 |
| Beginning balance | $ 700,000 | $ 747,000 | $ 801,400 | $ 863,940 | $ 935,434 |
| Equity earnings | $ 59,000 | $ 66,400 | $ 74,540 | $ 83,494 | $ 93,343 |
| Dividends | $ (12,000) | $ (12,000) | $ (12,000) | $ (12,000) | $ (12,000) |
| Ending balance | $ 747,000 | $ 801,400 | $ 863,940 | $ 935,434 | $ 1,016,777 |
| ROI | 8.43% | 8.89% | 9.30% | 9.66% | 9.98% |
| Average | 9.25% |
3.
Expert Solution
To determine
Compute the average of the projected returns on beginning investment balances for the first five years of Acme’s investment in PHC. Find the maximum amount which Acme can pay for PHC if it wishes to earn at least a 10 percent average return on beginning investment balance.
Explanation of Solution
The average of the projected returns on beginning investment balances for the first five years of Acme’s investment in PHC is as follows:
| Growth rate in income | 10% | ||||
| Dividends | 30000 | ||||
| Cost | 639794 | ||||
| Annual amortization | $ 15,000 | ||||
| 1st year PHC income | $ 185,000 | ||||
| Percentage owned | 40% | ||||
| 2018 | 2019 | 2020 | 2021 | 2022 | |
| PHC reported income | $ 74,000 | $ 81,400 | $ 89,540 | $ 98,494 | $ 108,343 |
| Amortization | $ 15,000 | $ 15,000 | $ 15,000 | $ 15,000 | $ 15,000 |
| Equity earnings | $ 59,000 | $ 66,400 | $ 74,540 | $ 83,494 | $ 93,343 |
| Beginning balance | $ 639,794 | $ 686,794 | $ 741,194 | $ 803,734 | $ 875,228 |
| Equity earnings | $ 59,000 | $ 66,400 | $ 74,540 | $ 83,494 | $ 93,343 |
| Dividends | $ (12,000) | $ (12,000) | $ (12,000) | $ (12,000) | $ (12,000) |
| Ending balance | $ 686,794 | $ 741,194 | $ 803,734 | $ 875,228 | $ 956,571 |
| ROI | 9.22% | 9.67% | 10.06% | 10.39% | 10.67% |
| Average | 10.00% |
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Chapter 1 Solutions
Soft Bound Version for Advanced Accounting 13th Edition
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Ch. 1 - Prob. 11QCh. 1 - In a stock acquisition accounted for by the equity...Ch. 1 - Prob. 13QCh. 1 - What is the difference between downstream and...Ch. 1 - Prob. 15QCh. 1 - Prob. 16QCh. 1 - What is the fair-value option for reporting equity...Ch. 1 - When an investor uses the equity method to account...Ch. 1 - Which of the following does not indicate an...Ch. 1 - Prob. 3PCh. 1 - Under fair-value accounting for an equity...Ch. 1 - When an equity method investment account is...Ch. 1 - Prob. 6PCh. 1 - In January 2017, Domingo, Inc., acquired 20...Ch. 1 - Prob. 8PCh. 1 - Evan Company reports net income of 140,000 each...Ch. 1 - Perez, Inc., applies the equity method for its 25...Ch. 1 - Prob. 11PCh. 1 - Alex, Inc., buys 40 percent of Steinbart Company...Ch. 1 - Prob. 13PCh. 1 - Prob. 14PCh. 1 - Prob. 15PCh. 1 - On January 1, 2017, Alison, Inc., paid 60,000 for...Ch. 1 - Prob. 17PCh. 1 - Prob. 18PCh. 1 - Prob. 19PCh. 1 - Prob. 20PCh. 1 - Prob. 21PCh. 1 - Echo, Inc., purchased 10 percent of ProForm...Ch. 1 - Prob. 23PCh. 1 - Prob. 24PCh. 1 - Prob. 25PCh. 1 - Prob. 26PCh. 1 - Belden, Inc. acquires 30 percent of the...Ch. 1 - Prob. 28PCh. 1 - Prob. 29PCh. 1 - On July 1, 2016, Killearn Company acquired 88,000...Ch. 1 - Prob. 31PCh. 1 - On January 1, 2017, Stream Company acquired 30...Ch. 1 - EXCEL CASE 1 On January 1, 2018, Acme Co. is...Ch. 1 - Access The Coca-Cola Companys SEC 10-K filing at...Ch. 1 - Prob. 4DYSCh. 1 - Prob. 5DYS
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