Abstruse text littered with mistakes
Never have I seen a textbook so haphazardly strewn with miscalculations. Apparently the author has developed Alzheimers'; I am sympathetic to his plight but it makes the situation similar to a man with no legs trying to teach a baby how to walk. It makes it difficult to solve a problem when the answers are complete nonsense (or vice versa, as my example shows)
Take P2-2, for example, on page 56:
JOURNAL ENTRIES FOR MIDYEAR INVESTMENT (COST AND EQUITY METHODS)
Putter Company paid $110,000 for an 80% interest in Siegel Company on July 1, 2009, when Siegel Company had total equity of $110,000. Siegel Company reported earnings of $10,000 for 2009 and declared dividends of $8,000 on November 1, 2009.
REQUIRED
2. Assuming that Putter Company uses the equity method of accounting for its subsidiaries (Any difference between investment cost and book value acquired is to be assigned to equipment and amortized over a 10 year period).
(...What equipment? Equipment was mentioned nowhere in the problem...)
ANSWER KEY:
2 Equity method
Investment in Siegel July 1, 2009 $110,000
Add: Share of reported income 4,000
Deduct: Dividends charged to investment (6,400)
Deduct: Excess Depreciation (1,100) <--OKAY, STOP RIGHT THERE. WHAT EQUIPMENT ARE WE DEPRECIATING?
Investment in Siegel balance at December 31, 2009 $106,500
July 1, 2009
Investment in Siegel 110,000
Cash 110,000
To record initial investment for 80% interest
of Siegel.
November 1, 2009
Cash 6,400
Investment in Siegel 6,400
To record receipt of dividends ($8,000 * 80%).
December 31, 2009
Investment in Siegel 2,900
Income from Siegel 2,900
To record income from Siegel computed as follows:
Share of Siegel's income ($10,000 * 1/2 year * 80%)
less excess depreciation ($22,000/10 years * 1/2 year). <--SO ONLY IN THE ANSWER KEY DO WE FIND OUT THAT THE VALUE OF THIS EQUIPMENT THAT WE'RE SUPPOSED TO BE DEPRECIATING, WHICH DEFEATS THE PURPOSE OF THE PROBLEM...THANKS, MR. BEAMS
The authors put together an entire book WITHOUT BOTHERING TO CHECK FOR ERRORS. Of course, this makes it difficult to learn from because you're constantly left wondering what's happening, and where all these answers came from. On top of that, the actual text itself is very didactic, constantly referencing entire quotes from the FASB, etc. such as on page 28:
We account for an investment in voting stock that gives the investor the ability to exercise significant influence over the financial and operating policies of the investee using the equity method of accounting. Paragraph 17 of APB Opinion No. 18 explains:
The Board concludes that the equity method of accounting for an investment in common stock should...be followed by an investor whose investment in voting stock gives it the ability to exercise significant influence over operating and financial policies of an investee even though the investor holds 50% or less of the voting stock.
The APB bases the ability to exert significant influence on a 20% ownership test:
An investment (direct or indirect) of 20% or more of the voting stock of an investor should lead to a presumption that in the absense of evidence to the contrary an investor has the ability to exercise significant influence over an investee. Conversely, an investment of less than 20% of the voting stock of an investee should lead to a presumption that an investor does not have the ability to exercise significant influence unless such ability can be demonstrated.
If I wanted to read APB Opinion No. 18, I would have looked it up myself. Why can't the author just write, "It is assumed that in an investment of 20%-50% of the voting stock an investor has the ability to exercise significant influence over the investee, unless evidence proves otherwise. Therefore, the equity method of accounting should be used."
Unless you have to use this book for a class (as in my case), DON'T BUY THIS BOOK. There have to be other books out there better than this one. This book is already making my semester a loooong one...
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