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Topic: Consolidation - Equity method (

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kars82
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Regular

Joined: 03 Mar 2009
Location: India
Online Status: Offline
Posts: 123

Posted: 24 Jun 2009 at 23:27 \| IP Logged

On January 1, Year 1, Mega Corp. acquired 10% of the outstanding voting stock of Penny, Inc. On January 2, Year 2, Mega gained the ability to exercise significant influence over financial and operating control of Penny by acquiring an additional 20% of Pennyā€™s outstanding stock. The two purchases were made at prices proportionate to the value assigned to Pennyā€™s net assets, which equaled their carrying amounts. Hence, no adjustment to investment income for acquisition differentials is necessary. For the years ended December 31, Year 1 and Year 2, Penny reported the following:


Year 1

Year 2


Dividends paid

yr1- $200,000

Yr2 - $300,000

Net income

yr 1-600,000

yr 2 - 650,000

In Year 2, what amounts should Mega report as current year investment income and as an adjustment, before income taxes, to Year 1 investment income?

Yr2 investment income - adjustment to yr1 investment income


1) $195,000      $160,000

2)$195,000       $120,000

3) $195,000       $40,000

4) $105,000        $40,000

asp87
Regular
Regular

Joined: 21 Jun 2009
Online Status: Offline
Posts: 138

Posted: 25 Jun 2009 at 00:33 \| IP Logged

When an additional investment allows the company to exercise significant influence over the investee, an adjustment to income has to be recorded. The previous dividend revenue recognized causes a negative adjustment and the net income reported by the investee in the previous period(s) causes a positive adjustment (at the previous ownership %)

I would say that the answer is C.
Year 2 Investment Income = (650,000 * .3) = 195,000
Year 1 Adjustment = (600,000 * .1) - (200,000 * .1) = 40,000

I hope that was clear.

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