|
|
|
 Topic: Equity Method Question(Becker # CPA00344) ( Topic Closed)
|
 
|
| Author |
|
KMirgAZ
Major Contributor
Joined: 01 Apr 2009
Location: United States
Online Status: Offline
Posts: 413
|
| Posted: 16 May 2010 at 13:36 | IP Logged
|
|
|
On January 1, 1989, Mega Corp. acquired 10% of the outstanding voting stock of Penny, Inc. On January 2,
1990, Mega gained the ability to exercise significant influence over financial and operating control of Penny by
acquiring an additional 20% of Penny's outstanding stock. The two purchases were made at prices proportionate
to the value assigned to Penny's net assets, which equaled their carrying amounts. For the years ended
December 31, 1989 and 1990, Penny reported the following:
1989 1990
Dividends paid $200,000 $300,000
Net income 600,000 650,000
In 1990, what amounts should Mega report as current year investment income and as an adjustment, before
income taxes, to 1989 investment income?
a. $195,000 $160,000
b. $195,000 $100,000
c. $195,000 $40,000
d. $105,000 $40,000
I was able to narrow this question down to C or D. I went with D and was wrong as the right answer per Becker is C. Why is it that in 1989 the investment income is 10% of income less 10% of dividends but in 1990 it's only the 30% of income and not the 30% of income less 30% of dividends?
__________________
Kevin
-----
BEC: 79
AUD: 72,84
REG: 88
FAR: 69,77
Ethics: 01/2010
|
| Back to Top |
|
| |
OrDieTryng!
Regular
Joined: 30 Mar 2010
Online Status: Offline
Posts: 130
|
| Posted: 16 May 2010 at 13:54 | IP Logged
|
|
|
Because for 1989 you are adjusting from the cost method to the equity
method and in 1990 you are only using equity method. Under the cost
method you recognized dividend income, not subsidiary income, in your
net income. But under the equity method you recognize sub income to
your net income and the sub's dividends paid is a balance sheet only
transaction that increases cash and decreases the investment account.
So for 1989, adjusting for equity method, you have to "un-recognize" the
dividend income and recognize the sub's actual income (10% only). -
20+60=40.
In 1990 no dividend income has been recognized like it was under cost
method, so there's no need to adjust for it. Simply recognize your share
of the sub's income 650*.3=195
Hope that helps.
__________________
FAR: 84 Becker
REG: 95 Becker
BEC: 88 Becker
AUD: 88 Gleim
|
| Back to Top |
|
| |
KMirgAZ
Major Contributor
Joined: 01 Apr 2009
Location: United States
Online Status: Offline
Posts: 413
|
| Posted: 16 May 2010 at 14:23 | IP Logged
|
|
|
OrDieTryng! wrote:
Because for 1989 you are adjusting from the cost method to the equity
method and in 1990 you are only using equity method. Under the cost
method you recognized dividend income, not subsidiary income, in your
net income. But under the equity method you recognize sub income to
your net income and the sub's dividends paid is a balance sheet only
transaction that increases cash and decreases the investment account.
So for 1989, adjusting for equity method, you have to "un-recognize" the
dividend income and recognize the sub's actual income (10% only). -
20+60=40.
In 1990 no dividend income has been recognized like it was under cost
method, so there's no need to adjust for it. Simply recognize your share
of the sub's income 650*.3=195
Hope that helps. |
|
|
Yeah, that helps. Thanks!
__________________
Kevin
-----
BEC: 79
AUD: 72,84
REG: 88
FAR: 69,77
Ethics: 01/2010
|
| Back to Top |
|
| |
|
|
Sorry, you can NOT post a reply.
This topic is closed.
|
|
You cannot post new topics in this forum
You cannot reply to topics in this forum
You cannot delete your posts in this forum
You cannot edit your posts in this forum
You cannot create polls in this forum
You cannot vote in polls in this forum
|
 Copyright ©2001-2010 Web Wiz Guide
This page was generated in 0.0938 seconds.
|
Active Topics 
Memberlist 
Search 
Help
Register 
Login
