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cwang1026
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| Posted: 22 Jul 2010 at 19:09 | IP Logged
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The following answer to this question doesn't make sense to me:
On 1/1/06, Mega Corp. acquired 10% of the outstanding voting stock of Penny, Inc. On 1/2/07, Mega gained the ability to exercise significant influence over finanical 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 12/31/06 and 2007, Penny reported the following:
2006 2007
Dividends paid: $200,000 &nbs p; $300,000
Net Income: 600,000 ; 650,000
In 2007, what amounts should Mega report as current year investment income and as an adjustment, before income taxes, to 2006 investment income?
answer is:
2007 investment income = $195,000
Adj to 2006 investment income = $40,000
I understand that the $40,000 adjustment came from:
(600,000 - 200,000)*.10 = $40,000
What I don't understand is why the 2007 dividends were not subtracted out of the 2007 net income. Can anyone please help explain this to me?
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1tryCPA
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| Posted: 22 Jul 2010 at 19:15 | IP Logged
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For 2006, the question is about adjustment as Mega reported 200,000 dividend income in 2006 b/c only of 10% of ownership. As it gained influence, then 2006 income should be accounted by equity method that you described.
For 2007, Mega uses equity method which 30% of net income of Penny. Dividends documented as reduction in investment - no effect on investment income
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cwang1026
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| Posted: 22 Jul 2010 at 22:56 | IP Logged
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so...if we were to do journal entries for the transactions...it would look like this?
Journal entry for 2006:
Dividend Payment:
cash 20,000
dividend revenue 20,000
When Mega gained influence: (equity method)
investment 60,000 (600,000*.10)
investment income 60,000
investment income 20,000 (200,000*.10)
investment &n bsp; 20,000
______________________________
Journal entry for 2007:
investment 195,000 (650,000*.30)
investment income 195,000
cash &n bsp; 90,000 (300,000*.30)
investment &n bsp; 90,000
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jsanders02
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| Posted: 22 Jul 2010 at 23:50 | IP Logged
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Yep, those journal entries look right to me.
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AUD: 94
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All four parts on first try!
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1tryCPA
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| Posted: 23 Jul 2010 at 08:02 | IP Logged
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The first set of entries as it should be, but I think if you are asking about actual JE in 2007, you do an entry to offset RE and investment account for adj as 2006 year is closed
__________________
FAR - 07/09/10 - {95}
AUD - 10/02/10 - {96}
BEC - 11/29/10 - {92}
REG - 05/23/11 - {75 would be enough}90 unbelievable, and I AM DONE!!!
______________
Wiley book/Gleim CD/Gleim simulations
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Topic: equity method - investments
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