Question

Dewey Corporation owns 30 percent of the common stock of Jimm Company, which it purchased at...

Dewey Corporation owns 30 percent of the common stock of Jimm Company, which it purchased at underlying book value on January 1, 20X5. Dewey reported a balance of $309,000 for its investment in Jimm Company on January 1, 20X5, and $334,800 at December 31, 20X5. During 20X5, Dewey and Jimm Company reported operating income of $359,000 and $72,000, respectively. Jimm received dividends from investments in marketable equity securities in the amount of $9,000 during 20X5. It also reported an increase of $15,000 in its portfolio of securities which were carried fair value, and a gain in the fair value of derivative contracts which were appropriately designated as cash flow hedges, hence this gain was reported in Other Comprehensive Income (OCI). Jimm paid dividends of $ $39,000 in 20X5. Ignore income taxes in determining your solution.
   
Required:
a. Assuming that Dewey uses the equity method in accounting for its investment in Jimm, compute the amount of income from Jimm recorded by Dewey in 20X5.



b. Compute the amount reported by Jimm as other comprehensive income in 20X5.

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Answer #1

a. Equity-method income reported by Dewey Corporation in 2015:

Amounts reported by Jimm Co. for 2015

Operating income 72,000
Dividend income 9,000
Gain on investment in trading securities 15,000
Net income 96,000
Ownership held by Dewey *30
Investment income reported by Dewey 28,800

Calculation of Amount added to investment account in 2015

December 31, 2015 334,800
January 1, 2015 309,000
Increase in investment account in 2015 25,800
Dividends received by Dewey during 2015 6,000
Amount added to investment account in 2015 31800

b.Computation of other comprehensive income reported by Jimm Co:

Amount added to investment account in 2015 31,800
Investment income reported by Dewey in 2015 28,800
Increase due to other comprehensive income reported by Jimm Co. 3000
Proportion of ownership held by Dewey 0.30
Other comprehensive income reported by Jimm Co. 10,000
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