Question

Problem 1-29 (LO 1-3, 1-4, 1-5b, 1-6) On January 1, 2018, Pine Company owns 40 percent (96,000 shares) of Seacrest, Inc., which it purchased several years ago for $487,200. Since the date of acquisition, the equity method has been properly applied, and the carrying amount of the investment account as of January 1, 2018, is $645,600. Excess patent cost amortization of $28.800 is still being recognized each year. During 2018, Seacrest reports net income of $678,000 and a $288,000 other comprehensive loss, both incurred uniformly throughout the year. No dividends were declared during the year. Pine sold 19,200 shares of Seacrest on August 1, 2018, for $187,555 in cash. However, Pine retains the ability to significantly influence the investee During the last quarter of 2017, Pine sold $64,000 in inventory (which it had originally purchased for only $38.400) to Seacrest. At the end of that fiscal year, Seacrest's inventory retained $18.400 (at sales price) of this merchandise, which was subsequently sold in the first quarter of 2018. On Pine's financial statements for the year ended December 31, 2018, what income effects would be reported from its ownership in Seacrest? (Do not round intermediate calculations. Round your answers to the nearest whole dollar.) SEACREST, INC Equity income Other comprehensive loss Gain on sale of investment

Answer 1

Part 1

Equity Income in Seacrest, Inc.

Investee income accrual—operations
$678,000 × 40% × 7/12 year	158200
$678,000 × 32% × 5/12 year	90400	248600
Amortization
$28800 × 7/12 year	16800
After 20 percent of stock is sold (19200 ÷ 96000 shares): $28800 × 80% × 5/12 year	9600	(26400)
Recognition of unrealized gross profit
Remaining inventory—12/31/17	18400
Gross profit percentage on original sale($(64000-38400) ÷ $64,000)	40%
Gross profit remaining in inventory	7360
Ownership percentage	40%
Intra-entity gross profit recognized in 2018		2944
Equity income in Seacrest, Inc		$225144

Part 2

Other comprehensive loss—Seacrest, Inc.

1/1/18 to 8/1/18 ($288,000 × 40% × 7/12 year)	67200
8/1/18 to 12/31/18 ($288,000 × 32% × 5/12 year)	38400	(105600)

Part 3

Gain on Sale of Investment in Seacrest, Inc.

Book value—investment in Seacrest, Inc.—1/1/18	645600
Investee income accrual—1/1/18 – 8/1/18	158200
Investee other comprehensive loss 1/1/18 – 8/1/18	(67200)
Amortization—1/1/18 – 8/1/18	(16800)
Recognition of deferred profit	2944
Investment in Seacrest book value 8/1/18	722744
Percentage of investment sold (19200 ÷ 96000 shares)	20%
Book value of shares being sold	144549
Proceeds from sale of shares	187555
Gain on sale of 19200 shares of Seacrest	$43006