Question

1. On January 1, 2019, Monroe, Inc., purchased 12,000 shares of Brown Company for $250,000, giving Monroe 10 percent ownership of Brown. On January 1, 2020, Monroe purchased an additional 18,000 shares for $590,000. This latest purchase gave Monroe the ability to apply significant influence over Brown. The original 10 percent investment was categorized as an available for sale security. Any excess of cost over book value acquired for either investment was attributed solely to goodwill. These amounts are assumed to have Brown reports net income and dividends as follows. occurred evenly throughout these years. 2019 2020 2021 Net Income $300,000 400,000 500,000 Cash Dividends (paid quarterly) $160,000 180,000 200,000 On July 1, 2021, Monroe sells 3,600 shares of this investment for $39 per share, thus reducing its interest in Brown. However, the company retains the ability to significantly influence Brown Using the equity method what amounts appear on Monroe's 2021 income statement? a) b) Total income accrual. Gain or loss on sale of investment.

Answer 1

Answer :-

1)a) Computation of Total Income Accural are as follows :-

Equity method income accrual for 2021
25% of $500,000 for 1/2 year	$62,500
22% of $500,000 for 1/2 year	$55,000
Total Income Accural	$117,500

Note :-

Monroe Inc. get 10% Ownership of Brown ,when Monroe purchase 12,000 shares

If 18,000 shares purchased ,Monroe get = {(10/12,000) × 18,000}

Monroe get additional 15% Ownership, when Monroe get 18,000 shares.

On July 1,2021, If Monroe sells 3,600 share which is equal to 3%

Monroe total Ownership after sells = 25% -3% = 22%

1)b)We will calculated the Book value of share on July 1,2021.For that we will add all Income Accural and Cash Dividend paid.

Cost of initial acquisition—2019	$250,000
Add:- 10% of Net Income in 2019 (10% × $300,000)	$30,000
Less :- 10% of Cash Dividend (10% × $160,000)	($16,000)
Additional share Acquisition - 2020	$590,000
Add:- (10 % + 15% ) of Net Income in 2020(25% × $400,000)	$100,000
Less :- 25% of Cash Dividend in 2020 ( 25% × $180,000)	($45,000)
Add:- 25%of Net Income in 2021 for 6months (25% × 500,000 × 6/12)	$62,500
Less :-25% of Cash Dividend in 2021 for 6months (25% × $200,000 × 6/12)	($25,000)
Book Value of 30000 shares on July 1,2021 (Total)	$946,500

Gain or loss on sale of Investment :-

Cash proceeds 3,600 shares for $39 per share (3,600 × $39 )	$140,400
Less :- Book Value of 3,600 shares {( $946,500/ 30,000 )× 3,600 share}	$113,580
Gain on sale of Investment	$26,820

Total income Accural - $117,500

Add :- Gain on sale of Investment - $26,820

Total income statement effect - 2021 - $144,320