Question

TunaCo purchases 25% of Stanley, Inc. on January 1 of the current year for $505,000. This acquisition gives TunaCo the ability to significantly influence Stanley's operating and financing policies. Stanley reports assets on that date of $1,600,000 with liabilities of $400,000. One building with a 15-year remaining life has a book value of $100,000 and a fair market value of $400,000. Any remaining excess must be Goodwill. During the current year, Stanley reports net income of $140,000 while paying dividends of $70,000. What is the Investment in Stanley account balance in TunaCo' accounting records at the end of the current year?

a. $500,000

b. $517,500

c. $530,000

d. $460,000

e. $512,500

On January 1, 20X1, Dawson, Incorporated, paid $110,000 for a 30% interest in Sacco Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 20X1, Sacco reported income of $50,000 and paid dividends of $20,000 while in 20X2 it reported income of $75,000 and dividends of $30,000. Assume Dawson has the ability to significantly influence the operations of Sacco.

The amount allocated to goodwill at January 1, 20X1, is

a. $26,000

b. $13,000

c. $9,000

d. 16,000

e. $10,000

Big owns 30% of the outstanding voting common stock of Little and has the ability to significantly influence the investee's operations and decision making. On January 1, 20X1, the balance in the Investment in Little Co. account was $402,000. There is no amortization associated with the purchase of this investment. During 20X1, Little earned income of $108,000 and paid cash dividends of $36,000.

Previously in 20X0, Little had sold inventory costing $28,800 to Big for $48,000. All but 25% of this merchandise was consumed by Big during 20X0. The remainder was used during 20X1. Additional sales were made to Big in 20X1; inventory costing $33,600 was transferred at a price of $60,000. Of this total, 40% was not consumed until 20X2.

What is the correct balance in the Investment in Little account on December 31, 20X1?

a. $402,000

b. $423,600

c. $421,872

d. $435,872

Smith Company holds 20% of the outstanding shares of Leef Greeting Cards and applies the equity method of accounting. For the current year, Leef reports earnings of $100,000 and pays cash dividends of $22,000. During the current year, Leef acquired inventory for $60,000, which was then sold to Smith for $100,000. At the end of the current year, Smith continues to hold merchandise with a transfer price of $30,000. Assuming no amortization expense related to this investment, what Equity in Investee Income should Smith report in the current year?

a, $18,400

b. $18,700

c. $12,000

d.$14,000

e. $17,600

Big owns 30% of the outstanding voting common stock of Little and has the ability to significantly influence the investee's operations and decision making. On January 1, 20X1, the balance in the Investment in Little Co. account was $402,000. There is no amortization associated with the purchase of this investment. During 20X1, Little earned income of $108,000 and paid cash dividends of $36,000.

Previously in 20X0, Little had sold inventory costing $28,800 to Big for $48,000. All but 25% of this merchandise was consumed by Big during 20X0. The remainder was used during 20X1. Additional sales were made to Big in 20X1; inventory costing $33,600 was transferred at a price of $60,000. Of this total, 40% was not consumed until 20X2.

What amount of equity income would Big have recognized in 20X1 from its ownership interest in Little?

a. $19,872

b. $32,400

c. $30,672

d. $21,640

e. $21,748

Answer 1

Amount $ Amount Big Co. Investment in Little Co. 1st Jan-2021 Income of Little Sharc of Big Co Smith Co. Income ot Leet100,000.00 Share of Smith Co. Amount Nat income of Stanlay share of TunaCo Share ot TunaCo Investment Value 140,000.00 A 25% B Costs of assets acquirad: Total Assets 402,000.00 A 5o,000.UA 35,000.00 C-A*B Less: Book Valuc ot Patent 10,000.00 D 108,000.00 30% 32,400.00 B 35,000.00 10,800.00 c 22,000.00 4400.00 C Ndd: Fair Value of Patent Fair value of assets Liabilities Net assets Share of Dawson 505,000.00 」 0,000.00 E 580,000.00 FA-D+E 300,D00.DO B 230,000.00 G-F-B 00,00. DNE Dividen Co e of Investment in Little Co. 423,600.00 Less- Dividend Recd. 17,500.00 Equity income Big 30% H 84,000.00 EH G 1 10,000.00 Amount Paid 000.00