Question

losses. 1. Puckett Company paid $1.6 million for 50.000 shares of Harrison's voting con which represents a 40 percent investment. No allocation to goodwill or other specific accoun stock, which represents a 40 percent inve was made. Signific de. Significant influence over Harrison is achieved by this acquisition and so Puckett applies the equity method. Harrison declared a Spe hod. Harrison declared a $2 per share dividend during the year and reported net income of $560.000. What is the balance in the Investment hat is the balance in the Investment in Harrison account found in Puckett's financial records as of December 31? a. $1,724.000 b. $1,784,000 c. $1.844.000 d. $1,884,000 . In January 2017, Domingo, Inc., acquired 20 percent of the outstanding common stock of Mar- tes, Inc., for $700,000. This investment gave Domingo the ability to exercise significant influence over Martes, whose balance sheet on that date showed total assets of $3,900,000 with liabilities of $900,000. Any excess of cost over book value of the investment was attributed to a patent having a remaining useful life of 10 years. In 2017. Martes reported net income of $170,000. In 2018, Martes reported net income of $210,000. Dividends of $70,000 were declared in each of these two years. What is the equity method balance of Domingo's Investment in Martes, Inc., at December 31, 2018? a. $728.000 b. $748.000 c. $756,000 d. $776,000

6 and 7 show solution

Answer 1

The equity method of accounting for investments in equity is sought when the investment is anywhere between 20 to 50% of another company’s shares. When the equity method is used, the net income increases investment amount while the dividend shall decrease investment amount of company.

6.

Acquisition price	$        1,600,000
Equity income ( 560,000 * 40%)	$            224,000
Dividends (50,000 * 2)	$         (100,000)
Investment in Harisson corporation as of December 31	$        1,724,000

Hence, the correct option is a. $ 1724,000

7.

Acquisition price	$            700,000
Martes net assets acquired (3mn * 20%)	$         (600,000)
excess cost to patent	$            100,000
Annual amortization (10 years life)	$              10,000

Acquisition price	$           700,000
Income accruals
2017 = 170,000 * 20%	$              34,000
2018 = 210,000 * 20%	$              42,000
Amortization in 2017 (computed above)	$           (10,000)
Amortization in 2018	$           (10,000)
Dividends 2017 = 70,000 *20%	$           (14,000)
2018 = 70,000 *20%	$           (14,000)
Investment in Martes	$            728,000

Hence, the correct option is $ a. 728,000

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