Question

I am confused on how to solve for the fair value

E2-6 Investment Income LO 2-2, 2-3 Ravine Corporation purchased 40 percent ownership of Valley Industries for $115,200 on January 1, 20X6, when Valley had capital stock of $241,000 and retained earnings of $47,000. During the period of January 1, 20X6, through December 31, 20X9, the market value of Ravine's investment in Valley's stock increased by $12,000 each year. The following data were reported by the companies for the years 20X6 through 20X9: Dividends Declared Year 20X6 20X7 20X8 20x9 Operating Income Ravine Corporation $141,000 85,000 236,000 161,000 Net Income, Valley Industries $32,000 52.000 10,000 42,000 Ravine $ 87,000 87,000 107,000 117,000 Valley $22,000 42,000 40,000 22,000 Required: a. What net income would Ravine Corporation have reported for each of the years, assuming Ravine accounts for the intercorporate investment either by carrying the investment at fair value, or by using the equity method? b-1. Give all appropriate journal entries for 20X8 that Ravine would make if it carries the investment at fair value. b-2. Give all appropriate journal entries for 20X8 that Ravine would make if it uses the equity method. Complete this question by entering your answers in the tabs below. Required A Required 11 Required B2 What net income would Ravine Corporation have reported for each of the years, assuming Ravine accounts for the intercorporate investment either by carrying the investment at fair value, or by using the equity method? Year 20X6 20x7 20X8 20X9 Net Income Fair Value Equity Method $ 153,800 $ 105,800 $ 240,000 $ 177,800

Answer 1

Part A 1

Ravine Corporation net income under Fair value Method:

Net income under Fair value Method = Operating income reported by Ravine+ Unrealized gain on increase in value of Valley stock+ Dividend income from Valley

20X6	141000+0+(22000*40%)	=	$149800
20X7	85000+0+(42000*40%)	=	$101800
20X8	236000+0+(30000*40%)	=	$248000
20X9	161000+0+(22000*40%)	=	$169800

As in 20X8 dividend declared is higher than net income, it means it is distributed from prior undistributed earnings

Therefore,

Dividend declared = (32000+52000-22000-42000)+10000 = 30000

Part A 2

Ravine Corporation net income under Equity Method:

Net income under Equity Method = Operating income reported by Ravine+ Operating income by Valley

20X6	141000+(32000*40%)	=	$153800
20X7	85000+(52000*40%)	=	$105800
20X8	236000+(10000*40%)	=	$240000
20X9	161000+(42000*40%)	=	$177800

Part B 1

Fair value method

Date	Account titles and explanation	Debit	Credit
20X8	Cash (42000*40%)	16800
	Dividend income (32000*40%)		12800
	Investment in valley stock		4000

Part B 2

Date	Account titles and explanation	Debit	Credit
20X8	Cash (42000*40%)	16800
	Investment in valley stock		16800
20X8	Investment in valley stock	4000
	Income from valley		4000