Question

On January 1, 2021, Pine Company owns 40 percent (104,000 shares) of Seacrest, Inc., which it purchased several years ago for $499,200. Since the date of acquisition, the equity method has been properly applied, and the carrying amount of the investment account as of January 1, 2021, is $670,800. Excess patent cost amortization of $31,200 is still being recognized each year. During 2021, Seacrest reports net income of $726,000 and a $312,000 other comprehensive loss, both incurred uniformly throughout the year. No dividends were declared during the year. Pine sold 20,800 shares of Seacrest on August 1, 2021, for $184,976 in cash. However, Pine retains the ability to significantly influence the investee.

During the last quarter of 2020, Pine sold $66,000 in inventory (which it had originally purchased for only $39,600) to Seacrest. At the end of that fiscal year, Seacrest's inventory retained $16,900 (at sales price) of this merchandise, which was subsequently sold in the first quarter of 2021.

On Pine’s financial statements for the year ended December 31, 2021, what income effects would be reported from its ownership in Seacrest? (Do not round intermediate calculations. Round your answers to the nearest whole dollar.)

Answer 1

a) Compute equity income in S Inc.,
Particulars	Amount	Amount
Accrued investment income during 2018:
From January 1 to July 31 ($726,000 × 40%) × 7 ÷ 12	$169,400
From August 1 to December 31 ($726,000 × 32%) × 5 ÷ 12 (40% - 40% * 20% =32%	$96,800
		$266,200
Less: Amortization of excess patent cost:
From January 1 to July 31 ($31,200 × 7 ÷ 12)	($18,200)
From August 1 to December 31 ($31,200 × 80% × 5 ÷ 12)	($10,400)
Total amortization		($28,600)
Add: Deferred gross profit on inventory sold:
Inventory balance	$16,900
Gross profit percentage ($66,000 − $39,600) / $66,000	40%
	$6,760
Ownership percentage	40%
Deferred gross profit recognized in the first quarter		$2,704
Total equity income		$240,304

b) Compute other comprehensive loss in S Inc.,
Particulars	Amount	Amount
From January to July 31 ($312,000 × 40%) × 7 ÷ 12	$72,800
From August to December 31 ($312,000 × 32%) × 5 ÷ 12	$41,600
Total other comprehensive loss		$114,400

c) Compute gain on sale of investment in S Inc.,
Particulars	Amount	Amount
Sale price of investment		$184,976
Book value of investment	$670,800
Accrued investment income up to July 31	$169,400
Deduct: Other comprehensive loss up to July 31	($72,800)
Deduct: Amortization up to July 31	($18,200)
Deferred gross profit recognized	$2,704
Book value of the investment on July 31	$751,904
×   Percentage of investment sold ( (20,800 ÷ 104,000)	20%
Book value of investment sold		$150,381
Gain on sale of investment		$34,595

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