Question

Ravine Corporation purchased 30 percent ownership of Valley Industries for $90,000 on January 1, 20X6, when Valley had capital stock of $240,000 and retained earnings of $60,000. During the period of January 1, 20X6, through December 31, 20X9, the market value of Ravine's investment in Valley's stock increased by $10,000 each year. The following data were reported by the companies for the years 20X6 through 20X9:

									Dividends Declared
Year	Operating Income, Ravine Corporation				Net Income, Valley Industries				Ravine				Valley
20X6		$	140,000			$	30,000			$	70,000			$	20,000
20X7			80,000				50,000				70,000				40,000
20X8			220,000				10,000				90,000				40,000
20X9			160,000				40,000				100,000				20,000

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.

Give all appropriate journal entries for 20X8 that Ravine would make if it uses the equity method. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

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	140000+0+(20000*30%)	=	$146000
20X7	80000+0+(40000*30%)	=	$92000
20X8	220000+0+(30000*30%)	=	$229000
20X9	160000+0+(20000*30%)	=	$166000

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

Therefore,

Dividend declared = (30000+50000-20000-40000)+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	140000+(30000*30%)	=	$149000
20X7	80000+(50000*30%)	=	$95000
20X8	220000+(10000*30%)	=	$223000
20X9	160000+(40000*30%)	=	$172000

Part B 1

Fair value method

Date	Account titles and explanation	Debit	Credit
20X8	Cash (40000*30%)	12000
	Dividend income (30000*30%)		9000
	Investment in valley stock		3000

Part B 2

Date	Account titles and explanation	Debit	Credit
20X8	Cash (40000*30%)	12000
	Investment in valley stock		12000
20X8	Investment in valley stock	3000
	Income from valley		3000