[LL Cool Jim]

Becker Question –

W/ 40% ownership it’s the equity method, why didn’t the dividend paid gets deducted from income?

Sage, Inc. bought 40% of Adams Corp.’s outstanding common stock on January 2, Year 1, for $400,000. The carrying amount of Adams’ net assets at the purchase date totaled $900,000. Fair values and carrying amounts were the same for all items except for plant and inventory, for which fair values exceeded their carrying amounts by $90,000 and $10,000, respectively. The plant has an 18-year life. All inventory was sold during Year 1. During Year 1, Adams reported net income of $120,000 and paid a $20,000 cash dividend. What amount should Sage report in its income statement from its investment in Adams for the year ended December 31, Year 1?

a. $32,000

b. $42,000

c. $48,000

d. $36,000

Explanation

Net income for Year 1 $ 120,000

Percent owned 40%

Share of income before adjustment 48,000

Amortization of higher plant value ($90,000 x 40% ÷ 18 years) (2,000)

Write off extra value of inventory (10,000 × 40%) (4,000)

Equity in income of 40% investee $ 42,000

FAR Done
REG Done
BEC Done

[jbisdamon]

I believe the journal entry for his share of the dividend would be:

Debit: Cash 8

Credit: Investment in Adams 8

Under the equity method dividends received reduce the carrying value of the investment whereas under the cost method it is recorded as income.

BEC - 76 7/22/14
AUD - 84 8/30/14
REG - 75 10/16/14
FAR - 87 11/24/14

[mdlynch3]

@ LL Cool Jim Dividends received from the sub decrease the parent's investment account, but do not affect the parent's calculation of income

FAR - 84 (11/26/2014)
REG - 82 (5/15/2015)
AUD - 90 (7/20/2015)
BEC - 88 (2/26/2015)

[Author]

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