First Question:
On January 1, Year 1, Mega Corp. acquired 10% of the outstanding voting stock of Penny, Inc. On January 2, Year 2, Mega gained the ability to exercise significant influence over financial and operating control of Penny by acquiring an additional 20% of Penny's outstanding stock. The two purchases were made at prices proportionate to the value assigned to Penny's net assets, which equaled their carrying amounts. For the years ended December 31, Year 1 and Year 2, Penny reported the following:
Year 1 Year 2
Dividends paid $ 200,000 $ 300,000
Net income 600,000 650,000
In Year 2, what amounts should Mega report as current year investment income and as an adjustment, before income taxes, to Year 1 investment income?
Year 2 Adjustment Year 1
Investment income investment income
a. $195,000 $100,000
b. $195,000 $160,000
c. $105,000 $40,000
d. $195,000 $40,000
Explanation
Choice “d” is correct, Year 2 investment income of $195,000 and an adjustment to Year 1 investment income of $40,000.
Rule: When two or more purchases of stock cause ownership to go from less than 20% to more than 20%, the equity method should be used and the periods during which the cost method was used are retroactively restated.
Year 2 investment income = 30% × $650,000 = $195,000???
Why wasn’t the dividend portion of ownership deducted for year 2???? NM…just got it. Because its asking for income and dividens are recorded in BS.
Year 2 adjustment to Year 1 investment income:
10% × $600,000 net income = $ 60,000
10% × $200,000 dividends paid = $(20,000)
adjustment to Year 1 $ 40,000
Its the small stuff that's going to kill me…..lol. Couldn't they do a us a favor and italicize these and the dates. aughhhh
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