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I am working on the becker’s questions, and 2 of the questions from the Cost to Equity Method are really confuse me.
Can anyone tell me why these 2 questions get 2 difference treatment from Cost to Equity?
Question 1 asks the treatment for the income from the Sub on Parent’s income statement. Question 2 asks simply asks the balance sheet treatment.
The question 1 reports partd of the pro-rated Sub’s income on Parent’s Income Statement, however, on question 2. the parent company reports the whole amount of income from sub into the parent’s balance sheet.
My understanding of the JE for Equity Investment is
Investment <<<< Balance Sheet
………..Equity in Earning <<<< Income Statement
After I done these 2 question, I am confuse because
Investment <<<< balance sheet gets the whole amount report?
…….Equity in Earning <<<< get the pro-rated amount from the month become equity method?
…….<<<Something Missing Here?>>>
Can anybody please explain why they use 2 different treatments in these 2 questions?
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Question.1
On January 1, 1992, Point, Inc. purchased 10% of Iona Co.’s common stock. Point purchased additional
shares bringing its ownership up to 40% of Iona’s common stock outstanding on August 1, 1992. During
October 1992, Iona declared and paid a cash dividend on all of its outstanding common stock. How
much income from the Iona investment should Point’s 1992 income statement report?
a. 10% of Iona’s income for January 1 to July 31, 1992, plus 40% of Iona’s income for August 1 to
December 31, 1992.
b. 40% of Iona’s income for August 1 to December 31, 1992 only.
c. 40% of Iona’s 1992 income.
d. Amount equal to dividends received from Iona.
Answer: A
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Question.2
Pare Inc. purchased 10% of Tot Co.’s 100,000 outstanding shares of common stock on January 2, Year 1, for $50,000.
On December31, Year 1, Pare purchased an additional 20,000 shares of Tot for $150,000.
There was no goodwill as a result of either acquisition, and Tot had not issued any additional stock during Year 1. Tot reported earnings of $300,000 for Year 1. What amount should Pare report in its December 31, Year 1, balance sheet as investment in Tot?
a. $170,000
b. $200,000
c. $230,000
d. $290,000
Answer: C
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