2. Abbey, Inc. acquired 15% of Tulsa Corporation on January 1, 2016, for $210,000 when the...

2. Abbey, Inc. acquired 15% of Tulsa Corporation on January 1, 2016, for $210,000 when the book value of Tulsa’s net assets was $950,000. During 2016, Tulsa reported net income of $330,000 and paid dividends of $70,000. On January 1, 2017, purchased an additional 25% of Tulsa for $350,000. Any excess of cost over book value was attributable to goodwill (No amortization). On that same date, Abbey changed to the equity method. During 2017, Tulsa reported net income of $420,000 and paid dividends of $110,000. Required: a. What income did Abbey record from Tulsa in 2016? b. What income did Abbey record from Tulsa in 2017? c. What journal entry was made to convert to the equity method? d. What was the balance in Equity Investment at December 31, 2017?

Expert Solution

Under cost method ,only share in dividend is recognized as income whereas under equity method ,share in net income will be recognised as income .

A)Income abbey will record in 2016 = Dividend *% of holding

= 70000*.15

= $ 10500

b)Total holding in 2017 = 15%+25%= 40%

Income abbey record in 2017 =Net income* % of holding

= 420000*.40

= $ 168000

c)on conversion to equity method ,unrecognised share in net income of tulsa for year 2016 will be recognised as income to bring investment balance as per equity method.

Unrecognised share in net income = (income 2016 -dividend )*% of holding

= [330000-70000]*.15

= 39000

Date	Account	dEBIT	credit
1 jan 2017	Investment in tulsa	39000
	Share in retained earning of Tulsa		39000
	[being adjusting entry on conversion to equity method recorded]

d)

Beginning value of investment as on 1 jan 2016	210000
Adjustment to bring investment to cost method	39000

Adjusted beginning balance	249000
Additional investment	350000
Share in net income [420000*.40]	168000
less:Dividend received in 2017 [110000*.40]	-44000

balance in Equity Investment at December 31, 2017	723000

ekkarill92 answered 2 years ago

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