Question

Accounting for Investments Using the Cost and Equity Methods

On 1/1/x1, Omega Corporation’s net worth was as follows:

Common stock (15,000 shares, $10 par value)                                             $150,000

Additional paid-in capital                                                                             30,000

Retained Earnings                                                                                          60,000            

    Total                                                                                                          $240,000           

On 1/1/14, Alpha, Inc. purchased 3,000 shares of Omega Corporation at a price of $29 per share. Omega Corporation’s equity securities are not readily marketable. Alpha could not attribute any of the excess cost over book value to any specific Omega assets and considered this excess to be goodwill.

Omega’s earnings and dividends for the next three years were as follows:

Year                                     Net Income                                             Dividends

20x1                                        10,000                                                6,000

20x2                                        25.000                                             30,000

20x3                                       80,000                                             40,000

Required:

Complete the following table, assuming that Alpha, Inc. had significant influence over Omega Corporation.

For Alpha, Inc.’s financial statements: Year	Balance sheet amount reported for Investment in Omega Corporation at end of 12/31	Income statement amount reported for Investment Income from Omega Corporation for the fiscal year ended 12/31
20x1
20x2
20x3

Complete the following table, assuming that Alpha, Inc. did not have significant influence over Omega Corporation:

For Alpha, Inc.’s financial statements: Year	Balance sheet amount reported for Investment in Omega Corporation at end of 12/31	Income statement amount reported for Investment Income from Omega Corporation for the fiscal year ended 12/31
20x1
20x2
20x3

Attach an Accounting for Investments Using the Cost and Equity Methods

On 1/1/x1, Omega Corporation’s net worth was as follows:

Common stock (15,000 shares, $10 par value)                                             $150,000

Additional paid-in capital                                                                             30,000

Retained Earnings                                                                                          60,000            

    Total                                                                                                          $240,000           

On 1/1/14, Alpha, Inc. purchased 3,000 shares of Omega Corporation at a price of $29 per share. Omega Corporation’s equity securities are not readily marketable. Alpha could not attribute any of the excess cost over book value to any specific Omega assets and considered this excess to be goodwill.

Omega’s earnings and dividends for the next three years were as follows:

Year                                     Net Income                                             Dividends

20x1                                        10,000                                                6,000

20x2                                        25.000                                             30,000

20x3                                       80,000                                             40,000

Required:

Complete the following table, assuming that Alpha, Inc. had significant influence over Omega Corporation.

For Alpha, Inc.’s financial statements: Year	Balance sheet amount reported for Investment in Omega Corporation at end of 12/31	Income statement amount reported for Investment Income from Omega Corporation for the fiscal year ended 12/31
20x1
20x2
20x3

Complete the following table, assuming that Alpha, Inc. did not have significant influence over Omega Corporation:

For Alpha, Inc.’s financial statements: Year	Balance sheet amount reported for Investment in Omega Corporation at end of 12/31	Income statement amount reported for Investment Income from Omega Corporation for the fiscal year ended 12/31
20x1
20x2
20x3

Attach an Excel spreadsheet containing documentation to support the above reported amounts.Excel spreadsheet containing documentation to support the above reported amounts.

Answer 1

1...Alpha, Inc. had significant influence over Omega Corporation.
	Journal entries (Equity method)
On Investment in Omega Corp.
1/1/20X1	Investment in Omega Corp.	87000
	Cash		87000
Proportionate Net Income for 20X1
12/31/20X1	Investment in Omega Corp.	2000
	Invetment income		2000
	(3000/15000=1/5*10000)
Proportionate Dividends for 20X1
12/31/20X1	Cash	1200
	Investment in Omega Corp.		1200
	(1/5*6000)
Proportionate Net Income for 20X2
12/31/20X2	Investment in Omega Corp.	5000
	Invetment income		5000
	(3000/15000=1/5*25000)
Proportionate Dividends for 20X2
12/31/20X2	Cash	6000
	Investment in Omega Corp.		6000
	(1/5*30000)
Proportionate Net Income for 20X3
12/31/20X3	Investment in Omega Corp.	16000
	Invetment income		16000
	(3000/15000=1/5*80000)
Proportionate Dividends for 20X3
12/31/20X3	Cash	8000
	Investment in Omega Corp.		8000
	(1/5*40000)

For Alpha, Inc.’s financial statements:
Year ended Dec.31	Balance sheet amount reported for Investment in Omega Corporation at end of 12/31	Income statement amount reported for Investment Income from Omega Corporation for the fiscal year ended 12/31
20X1	87800	2000
20X2	86800	5000
20X3	94800	16000
87000+2000-1200=	87800
87800+5000-6000=	86800
86800+16000-8000=	94800

2...Alpha, Inc. has no significant influence over Omega Corporation.
	Journal entries ( Cost method)
On Investment in Omega Corp.
1/1/20X1	Investment in Omega Corp.	87000
	Cash		87000
Proportionate Dividends for 20X1
12/31/20X1	Cash	1200
	Dividend Income		1200
	(1/5*6000)
Proportionate Dividends for 20X2
12/31/20X2	Cash	6000
	Dividend Income		6000
	(1/5*30000)
Proportionate Dividends for 20X3
12/31/20X3	Cash	8000
	Dividend Income		8000
	(1/5*40000)

For Alpha, Inc.’s financial statements:
Year ended Dec.31	Balance sheet amount reported for Investment in Omega Corporation at end of 12/31	Income statement amount reported for Investment Income from Omega Corporation for the fiscal year ended 12/31
20X1	87000	1200
20X2	87000	6000
20X3	87000	8000