Topic: Equity method investments LO 2 Delta Corporation acquired 25% of the voting stock of Davidson...

Topic: Equity method investments

LO 2

Delta Corporation acquired 25% of the voting stock of Davidson Company in 2019. There were no basis differences. It is now 2020. Davidson reported 2020 net income of $5,000,000, other comprehensive income of $100,000, and declared and paid cash dividends of $1,500,000. Delta’s ending inventory contains $1,020,000 purchased from Davidson, and its beginning inventory contains $750,000 purchased from Davidson. Davidson sells inventory to Delta at a markup of 20% on cost. Delta uses the equity method to account for its investment in Davidson.

Required

a. Calculate equity in net income of Davidson, reported on Delta’s 2020 income statement.

b. Prepare Delta’s 2020 journal entry or entries related to its investment in Davidson.

c. What is the net effect of the investment in Davidson on Delta’s 2020 net income and on Delta’s 2020 comprehensive income

Expert Solution

Part A

25% net income	25%*5000000	1250000
Unconfirmed profit on upstream ending inventory	25%* (1020000-(1020000/1.20))	(42500)
Confirmed profit on upstream beginning inventory	25%*(750000-(750000/1.20))	31250
Equity in net income		$1238750

Part B

No.	Account titles and explanation	Debit	Credit
1	Investment in Davidson (balancing figure)	888750
	Cash (1500000*25%)	375000
	Equity in OCL of Davidson (100000*25%)		25000
	Equity in NI of Davidson		1238750

Part C

Effect on net income	$1238750
Effect on comprehensive income (1238750+25000)	$1263750

ekkarill92 answered 2 years ago

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