Question

In: Accounting

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

Solutions

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


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