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On January 1, 2018, Pine Company owns 40 percent (132,000 shares) of Seacrest, Inc., which it...

On January 1, 2018, Pine Company owns 40 percent (132,000 shares) of Seacrest, Inc., which it purchased several years ago for $726,000. Since the date of acquisition, the equity method has been properly applied, and the carrying amount of the investment account as of January 1, 2018, is $943,800. Excess patent cost amortization of $39,600 is still being recognized each year. During 2018, Seacrest reports net income of $894,000 and a $396,000 other comprehensive loss, both incurred uniformly throughout the year. No dividends were declared during the year. Pine sold 26,400 shares of Seacrest on August 1, 2018, for $237,989 in cash. However, Pine retains the ability to significantly influence the investee. During the last quarter of 2017, Pine sold $73,000 in inventory (which it had originally purchased for only $43,800) to Seacrest. At the end of that fiscal year, Seacrest's inventory retained $9,800 (at sales price) of this merchandise, which was subsequently sold in the first quarter of 2018. On Pine's financial statements for the year ended December 31, 2018, what income effects would be reported from its ownership in Seacrest? (Do not round intermediate calculations. Round your answers to the nearest whole dollar.)

Equity Income............

Other comprehensive loss.........

Gain of sale on investment..........

Solutions

Expert Solution

Part 1

Equity Income in Seacrest, Inc.

Investee income accrual—operations

$894,000 × 40% × 7/12 year

208600

$894,000 × 32% × 5/12 year

119200

327800

Amortization

$39600 × 7/12 year

23100

After 20 percent of stock is sold (26400 ÷ 132000 shares): $39600 × 80% × 5/12 year

13200

(36300)

Recognition of unrealized gross profit

Remaining inventory—12/31/17

9800

Gross profit percentage on original sale($(73000-43800) ÷ $73,000)

40%

Gross profit remaining in inventory

3920

Ownership percentage

40%

Intra-entity gross profit recognized in 2018

1568

Equity income in Seacrest, Inc

$293068

Part 2

Other comprehensive loss—Seacrest, Inc.

1/1/18 to 8/1/18 ($396,000 × 40% × 7/12 year)

92400

8/1/18 to 12/31/18 ($396,000 × 32% × 5/12 year)

5280

(97680)

Part 3

Gain on Sale of Investment in Seacrest, Inc.

Book value—investment in Seacrest, Inc.—1/1/18

943800

Investee income accrual—1/1/18 – 8/1/18

208600

Investee other comprehensive loss 1/1/18 – 8/1/18

(92400)

Amortization—1/1/18 – 8/1/18

(23100)

Recognition of deferred profit

1568

Investment in Seacrest book value 8/1/18

1038468

Percentage of investment sold (26400 ÷ 13200 shares)

20%

Book value of shares being sold

207694

Proceeds from sale of shares

237989

Gain on sale of 26400 shares of Seacrest

$30295

ekkarill92 answered 1 year ago
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