Question

On January 1, 2018, Pine Company owns 40 percent (40,000 shares) of Seacrest, Inc., which it purchased several years ago for $182,000. 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 $293,600. Excess patent cost amortization of $12,000 is still being recognized each year. During 2018, Seacrest reports net income of $342,000 and a $120,000 other comprehensive loss, both incurred uniformly throughout the year. No dividends were declared during the year. Pine sold 8,000 shares of Seacrest on August 1, 2018, for $93,000 in cash. However, Pine retains the ability to significantly influence the investee. During the last quarter of 2017, Pine sold $50,000 in inventory (which it had originally purchased for only $30,000) to Seacrest. At the end of that fiscal year, Seacrest's inventory retained $10,000 (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? (Round your answers to the nearest whole dollar.)

Other Comprehensive Loss is what?

Gain on Sale of Investment is what?

Equity Income is what?

Answer 1

Answer:

Calculation of other comprehensive loss

Seacrest, Inc. 1/1/18 to 8/1/18 ($120,000 × 40% × 7/12 year)                                   (28,000)

8/1/18 to 12/31/18 ($120,000 × 32% × 5/12 year)                                                      (16,000)

Total Other Comprehensive Loss                                                                               $(44,000)

Calculation of gain on Sale of Investment

Book value—investment in Seacrest, Inc.—1/1/18                                                                $293,600

Investee income accrual—1/1/18 – 8/1/18 (Note 1)                                                               $79,800

Investee other comprehensive loss 1/1/18 – 8/1/18                                                                 (28,000)

Amortization—1/1/18 – 8/1/18 (Note 2)                                                                                (7,000)

Recognition of deferred profit (Note 3)                                                                                 1,600

Investment in Seacrest book value 8/1/18                                                                              $340,000

Percentage of investment sold (8,000 ÷ 40,000 shares)                                                         × 20%

Book value of shares being sold                                                                                             $ 68,000

Proceeds from sale of shares                                                                                                   93,000

Gain on sale of 8,000 shares of Seacrest                                                                              $ 25,000

Note 1

Investee income accrual—operations

$342,000 × 40% × 7/12 year                                                                                       $79,800

$342,000 × 32% × 5/12 year                                                                                       45,600

Total                                                                                                                            $125,400

Note 2

Amortization

$12,000 × 7/12 year                                                                                                    $7,000

After 20 percent of stock is sold (8,000 ÷ 40,000shares):

$12,000 × 80% × 5/12 year                                                                                         4,000

Total                                                                                                                           (11,000)

Note 3

Recognition of unrealized gross profit

Remaining inventory—12/31/17                                                                                 $10,000

Gross profit percentage on original sale ($20,000 ÷ $50,000)                                                × 40%

Gross profit remaining in inventory                                                                            $4,000

Ownership percentage                                                                                                            × 40%

Intra-entity gross profit recognized in 2018                                                                        1,600

Calculation of Equity Income

1. Investee income accrual- Operations                                                                      $125400

2.Amortization                                                                                                            (11000)

3.Recognition of unrealized gross profit                                                                    1600

Total Equity Income                                                                                                 $116000