Small Company reported 2017 net income of $300,000 and paid dividends of $90,000 during the year....

Small Company reported 2017 net income of $300,000 and paid dividends of $90,000 during the year. Parker Inc. acquired 20% of Small's outstanding voting stock on January 1, 2017 for $630,000. At December 31, 2017, Parker determined the fair value of the shares in small to be $615,000. Parker reported operating income of $540,000.

instructions: Compute Parker's net income for 2017 assuming it uses the following methods to account for its investment.

a. equity method in accounting for its investment in Small

b. fair value method in accounting for its investment in Small

Expert Solution

a. Journal

No.	Account Name	Debit	Credit
1.	Investment in Small Company	$630000
	Cash		$630000
	(To record investment made)
2.	Investment in Small Company ($300000 x 20%)	60000
	Equity income in Small Company		60000
	(To record equity income in associate)
3.	Cash ($90000 x 20%)	18000
	Investment in Small Company		18000
	(To record dividend income of associate)
4.	Realized loss (630000-615000)	15000
	Investment in Small Company		15000
	(To record permanent decline in fair market value)

Calculation of Net Income

Operating income	$540000
Add: Equity income in Small Company	60000
Less: permanent decline in fair market value	(15000)
Parker's Net Income	$585000

b. Journal

No.	Account Name	Debit	Credit
1.	Investment in Small Company	$630000
	Cash		$630000
	(To record investment made)
2.	Cash ($90000 x 20%)	18000
	Dividends		18000
	(To record dividend income of associate)
3.	Realized loss (630000-615000)	15000
	Investment in Small Company		15000
	(To record permanent decline in fair market value)

Calculation of Net Income

Operating income	$540000
Add: Dividend receipt from Small Company	18000
Less: permanent decline in fair market value	(15000)
Parker's Net Income	$543000

ekkarill92 answered 1 year ago

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