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In: Accounting

Arm, Inc. acquired 15% of Waist Corporation on January 1, 2017, for $410,000 when the book...

Arm, Inc. acquired 15% of Waist Corporation on January 1, 2017, for $410,000 when the book value of Waist’s net assets was $1,050,000. During 2017, Waist reported net income of $230,000 and paid dividends of $90,000. On January 1, 2017, Arm purchased an additional 25% of Waist for $510,000. Any excess of cost over book value was attributable to goodwill (No amortization). On that same date, Arm changed to the equity method. During 2018, Waist reported net income of $480,000 and paid dividends of $100,000.

What type and amount of income(s) did Arm record from Waist in 2017? Please show calculations.

What type and amount of income(s) did Arm record from Waist in 2018? Please show calculations.

What journal entry was made to convert to the equity method?

What was the balance in the Equity Investment account at December 31, 2018? Please show calculations.

Solutions

Expert Solution

Only share in dividend is recognized as income under cost method whereas under equity method ,share in net income will be recognised as income .

Calculate the income of A from W in 2017:

Income of A in 2017 = Dividend *Percentage of holding

= $90,000*15%

= $13,500

Calculate the income of A from W in 2018:

Total holding in 2018 = 15%+25%= 40%

Income of A from W in 2018 = Net income * Percentage of holding

= 480,000 * 40%

= $ 192,000

On event conversion to equity method, unrecognised share in net income of W for year 2017 will be recognised as income to bring investment balance as per equity method.

Unrecognised share in net income = (Income of 2017 - Dividend ) * Percentage of holding

= [230,000-90,000] * 15%

= $21,000

Journal entry on the event of conversion to equity method:

Calulate the balance in equity investment account at Dec., 2018:

ekkarill92 answered 1 year ago
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