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In: Accounting

On January 1, 2018, Pine Company owns 40 percent (56,000 shares) of Seacrest, Inc., which it...

On January 1, 2018, Pine Company owns 40 percent (56,000 shares) of Seacrest, Inc., which it purchased several years ago for $312,200. 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 $404,600. Excess patent cost amortization of $16,800 is still being recognized each year. During 2018, Seacrest reports net income of $438,000 and a $168,000 other comprehensive loss, both incurred uniformly throughout the year. No dividends were declared during the year. Pine sold 11,200 shares of Seacrest on August 1, 2018, for $133,707 in cash. However, Pine retains the ability to significantly influence the investee. During the last quarter of 2017, Pine sold $54,000 in inventory (which it had originally purchased for only $32,400) to Seacrest. At the end of that fiscal year, Seacrest's inventory retained $16,600 (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 on sale of investment_______

Solutions

Expert Solution

1. Compute equity income in S Inc.,
Particulars Amount Amount
Accrued investment income during 2018:
         From January 1 to July 31 ($438,000 × 40%) × 7 ÷ 12 $102,200
         From August 1 to December 31 ($438,000 × 32%) × 5 ÷ 12 $58,400
$160,600
Less: Amortization of excess patent cost:
         From January 1 to July 31 ($16,800 × 7 ÷ 12) ($9,800)
         From August 1 to December 31 ($16,800 × 80% × 5 ÷ 12) ($5,600)
                          Total amortization ($15,400)
Add: Deferred gross profit on inventory sold:
Inventory balance $16,600
Gross profit percentage ($54,000 − $32,400) − $54,000 40%
$6,640
Ownership percentage 40%
                 Deferred gross profit recognized in the first quarter $2,656
            Total equity income $147,856
2. Compute other comprehensive loss in S Inc.,
Particulars Amount Amount
From January to July 31 ($168,000 × 40%) × 7 ÷ 12 $39,200
From August to December 31 ($168,000 × 32%) × 5 ÷ 12 $22,400
                    Total other comprehensive loss $61,600
3. Compute gain on sale of investment in S Inc.,
Particulars Amount Amount
Sale price of investment $133,707
Book value of investment $404,600
Accrued investment income up to July 31 $102,200
Deduct: Other comprehensive loss up to July 31 ($39,200)
Deduct: Amortization up to July 31 ($9,800)
Deferred gross profit recognized $2,656
         Book value of the investment on July 31 $460,456
×   Percentage of investment sold ( (11,200 ÷ 56,000) 20%
                   Book value of investment sold $92,091
            Gain on sale of investment $41,616

ekkarill92 answered 1 year ago
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