Small Company reported 20X7 net income of $43,000 and paid dividends of $14,000 during the year....

Small Company reported 20X7 net income of $43,000 and paid dividends of $14,000 during the year. Mock Corporation acquired 30 percent of Small's shares on January 1, 20X7, for $99,000. At December 31, 20X7, Mock determined the fair value of the shares of Small to be $127,000. Mock reported operating income of $81,000 for 20X7.

Required:

Compute Mock's net income for 20X7 assuming it

a. Carries the investment in Small at fair value.

b. Uses the equity method of accounting for its investment in Small.


a.	Net income (fair value method)
b.	Net income (equity method)

Solutions

Expert Solution

a.	Net income (fair value method)	$ 113,200
b.	Net income (equity method)	$ 93,900

Working:

	Fair Value Method	Equity Method
Operating income	81000	81000
Dividend revenue (30% x $14000)	4200	0
Unrealized holding gain ($127000 - $99000)	28000	0
Investment income (30% x $43000)	0	12900
Net income $	113200	93900

ekkarill92 answered 2 years ago

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