Question

On January 1, 2018, Pine Company owns 40 percent (80,000 shares) of Seacrest, Inc., which it purchased several years ago for $448,000. 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 $580,000. Excess patent cost amortization of $24,000 is still being recognized each year. During 2018, Seacrest reports net income of $582,000 and a $240,000 other comprehensive loss, both incurred uniformly throughout the year. No dividends were declared during the year. Pine sold 16,000 shares of Seacrest on August 1, 2018, for $168,759 in cash. However, Pine retains the ability to significantly influence the investee. During the last quarter of 2017, Pine sold $60,000 in inventory (which it had originally purchased for only $36,000) to Seacrest. At the end of that fiscal year, Seacrest's inventory retained $13,900 (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?

Answer 1

Ans- The effect of equity income can be shown as follows;-

Income effects for year ending December 31,2018

Equity Income in Seacrest, Inc.(Schedule 1)		$193,624
Other Comprehensive Loss-Seacrest,Inc.
1/1/18 to 8/1/18 ($240,000*40%*7/12)	-$56,000
8/1/18 to 12/31/18 ($240,000*32%*5/12)	-$32,000	-$88,000
Gain on sale of sale of 16,000 shares of Seacrest (Schedule 2)		$39,154

Schedules can be shown as follows:

Schedule-1 Equity Income in Seacrest, Inc.

Investee income accural- operations
$582,000*40%*7/12 year	$135,800
$582,000*32%*5/12 year	$77,600	$213,400
Amortization
$24,000*7/12 year	$14,000
After 20 percent of stock is sold (16,000/80,000 shares): $24,000*80%*5/12 year	$8,000	-$22,000
Recognition of intra-entity gross profit
Remaining inventory-12/31/17	$13,900
Gross profit percentage on original sale
($24,000/$60,000)	*40%
Gross profit remaining in inventory	$5,560
Ownership percentage	*40%
Intra-entity gross profit recognised in 2018		$2,224
Equity Income in Seacrest,Inc.		$193,624

Schedule 2- Gain on Sale of Investment in Seacrest,Inc.

Book value-Investment in Seacrest,Inc.-1/1/18 (Given)	$580,000
Investee Income Accrual-1/1/18-8/1/18 (Schedule-1)	$135,800
Investee other comprehensive loss 1/1/18-8/1/18 ($240,000*40%*7/12)	-$56,000
Amortization-1/1/18-81/1/18 (Schedule 1)	-$14,000
Recognition of deferred profit (Schedule 1)	$2,224
Investment in Seacrest book value 8/1/18	$648,024
Percentage of investment sold (16,000/80,000 shares)	*20%
Book value of shares being sold	$129,605
Proceeds from sale of shares	$168,759
Gain on sale of 16,000 shares of Seacrest	$39,154

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