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On January 1, Year 1, Parent Company buys 15% of Son Company for $300,000. Parent has the ability to assert significant influence over Son and does not elect the fair value method. During Year 1, Son reported net income of $160,000 and paid cash dividends of $25,000. What is the book value of Parent's investment in Son at the end of Year 1?
Parent must use the equity method to account for its investment in Son because it has the ability to exert significant influence over Son. Under the equity method, the balance in the investment account at the end of the year will be the beginning balance of $300K (equal to cost) + Parent's portion of Son's net income equal to $24K ($160K x 15% ownership) - Parent's portion of dividends paid of $3,750 ($25K x 15% ownership).
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Greg Company owns 75% of George Company's common stock. During the 3rd quarter of the current year, George sold inventory to Greg for $100,000. At the end of the current year, half of this purchase remains in Greg's inventory. For the current year, Greg's gross profit margin was 25% and George's gross profit margin was 40%. How much unrealized profit should be eliminated from ending inventory at year-end?
George must eliminate any gross profit recognized on sold inventory that still remains in Greg's possession. Thus the elimination would be calculated as $100K x 50% remaining in inventory x 40% GP margin.
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Which of the following, if received from an investee, will effect income reported by an investor using the equity method?
Under the equity method, dividends are not reported as income. Even a cash dividend would reduce the investment account rather than increasing income.
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ABC Company uses the equity method to account for its investment in DEF Co common stock. How should ABC record a 3% stock dividend received from DEF?
ABC should record the stock dividend received from DEF with a memorandum entry that reduces the unit cost of all DEF stock owned.
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ABC Inc is currently using the equity method to account for its 25% investment in DEF Inc. In the acquisition last year of DEF stock, ABC calculated $750,000 of goodwill. The correct accounting for this goodwill during the current year is:
Any goodwill created in an investment accounted for under the equity method is ignored. It is neither amortized nor tested for impairment. The entire investment is subject to the impairment test.
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Gerald Company purchased 30% of Randy Company's outstanding nonvoting preferred stock. How should this investment be recorded?
There is not significant influence in this situation so the fair value method is utilized. If there was more than 50% ownership, consolidation would be used and the equity method would only be used if there is significant influence.
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