Question

On January 1, 2018, Pine Company owns 40 percent (124,000 shares) of Seacrest, Inc., which it purchased several years ago for $700,600. 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 $905,200. Excess patent cost amortization of $37,200 is still being recognized each year. During 2018, Seacrest reports net income of $846,000 and a $372,000 other comprehensive loss, both incurred uniformly throughout the year. No dividends were declared during the year. Pine sold 24,800 shares of Seacrest on August 1, 2018, for $236,528 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?

Answer 1

Answer:

A. Equity income $278,756

B. Other Comprehensive Loss ($136,400)

C. Gain on sale $37,177

Explanation:

Calculation to determine what income effects would be reported from its ownership in Seacrest

A. Calculation to determine the Equity Income In Seacrest, Inc.

EQUITY INCOME In Seacrest, Inc.

Investee income accrual—operations $310,200

$846,000 × 40% × 7/12 year $197,400

$846,000 × 32% × 5/12 year $112,800

Amortization ($34,100)

($21,700+$12,400)

$37,200 × 7/12 year $21,700

After 20 percent of stock is sold $12,400

[ (24,800 ÷ 124,000 shares): $37,200 × 80% × 5/12 year]

Recognition of unrealized gross profit

Remaining inventory—12/31/17

$16,600

Gross profit percentage on original 40%

sale($($54,000-$32,400) ÷ $54,000)

Gross profit remaining in inventory $6,640

($16,600*40%)

Ownership percentage 40%

Intra-entity gross profit recognized in 2018 $2,656

(40%*$6,640)

Equity income in Seacrest, Inc $278,756

($310,200-$34,100+$2,656)

B. Calculation to determine Other comprehensive loss—Seacrest, Inc.

OTHER COMPREHENSIVE LOSS—Seacrest, Inc.

1/1/18 to 8/1/18 ($372,000 × 40% × 7/12 year) $86,800

8/1/18 to 12/31/18 ($372,000 × 32% × 5/12 year) $49,600

Other Comprehensive Loss—Seacrest, Inc ($136,400)

($86,800+$49,600)

C. Calculation to determine Gain on Sale of Investment in Seacrest, Inc.

GAIN ON SALE OF INVESTMENT in Seacrest, Inc.

Book value—investment in Seacrest, Inc.—1/1/18

$905,200

Investee income accrual—1/1/18 – 8/1/18 $197,400

Investee other comprehensive loss 1/1/18 – 8/1/18 ($86,800)

Amortization—1/1/18 – 8/1/18 ($21,700)

Recognition of deferred profit $2,656

Investment in Seacrest book value 8/1/18 $996,756

(905,200+197,400-$86,800-$21,700+$2,656)

Percentage of investment sold 20%

(24,800 ÷ 124,000 shares)

Book value of shares being sold $199,351

(20%*996,756)

Proceeds from sale of shares $236,528

Gain on sale of 24,800 shares of Seacrest $37,177

($236,528-$199,351)

Therefore On Pine's financial statements for the year ended December 31, 2018 the income effects that would be reported from its ownership in Seacrest are:

A. Equity income $278,756

B. Other Comprehensive Loss ($136,400)

C. Gain on sale $37,177