Asked by Hunter Kinnett on May 21, 2024
Verified
Steven Company owns 40% of the outstanding voting common stock of Nicholas Corp. and has the ability to significantly influence the investee's operations. On January 4, 2021, the balance in the Investment in Nicholas Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2021, Nicholas earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2020, Nicholas had sold inventory costing $35,000 to Steven for $50,000. All but 25% of that inventory had been sold to outsiders by Steven during 2020; the remainder was sold in 2021. Additional sales were made to Steven in 2021 at an intra-entity selling price of $75,000. The goods in the intra-entity sales cost Nicholas $54,000. Only 10% of the 2021 intra-entity purchases from Nicholas had not been sold to outsiders by the end of 2021.What was the balance in the Investment in Nicholas Corp. account at December 31, 2021?
Amortization
The process of gradually writing off the initial cost of an asset over its useful life.
Equity Income
Equity income refers to the earnings generated from investments in the stock of other companies, typically accounted for using the equity method.
Intra-entity Sales
Transactions occurring between the departments or divisions within the same company, often used for internal accounting or transfer pricing.
- Comprehend and implement the equity method in accounting for investments.
- Construct journal records pertaining to investments under the equity method, encompassing the initial acknowledgment, acknowledgment of net income or loss from the investee, and dividends received.
- Identify and adjust for other comprehensive income or loss when applying the equity method.
Verified Answer
CD
Learning Objectives
- Comprehend and implement the equity method in accounting for investments.
- Construct journal records pertaining to investments under the equity method, encompassing the initial acknowledgment, acknowledgment of net income or loss from the investee, and dividends received.
- Identify and adjust for other comprehensive income or loss when applying the equity method.