FAR Part 4 Module 2 Incorrect(s)/Confusing

Grant Inc. acquired 30% of South Co.'s voting stock for $200,000 on January 2, Year 1. Grant's 30% interest gave Grant the ability to exercise significant influence over South's operating and financial policies. During Year 1, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the six months ended June 30, Year 2 and $200,000 for the year ended December 31, Year 2. On July 1, Year 2, Grant sold half its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, Year 2. In its Year 2 income statement, what amount should Grant report as gain from the sale of half its investment?

Purchase price: $200,000 + Year 1 Income (80,000 * 0.30): + 24,000 - Year 1 Dividends (50,000 * 0.30): - 15,000 = Balance at 12/31/Year 1: $209,000 + Year 2 Income: (100,000 * 0.30): +30,000 = 6/30/Year 2 Balance: $239,000 * 50% sold: $119,500 Selling price: $150,000 = Gain on sale: $30,500

Peel Co. received a cash dividend from a common stock investment. Should Peel record an increase in the investment account if it uses the fair value method of accounting or the equity method of accounting? Fair Value: Yes/No Equity: Yes/No

Fair Value: NO Under the fair value method, receipt of a dividend is recorded as income and does not affect the investment account. Equity method: NO Under the equity method, receipt of a dividend is recorded as a decrease in the investment account.

Puff Co. acquired 40% of Straw, Inc.'s voting common stock on January 2, Year 1 for $400,000. The carrying amount of Straw's net assets at the purchase date totaled $900,000. Fair values equaled carrying amounts for all items except equipment, for which fair values exceeded carrying amounts by $100,000. The equipment has a five-year life. During Year 1, Straw reported net income of $150,000. What amount of income from this investment should Puff report in its Year 1 income statement?

Fair value amortization $100,000 * 40% share owned by Puff = $40,000/5 years = $8,000 a year. Puff's share of Straw's income $150,000 * 0.40 = $60,000 (Excess FV amortization) (8,000) = $52,000 in equity method investment income

Pare Inc. purchased 10% of Tot Co.'s 100,000 outstanding shares of common stock on January 2, Year 1, for $50,000. On December31, Year 1, Pare purchased an additional 20,000 shares of Tot for $150,000. There was no goodwill as a result of either acquisition, and Tot had not issued any additional stock during Year 1. Tot reported earnings of $300,000 for Year 1. What amount should Pare report in its December 31, Year 1, balance sheet as investment in Tot?

$200,000 On 12/31 the total carrying value is $200,000 ($50,000 original cost + $150,000 additional shares purchased). Pare will use the equity method starting on December 31, Year 1, and will add its share to Tot's earnings in the subsidiary beginning in Year 2.

On January 1, Year 2, Point Inc. purchased 10% of Iona Company's common stock. Point purchased additional shares bringing its ownership up to 40% of Iona's common stock on August 1, Year 2. During October, Year 2, Iona declared and paid a cash dividend on all of its outstanding common stock. How much income from the Iona investment should Point's Year 2 income statement report?

40% of Iona's income from August 1st to December 31st, Year 2 only. When significant influence is acquired, the equity method is adopted from that date and going forward. Retroactive adjustments are not required. Therefore, Point will use the equity method beginning on August 1st, Year 2, and will recognize 40% of Iona's income from August 1st to December 31 on its Income Statement.

On July 1, Year 1, Denver Corp. purchased 3,000 shares of Eagle Co.'s 10,000 outstanding shares of common stock for $20 per share. On December 15, Year 1, Eagle paid $40,000 in dividends to its common stockholders. Eagle's net income for the year ended December31,Year 1, was $120,000, earned evenly throughout the year. In its Year 1 income statement, what amount of income from this investment should Denver report?

Eagle's Year 1 income: $120,000 * 30% = $36,000 * (6/12 months) = Income from investment in Eagle: $18,000

Moss Corp. owns 20% of Dubro Corp.'s preferred stock and 40% of its common stock. Dubro's stock outstanding at December 31, Year 1, is as follows: 10% cumulative preferred stock $100,000 Common stock 700,000 Dubro reported net income of $60,000 and paid dividends of $10,000 to its preferred shareholders for the year ended December 31, Year 1. How much total revenue should Moss record due to its investment in Dubro?

Preferred Stock $100,000 * 10% = $10,000 dividends $10,000 dividends * 20% ownership = $2,000 dividends received. Common Stock Net Income: $60,000 (Preferred Dividends) (10,000) = Net Income available to common shareholders: $50,000 * 0.40 = $20,000 equity in earnings