[Anonymous]

I am working on the becker’s questions, and 2 of the questions from the Cost to Equity Method are really confuse me.

Can anyone tell me why these 2 questions get 2 difference treatment from Cost to Equity?

Question 1 asks the treatment for the income from the Sub on Parent’s income statement. Question 2 asks simply asks the balance sheet treatment.

The question 1 reports partd of the pro-rated Sub’s income on Parent’s Income Statement, however, on question 2. the parent company reports the whole amount of income from sub into the parent’s balance sheet.

My understanding of the JE for Equity Investment is

Investment <<<< Balance Sheet

………..Equity in Earning <<<< Income Statement

After I done these 2 question, I am confuse because

Investment <<<< balance sheet gets the whole amount report?

…….Equity in Earning <<<< get the pro-rated amount from the month become equity method?

…….<<<Something Missing Here?>>>

Can anybody please explain why they use 2 different treatments in these 2 questions?

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Question.1

On January 1, 1992, Point, Inc. purchased 10% of Iona Co.’s common stock. Point purchased additional

shares bringing its ownership up to 40% of Iona’s common stock outstanding on August 1, 1992. During

October 1992, Iona declared and paid a cash dividend on all of its outstanding common stock. How

much income from the Iona investment should Point’s 1992 income statement report?

a. 10% of Iona’s income for January 1 to July 31, 1992, plus 40% of Iona’s income for August 1 to

December 31, 1992.

b. 40% of Iona’s income for August 1 to December 31, 1992 only.

c. 40% of Iona’s 1992 income.

d. Amount equal to dividends received from Iona.

Answer: A

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Question.2

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?

a. $170,000

b. $200,000

c. $230,000

d. $290,000

Answer: C

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[icanhazcpa]

The answer to the second question is C because you only take the percentage of ownership that you had at that time. So you add up both of what you paid so that gets to the 200, then take 10% of the earnings because that's the ownership you had during the year. You still have to claim it because you're equity method now at year end, but you don't get to claim what wasn't yours during that time.

OK for the first one, you have to look at the dates. The second one is more straight forward because it's at year end. But when the move from cost to equity occurs during the year you have to go back and take your share of earnings at the percent you had at the time. Luckily you don't have to calculate that out in that problem.

Honestly thinking of those in journal entries doesn't make sense to me, I just think about it like I've outlined above. Hope it helps, but really the only time I put down a JE for a MCQ is when working with stocks, bonds, and leases.

BEC - 83
FAR - 83
REG - 74, 78
AUD - 76

Becker Self Study

[mb0363]

In question 2, does anyone know how theyre calculating the ownership percentages?

I thought ownership was based on shares and since he only purchased 20,000 more shares this increased his ownership percentage to 12% which would be the cost method. (If 100k shares = 10% an additional 20 would be 2%)

Thanks!

BEC - PASS
AUDIT - PASS
REG - PASS
FAR - PASS

[Anonymous]

^ You misread the Q. Pare purchased additional 20k of shares so that is additional 20% ownership bring up the total to 30%. This would warrant the use of equity method but sicne the 20% was acquired on Dec 31, you'd apply the equity method to the 10% owned throughtout the year.

So total investment would be $50K + $150K + $30K = $230K

[mb0363]

Hah…Wouldn't be the first time!

Got it. Thank you so much!

BEC - PASS
AUDIT - PASS
REG - PASS
FAR - PASS

[Author]

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