Pedro purchased 100% of the common stock of the Sanburn Company on January 1, 20

Question

Pedro purchased 100% of the common stock of the Sanburn Company on January 1, 20X1, for $500,000. On that date, the stockholders' equity of Sanburn Company was $380,000.On the purchase date, inventory of Sanburn Company, which was sold during 20X1, was understated by $20,000. Any remaining excess of cost over book value is attributable to patent with a 20-year life. The reported income and dividends paid by Sanburn Company were as follows:

20X1

Net income

$80,000

Dividends paid

Using the simple equity method, which of the following amounts on the parent's books are correct?

10,000

  Subsidiary Income      Investment Account Balance

    20X1                    December 31, 20X1

a.

$80,000                  $570,000

b.

$70,000                  $570,000

c.

$70,000                  $550,000

d.

$80,000                  $550,000

You MUST explain how you arrived at the answer.

20X1

Net income

$80,000

Dividends paid

Using the simple equity method, which of the following amounts on the parent's books are correct?

10,000

Explanation / Answer

Answer seems to be A

Pedro holds 100% of common stock & therby, significant influence is held on 01st Jan 20X1.

Using Simple equity method, Net income of $80,000 from subsidiary is recognized, along with an increase in the investment in books of Pedro. Dividends are reported by Sanburn as a $10,000 reduction in the investment and not as income .

Unrealized gains and losses on available-for-sale securities should be adjusted in other comprehensive income A/c

The investment balance grows at a rate of $70,000 ($80,000 increase less $10,000 decrease )so that it is reported as $5,70,000 at the year end

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