On January 1, 2018, Pine Company owns 40 percent (40,000 shares) of Seacrest, In
ID: 2508849 • Letter: O
Question
On January 1, 2018, Pine Company owns 40 percent (40,000 shares) of Seacrest, Inc., which it purchased several years ago for $182,000. 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 $293,600. Excess patent cost amortization of $12,000 is still being recognized each year. During 2018, Seacrest reports net income of $342,000 and a $120,000 other comprehensive loss, both incurred uniformly throughout the year. No dividends were declared during the year. Pine sold 8,000 shares of Seacrest on August 1, 2018, for $93,000 in cash. However, Pine retains the ability to significantly influence the investee. During the last quarter of 2017, Pine sold $50,000 in inventory (which it had originally purchased for only $30,000) to Seacrest. At the end of that fiscal year, Seacrest's inventory retained $10,000 (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? (Round your answers to the nearest whole dollar.)
Other Comprehensive Loss is what?
Gain on Sale of Investment is what?
Equity Income is what?
Explanation / Answer
Answer:
Calculation of other comprehensive loss
Seacrest, Inc. 1/1/18 to 8/1/18 ($120,000 × 40% × 7/12 year) (28,000)
8/1/18 to 12/31/18 ($120,000 × 32% × 5/12 year) (16,000)
Total Other Comprehensive Loss $(44,000)
Calculation of gain on Sale of Investment
Book value—investment in Seacrest, Inc.—1/1/18 $293,600
Investee income accrual—1/1/18 – 8/1/18 (Note 1) $79,800
Investee other comprehensive loss 1/1/18 – 8/1/18 (28,000)
Amortization—1/1/18 – 8/1/18 (Note 2) (7,000)
Recognition of deferred profit (Note 3) 1,600
Investment in Seacrest book value 8/1/18 $340,000
Percentage of investment sold (8,000 ÷ 40,000 shares) × 20%
Book value of shares being sold $ 68,000
Proceeds from sale of shares 93,000
Gain on sale of 8,000 shares of Seacrest $ 25,000
Note 1
Investee income accrual—operations
$342,000 × 40% × 7/12 year $79,800
$342,000 × 32% × 5/12 year 45,600
Total $125,400
Note 2
Amortization
$12,000 × 7/12 year $7,000
After 20 percent of stock is sold (8,000 ÷ 40,000shares):
$12,000 × 80% × 5/12 year 4,000
Total (11,000)
Note 3
Recognition of unrealized gross profit
Remaining inventory—12/31/17 $10,000
Gross profit percentage on original sale ($20,000 ÷ $50,000) × 40%
Gross profit remaining in inventory $4,000
Ownership percentage × 40%
Intra-entity gross profit recognized in 2018 1,600
Calculation of Equity Income
1. Investee income accrual- Operations $125400
2.Amortization (11000)
3.Recognition of unrealized gross profit 1600
Total Equity Income $116000
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