Hanson Corporation purchases a 10 interest in Novic Company on
Hanson Corporation purchases a 10% interest in Novic Company on January 1, 2016, and an additional 15% interest on January 1, 2018. These investments cost Hanson Corporation $80,000 and $110,000, respectively.
The following stockholders’ equities of Novic Company are available:
Any excess of cost over book value on the original investment is attributed to goodwill. Any excess on the second purchase is attributable to equipment with a 4-year life. Novic Company has income of $30,000, $30,000, and $40,000 for 2016, 2017, and 2018, respectively. Novic pays dividends of $0.20 per share in 2017 and 2018. Ignore income tax considerations, and assume equity method adjusting entries are made at the end of the calendar year only.
1. Prepare the cost-to-equity conversion entry on January 1, 2018, when Hanson’s investment in Novic Company first exceeds 20%. Any supporting schedules should be in good form.
2. Prepare the December 31, 2018, equity adjustment on Hanson’s books. Provide supporting calculations in good form.
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