Question: Penston Company owns 40 percent 40 000 shares of Scranton Inc

Penston Company owns 40 percent (40,000 shares) of Scranton, Inc., which it purchased several years ago for $182,000. Since the date of acquisition, the equity method has been properly applied, and the book value of the investment account as of January 1, 2011, is $248,000. Excess patent cost amortization of $12,000 is still being recognized each year. During 2011, Scranton reports net income of $200,000, $320,000 in operating income earned evenly throughout the year, and a $120,000 extraordinary loss incurred on October 1. No dividends were paid during the year. Penston sold 8,000 shares of Scranton on August 1, 2011, for $94,000 in cash. However, Penston retains the ability to significantly influence the investee.
During the last quarter of 2010, Penston sold $50,000 in inventory (which it had originally purchased for only $30,000) to Scranton. At the end of that fiscal year, Scranton's inventory retained $9,000 (at sales price) of this merchandise, which was subsequently sold in the first quarter of 2011.
On Penston's financial statements for the year ended December 31, 2011, what income effects would be reported from its ownership in Scranton?

  • CreatedOctober 04, 2014
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