On 1/1/20x1, Palma Company acquires 25% investment in the voting common stock of Small Fish, Inc....

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On 1/1/20x1, Palma Company acquires 25% investment in the voting common stock of Small Fish, Inc. for $50,000. Palma Company accounts for their investment using the equity method. 1) If, for fiscal year-end 20x1, Small Fish, Inc. incurs a net loss of $250,000, how should Palma Company account for their share of Small Fish, Inc.'s net loss? 2) Suppose for fiscal year-end 20x2, Small Fish, Inc. incurs a net loss of $125,000. How should Palma Company account for their share of Small Fish, Inc.'s net loss? 3) Lastly, assume that Small Fish, Inc. returns to profitability and generates $300,000 of net income for fiscal year- end 20x3. How should Palma Company account for their share of Small Fish, Inc.'s 20x3 net income? Assume that Palma Company does not pay dividends during fiscal years 20x1, 20x2, and 20x3. (For this question, you do not have to prepare journal entries. Instead, you can explain your answer and show the effect on Palma Company's investment account) On 1/1/20x1, Palma Company acquires 25% investment in the voting common stock of Small Fish, Inc. for $50,000. Palma Company accounts for their investment using the equity method. 1) If, for fiscal year-end 20x1, Small Fish, Inc. incurs a net loss of $250,000, how should Palma Company account for their share of Small Fish, Inc.'s net loss? 2) Suppose for fiscal year-end 20x2, Small Fish, Inc. incurs a net loss of $125,000. How should Palma Company account for their share of Small Fish, Inc.'s net loss? 3) Lastly, assume that Small Fish, Inc. returns to profitability and generates $300,000 of net income for fiscal year- end 20x3. How should Palma Company account for their share of Small Fish, Inc.'s 20x3 net income? Assume that Palma Company does not pay dividends during fiscal years 20x1, 20x2, and 20x3. (For this question, you do not have to prepare journal entries. Instead, you can explain your answer and show the effect on Palma Company's investment account)

Answer rating: 100% (QA)

Step 1 Under equity method the amount of investment by the investor entity shall reduce such an amou... View the full answer