Black paid $300,000 for 20,000 (25%) of the outstanding shared of White Limited on January 1, Year-5.
Question:
Black paid $300,000 for 20,000 (25%) of the outstanding shared of White Limited on January 1, Year-5. During Year-5, White paid dividends of $50,000 and reported other comprehensive income (OCI) of $20,000 and profit as follows:
Profit before discontinued operations $350,000
Discontinued operations loss (net of tax) (30,000)
Profit $320,000
Black’s profit for Year-5 is calculated on $1,000,000 in sales, expenses of $ 150,000, income tax expenses of $375,000, and its investment income from White. Both companies have an income tax rate of 40%.
Required:
1) Assume that Black is a public company, has significant influence over White and reports its investment using the equity method to account for this investment:
a. Prepare all the journal entries necessary to account for Black’s investment for Year-5.
b. Determine the correct balance in Black’s investment account at December 31, Year-5.
c. Prepare an income statement for Black for Year-5.
2) Assume Black is a private company, has significant influence and chooses to use the cost method to account for its investment in White:
a. Prepare all the journal entries necessary to account for Black’s investment for Year-5
b. Determine the correct balance in Black’s investment account at December 31, Year-5.
c. Prepare an income statement for Black for year-5.
Expert Answer:
The company who have significant control over other company needed to record investments in othe... View the full answer
