$*$P$21\mathrm{.}11$B $($LO $5)($Fair Value to Equity Method with Goodwill$)$ On January $1,2025,$ Phipps Inc.

paid $$500,000$ for $20,000$ shares of Payson Company's voting common stock, which was a $10\%$ interest

in Payson. At that date, the net assets of Payson totaled $$4,000,000.$ The fair values of all of Payson's

identifiable assets and liabilities were equal to their book values. Phipps does not have the ability to exer$-$

cise significant influence over the operating and financial policies of Payson. Phipps received dividends

of $$1\mathrm{.}25$ per share from Payson on June $1,2025.$ Payson reported net income of $$340,000$ for the year

ended December $31,2025.$

On July $1,2026,$ Phipps paid $$1,900,000$ for $60,000$ additional shares of Payson Company's voting

common stock which represents a $30\%$ investment in Payson. The fair values of all of Payson's identi$-$

fiable assets net of liabilities were equal to their book values of $$5,400,000.$ As a result of this transac$-$

tion, Phipps has the ability to exercise significant influence over the operating and financial policies of

Payson. Phipps received dividends of $$1\mathrm{.}50$ per share from Payson on June $1,2026,$ and $$2\mathrm{.}00$ per share

on December $1,2026.$ Payson reported net income of $$520,000$ for the year ended December $31,2026,$

and $$325,000$ for the $6$ months ended December $31,2026.$

Instructions

a$.$ Prepare a schedule showing the income or loss before income taxes for the year ended December

$31,2025,$ that Phipps should report from its investment in Payson in its income statement issued in

March $2026.$

b$.$ During March $2027,$ Phipps issues comparative financial statements for $2025$ and $2026.$ Prepare

schedules showing the income or loss before income taxes for the years ended December $31,2025$

and $2026,$ that Phipps should report from its investment in Payson.

$($AICPA adapted$)$