The following information pertains to the entity P and consolidated subsidiary S. P has owned 100% of S since 1/1 2018. On that date, S had common stock and retained earnings of $10,000 and $20,000 respectively. The purchase price was $35,000 due to the existence of an undervalued patent with a remaining economic life of 5 years. S net income and dividends since acquisition are reported below. P uses the cost method to account for its investment in S.

Compute:

1. Investment income reported under the cost method
2. Investment income reported under the full equity method
3. Adjusrments to 1/1 consolidated retained earnings arising from P’s use of the cost method that are needed to bring consolidated 1/1 RE each year to its GAAP value

Year	S Net Income	Dividends	Cost Income	Equity Income	Adjustment to 1/1 RE
2018	4,000	1,000	NA
2019	5,000	2,000
2020	6,000	3,000
1/1/21 RE adj	NA	NA	NA	NA

Answer rating: 100% (QA)

1 Initial Liability PV of lease payments 60100 X 81... View the full answer