Exam 23: Equity Method for Unconsolidated Investments

Company P purchased a 30% interest in Company S on January 1, 20X1, for $100,000.The price was equal to the book value of the equity acquired.The reported income (loss) and dividends paid by the Company S are as follows: ? Income Dividends Year ( loss ) Paid 201 \ 5,000 \ 5,000 202 (270,000) 0 203 (100,000) 0 204 50,000 5,000 Investment income reported in 20X4 under the sophisticated equity method would be ____.

The underlying book value of an investment is not a required disclosure for equity method investors.

All but the following are required disclosures for equity method investors:

Company P uses the sophisticated equity method of accounting for its 30% investment in Company S's common stock.During 20X9, Company S reported net earnings of $650,000 and paid dividends of $150,000.Assume that all the undistributed earnings of Company S will be distributed as dividends in future periods.The dividends received from Company S are eligible for the 80% dividends received deduction.Company P's 20X9, tax rate is 30%.In its December 31, 20X9, balance sheet, the increase in the deferred tax liability from these transactions would be ____.

On January 1, 20X3, Company P purchased a 15% interest in Company S.On July 1, 20X6, Company P purchased an additional 20% interest in Company S.Both purchases were at a cost in excess of underlying book value.Company S paid dividends each December from 20X3 to 20X6. ? Required: ? a.How would Company P record its investment in Company S in its financial statements originally issued for 20X3 to 20X5? ? ? b.Does a 35% ownership interest absolutely require the use of the equity method? ? ? c.How will Company P account for its investment in Company S in its 20X6 financial statements? ? ? d.How will Company P account for its investment in Company S in the 20X3 to 20X6 comparative statements published in March 20X7?