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    Stuffy Sofa Corporation on January 1, 20X1. What amount of investment income will Easy Chair Company record during 20X1 under equity-method accounting?

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    Easy Chair Company purchased 40 percent ownership of Stuffy Sofa Corporation on January 1, 20X1, for $150,000. Stuffy Sofa's balance sheet at the time of acquisition was as follows: (see balanced sheet attached)

    Analysis
    Computation of Account Balances
    During 20X1 Stuffy Sofa Corporation reported net income of $30,000 and paid dividends of $9,000. The fair values of Stuffy Sofa's assets and liabilities were equal to their book values at the date of acquisition, with the exception of buildings and equipment, which had a fair value $35,000 above book value. All buildings and equipment had remaining lives of five years at the time of the business combination. The amount attributed to goodwill as a result of its purchase of Stuffy Sofa shares is not amortized.

    Problem:
    a) What amount of investment income will Easy Chair Company record during 20X1 under equity-method accounting?
    b) What amount of income will be reported under the cost method?
    c) What will be the balance in the investment account on December 31, 20X1, under (1) cost-method and (2) equity-method accounting?

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    (a) 40% of 30,000 or 12,000.

    (b) 0 since under that method the parent company ...

    Solution Summary

    Computations shown for you.

    $2.19

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