Ask Question
6 August, 18:59

Puff Co. acquired 40% of Straw, Inc.'s voting common stock on January 2, Year 1, for $400,000. The carrying amount of Straw's net assets at the purchase date totaled $900,000. Fair values equaled carrying amounts for all items except equipment, for which fair values exceeded carrying amounts by $100.000. The equipment has a five-year life. During Year 1, Straw reported net income of $150,000. What amount of income from this investment should Puff report in its Year 1 income statement if Puff uses the equity method to account for the investment?

+2
Answers (1)
  1. 6 August, 21:02
    0
    Investment revenue = $52,000

    Explanation:

    Since Puff uses the equity method, the original journal entry to record the purchase of 40% of the shares should have been:

    Dr Investment in Straw 400,000

    Cr Cash 400,000

    After one year, Straw earned $150,000 in net income, but it also had equipment with a fair market value higher than carrying value also depreciable by $100,000. So the net income must be adjusted = $150,000 - ($100,000 x 20%) = $130,000. The journal entry to record the adjusted income should be ($130,000 x 40%):

    Dr Investment in Straw 52,000

    Cr Investment revenue 52,000
Know the Answer?
Not Sure About the Answer?
Get an answer to your question ✅ “Puff Co. acquired 40% of Straw, Inc.'s voting common stock on January 2, Year 1, for $400,000. The carrying amount of Straw's net assets at ...” in 📙 Business if there is no answer or all answers are wrong, use a search bar and try to find the answer among similar questions.
Search for Other Answers