2 Abbey Inc acquired 15 of Tulsa Corporation on January 1 20

2. Abbey, Inc. acquired 15% of Tulsa Corporation on January 1, 2016, for $210,000 when the book value of Tulsa’s net assets was $950,000. During 2016, Tulsa reported net income of $330,000 and paid dividends of $70,000. On January 1, 2017, purchased an additional 25% of Tulsa for $350,000. Any excess of cost over book value was attributable to goodwill (No amortization). On that same date, Abbey changed to the equity method. During 2017, Tulsa reported net income of $420,000 and paid dividends of $110,000. Required: a. What income did Abbey record from Tulsa in 2016? b. What income did Abbey record from Tulsa in 2017? c. What journal entry was made to convert to the equity method? d. What was the balance in Equity Investment at December 31, 2017?

Solution

Under cost method ,only share in dividend is recognized as income whereas under equity method ,share in net income will be recognised as income .

A)Income abbey will record in 2016 = Dividend *% of holding

                       = 70000*.15

                         = $ 10500

b)Total holding in 2017 = 15%+25%= 40%

Income abbey record in 2017 =Net income* % of holding

          = 420000*.40

           = $ 168000

c)on conversion to equity method ,unrecognised share in net income of tulsa for year 2016 will be recognised as income to bring investment balance as per equity method.

Unrecognised share in net income = (income 2016 -dividend )*% of holding

            = [330000-70000]*.15

             = 39000

d)