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Computation of Account Balances Easy Chair Company purchased 40 percent ownership of Stuffy Sofa Corporation on January 1 20X1 for $150000 Stuffy Sofa’s balance sheet at the time of acquisition

Computation of Account Balances

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:

 

STUFFY SOFA CORPORATION

Balance Sheet

January 1, 20X1

Cash

 

$ 30,000

Current Liabilities

$ 40,000

Accounts Receivable

 

120,000

Bonds Payable

200,000

Inventory

 

80,000

Common Stock

200,000

Land

 

150,000

Additional Paid-In Capital

40,000

Buildings & Equipment

$ 30,000

 

 

 

Less: Accumulated Depreciation

(120,000)

180,000

Retained Earnings

80,000

Total Assets

 

$560,000

Total Liabilities & Equities

$560,000

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 impaired.

Required

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) costmethod and (2) equity-method accounting?

Jul 09 2020 View more View Less

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