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Chapter 13: Q4CA (page 658)

(Investment Accounted for under the Equity Method) On July 1, 2018, Fontaine Company purchased for cash 40% ofthe outstanding common stock of Knoblett Company. Both Fontaine Company and Knoblett Company have a December 31 year-end.

Knoblett Company, whose common stock is actively traded in the over-the-counter market, reported its total net income forthe year to Fontaine Company and also paid cash dividends on November 15, 2018, to Fontaine Company and its other stockholders.

Instructions

How should Fontaine Company report the above facts in its December 31, 2018, balance sheet and its income statement for theyear then ended? Discuss the rationale for your answer.

Short Answer

Expert verified

Income from investment is reported in the income statement.

Step by step solution

01

Definition of equity method

The equity is the portion of funds of company which are invested by the owners of the company.

02

Treatment of investment revenue

The share of the income is reported in the balance sheet under the head of shareholder’s equity. On the other hand, the dividend received increases the cash. It is recorded in the income statement under the authority of additional income; the dividend decreases the investment's carrying value.

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Most popular questions from this chapter

How does unearned revenue arise? Why can it be classified properly as a current liability? Give several examples of business activities that result in unearned revenues.

Briefly describe some of the similarities and differences between GAAP and IFRS with respect to the accounting for

investments.


Question: 13-17 (L04) (Ratio Computations and Discussion) Sprague Company has been operating for several years, and on December 31, 2017, presented the following balance sheet.

SPRAGUE COMPANY
BALANCE SHEET
DECEMBER 31, 2017

Cash

\(40,000

Accounts payable

\)80,0000

Receivables

\(75,0000

Mortgage payable

\)140,000

Inventory

\(95,000

Common stock (\)1 par)

\(150,000

Plant assets (net)

\)220,000

Retained earnings

\(60,000

\)430,000

\(430,000

The net income for 2017 was \)25,000. Assume that total assets are the same in 2016 and 2017.

Instructions

Compute each of the following ratios. For each of the four, indicate how it is computed and its significance as a tool in the analysis of the financial soundness of the company.

(a) Current ratio. (C) Debt to assets ratio.

(b) Acid-test ratio. (d) Return on assets.

Distinguish between a current liability and a long-term debt

BE13-4 (L01) Sport Pro Magazine sold 12,000 annual subscriptions on August 1, 2017, for $18 each. Prepare Sport Pro’s August 1, 2017, journal entry and the December 31, 2017, annual adjusting entry, assuming the magazines are published and delivered monthly.
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