Small Company reported 20X7 net income of $43,000 and paid dividends of $14,000 during the year. Mock Corporation acquired 30 percent of Small's shares on January 1, 20X7, for $99,000. At December 31, 20X7, Mock determined the fair value of the shares of Small to be $127,000. Mock reported operating income of $81,000 for 20X7.
Required:
Compute Mock's net income for 20X7 assuming it
a. Carries the investment in Small at fair value.
b. Uses the equity method of accounting for its investment in Small.
| a. | Net income (fair value method) |
| b. | Net income (equity method) |
| a. | Net income (fair value method) | $ 113,200 |
| b. | Net income (equity method) | $ 93,900 |
Working:
| Fair Value Method | Equity Method | |
| Operating income | 81000 | 81000 |
| Dividend revenue (30% x $14000) | 4200 | 0 |
| Unrealized holding gain ($127000 - $99000) | 28000 | 0 |
| Investment income (30% x $43000) | 0 | 12900 |
| Net income $ | 113200 | 93900 |
Small Company reported 20X7 net income of $43,000 and paid dividends of $14,000 during the year....