Ravine Corporation purchased 30 percent ownership of Valley Industries for $90,000 on January 1, 20X6, when Valley had capital stock of $240,000 and retained earnings of $60,000. The following data were reported by the companies for the years 20X6 through 20X9: Dividends Declared Year Operating Income, Ravine Corporation Net Income, Valley Industries Ravine Valley 20X6 $ 140,000 $ 30,000 $ 70,000 $ 20,000 20X7 80,000 50,000 70,000 40,000 20X8 220,000 10,000 90,000 40,000 20X9 160,000 40,000 100,000 20,000 Required:a. What net income would Ravine Corporation have reported for each of the years, assuming Ravine accounts for the intercorporate investment using the cost method and the equity method? b-1. Give all appropriate journal entries for 20X8 that Ravine made under the cost method. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

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Business

Marely

19 January, 08:25

Ravine Corporation purchased 30 percent ownership of Valley Industries for $90,000 on January 1, 20X6, when Valley had capital stock of $240,000 and retained earnings of $60,000. The following data were reported by the companies for the years 20X6 through 20X9: Dividends Declared Year Operating Income, Ravine Corporation Net Income, Valley Industries Ravine Valley 20X6 $ 140,000 $ 30,000 $ 70,000 $ 20,000 20X7 80,000 50,000 70,000 40,000 20X8 220,000 10,000 90,000 40,000 20X9 160,000 40,000 100,000 20,000 Required:a. What net income would Ravine Corporation have reported for each of the years, assuming Ravine accounts for the intercorporate investment using the cost method and the equity method? b-1. Give all appropriate journal entries for 20X8 that Ravine made under the cost method. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

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Conor Thompson · Answer 1

Cost method:

Net income = Net income of Ravine + Ownership interest x Dividends declared of Valley Company.

Dividends to reported (20X8) = ($40,000 - $10,000) = $30,000

Net Income (20X6) = $140,000 + 0.3 x $20,000 = $146,000

Net income (20X7) = $80,000 + 0.3 x $40,000 = $92,000

Net Income (20X8) = $220,000 + 0.3 x $30,000 = $229,000

Net Income (20X9) = $160,000 + 0.3 x $20,000 = $166,000

Equity method: Net income as recorded in the books of Ravine Company is:

Net income = Net income of Ravine + Ownership interest x Net income of Valley

Net Income (20X6) = $140,000 + 0.3 x $30,000 = $149,000

Net Income (20X7) = $80,000 + 0.3 x $50,000 = $95,000

Net Income (20X8) = $220,000 + 0.3 x $10,000 = $223,000

Net Income (20X9) = $160,000 + 30% x $40,000 = $172,000

(b) Dividends declared is the amount of cash received.

Cash received = $40,000 x 0.3 = $12,000

We credit in investment in Valley Stock equal to net income of the subsidiary.

Investment in Valley = $10,000 x 0.3 = $3,000

We also credit dividend income which is the difference between the cash received and the investment in Valley,

Dividend income = $12,000 - $3,000 = $9,000

Dividend Income = Cash (credit) - investment in valley

Dividend Income (Total) = $12,000 - $9,000 = $3,000

Using the Equity method

Dividends declared = $40,000 x 0.3 = $12,000

Cash (credit) = $12,000

Investment in Valley = $12,000

Net = cash (credit) - investment in valley = 0

Since the Share in net income increase investment in Valley and income from Valley.

Share in net income = $10,000 x 0.3 = $3,000