# Calculation of Net Income Using Cost and Equity Method

Document Sample

```					                 Finance

Homework Help
Step-by-Step Solutions

LEARN TO EXCEL
Experienced Tutors

Detailed Explanation

www.classof1.com/homework-help/finance
Toll Free: 1-877-252-7763
Sub: Finance                                                                       Topic: Financial Accouting

Question:

Calculation of Net Income Using Cost and Equity Method

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 Net               Income,           Valley Ravine             Valley
Corporation                                          Industries

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 inter corporate investment using (1) the cost method and (2) the equity method?

b. Give all appropriate journal entries for 20X8 that Ravine made under both the cost and the equity
methods.

www.classof1.com/homework-help/finance
*The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for
Sub: Finance                                                                       Topic: Financial Accouting

Solution :

a)

a)    under Equity method

Ravine corporation

year 2,006

Operating income of its own                                      \$140,000

Add                            investment income from - Valley ( 30000*30%) \$9,000

Net income                                                       \$149,000

year 2,007

Operating income of its own                                      \$80,000

Add                            investment income from - Valley ( 50000*30%) \$15,000

Net income                                                       \$95,000

www.classof1.com/homework-help/finance
*The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for
Sub: Finance                                                                       Topic: Financial Accouting

year 2,008

Operating income of its own                                      \$220,000

investment income from - Valley ( 10000*30%) \$3,000

Net income                                                       \$223,000

year 2,009                           Operating income of its own                                      \$160,000

investment income from - Valley ( 40000*30%) \$12,000

Net income                                                       \$172,000

Under            Cost
Method

year 2,006

Operating income of its own                               \$140,000

Add                     Dividend Income                        ( 20000*30%) \$6,000

Net income                                                \$146,000

year 2,007

Operating income of its own                               \$80,000

www.classof1.com/homework-help/finance
*The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for
Sub: Finance                                                                       Topic: Financial Accouting

Add                    Dividend income from - Valley ( 40000*30%) \$12,000

Net income                                                 \$92,000

year 2,008

Operating income of its own                                \$220,000

Dividend income from - Valley ( 40000*30%) \$12,000

Net income                                                 \$232,000

year 2,009                   Operating income of its own                                \$160,000

Dividend income from - Valley (20000*30%) \$6,000

Net income                                                 \$166,000

Investment value on 1-1-2006                         \$90,000

Investment value on 31-12-2006                       90000 +30000*30% -20000*30% \$93,000

Investment value on 31-12-2007                       93000 +50000*30% -40000*30% \$96,000

Investment value on 31-12-2008                       96000+10000*30% -40000*30% \$87,000

Investment value on 31 -12-2009                      87000 +40000*30% -20000*30% \$93,000

www.classof1.com/homework-help/finance
*The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for
Sub: Finance                                                                       Topic: Financial Accouting

Retained Earnings               Beginning Balance                  \$0

Year                   2,006 Add: Net income                       \$149,000

Less : dividends declared \$70,000

Year                   2,007 Beginning Balance                     \$79,000

Less : dividends declared \$70,000

year                   2,008 Beginning Balance                     \$104,000

Less : dividends declared \$90,000

year                   2,009 Beginning Balance                     \$237,000

Less : dividends declared \$100,000

Year                   2,010 Beginning Balance                     \$309,000

b)

www.classof1.com/homework-help/finance
*The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for
Sub: Finance                                                                       Topic: Financial Accouting

Under        Equity
Method                                                                                       Year -2008

Ravine
Corporation

Date                  Accounts title and Explanation                                                            Debit Credit

\$3,00
12/31/2008            Investment in Company -Valley Limited                                                     0

\$3,00
Investment income                                                                                 0

To record 30% income from Subsidiary Valley
(10000*30%)

\$12,0
12/31/2006            Dividends receivable -Valley company
```
DOCUMENT INFO
Shared By:
Categories:
Stats:
 views: 53 posted: 2/1/2013 language: English pages: 11
Description: 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:
BUY THIS DOCUMENT NOW PRICE: \$8.99 100% MONEY BACK GUARANTEED
PARTNER
Classof1 is a supplemental education company providing comprehensive online tutoring, homework guidance, and e-learning courseware development services to the school, college, and university student communities. As a part of its endeavor to help students around the world to excel in their studies, Classof1 has built a repository of self-study guides with step-by-step solutions and lucid explanations. These guides have been created and whetted by expert tutors with several years of experience in education. Apart from Docstoc.com, these self-help guides are also available at Classof1’s Solution Library (http://classof1.com/solution-library). Please visit www.classof1.com for further information.