91Ó°ÊÓ

On January 1, 2017, Millay Inc. paid \(700,000 for 10,000 shares of Genso Company’s voting common stock, which was a 10% interest in Genso. At that date, the net assets of Gensototaled \)6,000,000. The fair values of all of Genso’s identifiable assets and liabilities were equal to their book values. Millay does not have the ability to exercise significant influence over the operating and financial policies of Genso. Millay received dividends of \(1.50 per share from Genso on October 1, 2017. Genso reported net income of \)550,000 for the year ended December 31, 2017.

On July 1, 2018, Millay paid \(2,325,000 for 30,000 additional shares of Genso Company’s voting common stock which represents a 30% investment in Genso. The fair values of all of Genso’s identifiable assets net of liabilities were equal to their book values of \)6,550,000. As a result of this transaction, Millay has the ability to exercise significant influence over the operating and financial policies of Genso. Millay received dividends of \(2.00 per share from Genso on April 1, 2018, and \)2.50 per share on October 1, 2018. Genso reported net income of \(650,000 for the year ended December 31, 2018, and \)350,000 for the 6 months ended December 31, 2018.

Instructions (For both purchases, assume any excess of cost over book value is due to goodwill.)

(a) Prepare a schedule showing the income or loss before income taxes for the year ended December 31, 2017, that Millay should report from its investment in Genso in its income statement issued in March 2018.

(b) During March 2019, Millay issues comparative financial statements for 2017 and 2018. Prepare schedules showing the income or loss before income taxes for the years ended December 31, 2017 and 2018, that Millay should report from its investment in Genso.

Step by step solution

01

Schedule showing Income or losses for 2017

Schedule of Income or Loss from Investment
	Amount ($)
Dividend revenue	15,000
(10,000*1.50)

02

Schedule showing Income or losses for 2017 and 2018

Schedule of Income or Loss from Investment
	2018 ($)	2017 ($)
Income from Investment in Genso	170,000	55,000

Working notes:

$$\begin{gathered} \mathbf{Investment}\mathbf{}\mathbf{}\mathbf{Income}\mathbf{}\mathbf{2017}\mathbf{=}\mathbf{Net}\mathbf{}\mathbf{Income}\mathbf{}\mathbf{for}\mathbf{}\mathbf{2017}\mathbf{×}\mathbf{Percentage}\mathbf{}\mathbf{Interest} \\ \mathbf{=}\mathbf{550}\mathbf{,}\mathbf{000}\mathbf{×}\mathbf{10}\mathbf{\%} \\ \mathbf{=}\mathbf{\$}\mathbf{55}\mathbf{,}\mathbf{000} \\ \mathbf{Investment}\mathbf{}\mathbf{Income}\mathbf{}\mathbf{for}\mathbf{}\mathbf{2018}\mathbf{=}\mathbf{Income}\mathbf{}\mathbf{for}\mathbf{}\mathbf{first}\mathbf{}\mathbf{6}\mathbf{months}\mathbf{+}\mathbf{Income}\mathbf{}\mathbf{from}\mathbf{}\mathbf{next}\mathbf{}\mathbf{6}\mathbf{months} \\ \mathbf{=}\mathbf{(}\mathbf{650}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{350}\mathbf{,}\mathbf{000}\mathbf{)}\mathbf{×}\mathbf{10}\mathbf{\%}\mathbf{+}\mathbf{350}\mathbf{,}\mathbf{000}\mathbf{×}\mathbf{(}\mathbf{10}\mathbf{\%}\mathbf{+}\mathbf{30}\mathbf{\%}\mathbf{)} \\ \mathbf{=}\mathbf{30}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{140}\mathbf{,}\mathbf{000} \\ \mathbf{=}\mathbf{\$}\mathbf{170}\mathbf{,}\mathbf{000} \end{gathered}$$

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