Advanced Accounting

Question

On January 1, 2024, Pine Company owns 40 percent (92,000 shares) of Seacrest, Incorporated, which it purchased several years ago for $476,100. Since the date of acquisition, the equity method has been properly applied, and the carrying amount of the investment account as of January 1, 2024, is $627,900. Excess patent cost amortization of $27,600 is still being recognized each year. During 2024, Seacrest reports net income of $654,000 and a $276,000 other comprehensive loss, both incurred uniformly throughout the year. No dividends were declared during the year. Pine sold 18,400 shares of Seacrest on August 1, 2024, for $182,021 in cash. However, Pine retains the ability to significantly influence the investee.

During the last quarter of 2023, Pine sold $63,000 in inventory (which it had originally purchased for only $37,800) to Seacrest. At the end of that fiscal year, Seacrest's inventory retained $18,700 (at sales price) of this merchandise, which was subsequently sold in the first quarter of 2024.

Required:

On Pine’s financial statements for the year ended December 31, 2024, what income effects would be reported from its ownership in Seacrest?

Note: Do not round intermediate calculations. Round your answers to the nearest whole dollar.

SEACREST, INCORPORATED

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Answer 1

To calculate the income effects reported by Pine Company from its ownership in Seacrest for the year ending December 31, 2024, we will follow these steps:

1. Record Equity Income from Seacrest’s Net Income (before sale of shares):

Since Pine Company owns 40% of Seacrest and applies the equity method, it records its share of Seacrest’s net income for the portion of the year before selling shares on August 1, 2024. Seacrest's total net income for the year is $654,000.

1. Pine’s share of net income from January 1 to July 31 (7 months): Pine’s share of net income=712×40%×654,000=712×0.4×654,000=152,600\text{Pine's share of net income} = \frac{7}{12} \times 40\% \times 654,000 = \frac{7}{12} \times 0.4 \times 654,000 = 152,600Pine’s share of net income=127​×40%×654,000=127​×0.4×654,000=152,600

2. Recognize Pine’s Gain on the Sale of Seacrest Shares:

On August 1, Pine sold 18,400 shares of Seacrest for $182,021 in cash. To calculate the gain on this sale:

1. Carrying amount per share: Pine’s total carrying amount for 92,000 shares as of January 1, 2024, was $627,900.
2. Carrying amount per share=627,90092,000=6.826\text{Carrying amount per share} = \frac{627,900}{92,000} = 6.826Carrying amount per share=92,000627,900​=6.826
3. Carrying amount of 18,400 shares:
4. Carrying amount of sold shares=18,400×6.826=125,598\text{Carrying amount of sold shares} = 18,400 \times 6.826 = 125,598Carrying amount of sold shares=18,400×6.826=125,598
5. Gain on sale: The gain is the difference between the sale proceeds and the carrying amount of the sold shares:
6. Gain on sale=182,021−125,598=56,423\text{Gain on sale} = 182,021 - 125,598 = 56,423Gain on sale=182,021−125,598=56,423

3. Record Equity Income from Seacrest’s Net Income (after sale of shares):

After selling the shares, Pine’s ownership percentage in Seacrest decreases. The new ownership percentage is:

New ownership percentage=92,000−18,40092,000×40%=0.8×40%=32%\text{New ownership percentage} = \frac{92,000 - 18,400}{92,000} \times 40\% = 0.8 \times 40\% = 32\%New ownership percentage=92,00092,000−18,400​×40%=0.8×40%=32%

Pine’s share of Seacrest’s net income from August 1 to December 31 (5 months):

Pine’s share of net income (after sale)=512×32%×654,000=512×0.32×654,000=87,200\text{Pine's share of net income (after sale)} = \frac{5}{12} \times 32\% \times 654,000 = \frac{5}{12} \times 0.32 \times 654,000 = 87,200Pine’s share of net income (after sale)=125​×32%×654,000=125​×0.32×654,000=87,200

4. Amortization of Excess Patent Cost:

Excess patent cost amortization is $27,600 per year. Pine needs to recognize this for the full year, as the amortization is related to prior excess purchase price allocation.

5. Downstream Inventory Sales Adjustment:

Pine sold $63,000 of inventory to Seacrest at a markup ($63,000 - $37,800 = $25,200 profit). At the end of 2023, $18,700 of this inventory remained unsold. In 2024, Seacrest sold this inventory, so Pine must recognize its share of the deferred profit.

1. Pine’s share of deferred profit: Pine’s share=40%×18,700−37,800×18,70063,000=40%×6,000=2,400\text{Pine's share} = 40\% \times \frac{18,700 - 37,800 \times \frac{18,700}{63,000}} = 40\% \times 6,000 = 2,400Pine’s share=40%×=18,700−37,800×63,00018,700​​40%×6,000=2,400

Pine must reduce income by this amount in 2023 and recognize it in 2024.

6. Effect of Other Comprehensive Loss:

Seacrest reported an Other Comprehensive Loss of $276,000 uniformly throughout the year. Pine’s share of this loss, allocated over the ownership periods, would reduce Pine’s comprehensive income but not net income.

Final Calculation:

1. Share of net income (Jan 1 to July 31): $152,600
2. Share of net income (Aug 1 to Dec 31): $87,200
3. Gain on sale of shares: $56,423
4. Amortization of excess patent: $(27,600)
5. Deferred inventory profit recognized: $2,400

Total income effect:

152,600+87,200+56,423−27,600+2,400=271,023152,600 + 87,200 + 56,423 - 27,600 + 2,400 = 271,023152,600+87,200+56,423−27,600+2,400=271,023

Answer:

Pine Company would report $271,023 in income effects from its ownership in Seacrest for the year ended December 31, 2024.