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Question
On April 1, 2012, GMR Company purchased 30% of the outstanding voting stock of the Victory Corporation for $960,000. Victory's net assets on April 1, 2012 totaled $2,500,000. Victory's equipment was undervalued by $500,000 and its inventory was undervalued by $200,000 as of the date of purchase. The equipment has a ten-year remaining life as of April 1, 2012; the inventory was sold during 2012. Victory reported $450,000 of net income during 2012 and paid dividends of $75,000. Assume that net income was earned evenly during 2012 and dividends were declared and paid evenly during 2012.
Required:
1. Determine the amount of investment income to be reported by GMR during 2012 assuming that the equity method of accounting is applicable.
2. Determine the balance in the investment account as of December 31, 2012 assuming that the equity method is applicable.
3. Describe how the financial accounting and reporting would have differed if the equity method wasn't applicable.
4. Describe how equity method investments are accounted for when the fair value option is chosen.
Answer
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