Problem: On January 1, 2004, Ace acquires 15 percent of Zach’s outstanding common stock for $52,000 and classifies the investment as an available-for-sale security. On January 1, 2005, Ace buys an additional 10 percent of Zach for $43,800. This second purchase gives Ace the ability to influence Zach’s decision making significantly.
During 2004 and 2005, Zach reports the following:
|
Income |
Dividends |
Market Value |
|
| 2004 |
$80,000 |
$30,000 |
$60,000 |
| 2005 |
100,000 |
40,000 |
117,000 |
In each purchase, Ace attributes any excess of cost over book value to Zach’s franchise agreements that had a remaining life of 10 years at January 1, 2004. As of December 31, 2005, Zach reports a net book value of $390,000.
Q1. On Ace’s December 31, 2005, balance sheet, what amount is reported for the Investment in Zach account?
Q2. What amount of equity income should Ace report for 2005?
Q3. Prepare the January 1, 2005, journal entries to retroactively adjust the Investment in Zach account to the equity method.