Problem - On January 4, 2018, RTN Industries paid $648,000 for 20,000 shares of Austin Cattle Company common stock. The investment represents a 30% interest in the net assets of Austin and gave RTN the ability to exercise signi?cant in?uence over Austin's operations. RTN received dividends of $3.00 per share on December 6, 2018, and Austin reported net income of $320,000 for the year ended December 31, 2018. The market value of Austin's common stock at December 31, 2018, was $32 per share. The book value of Austin's net assets was $1,600,000 and:
a. The fair market value of Austin's depreciable assets, with an average remaining useful life of 8 years, exceeded their book value by $160,000.
b. The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwill.
Required:
1. Prepare all appropriate journal entries related to the investment during 2008, assuming RTN accounts for this investment by the equity method. What is the carrying amount of this investment on RTN's balance sheet as of December 31, 2008? What's the effect of this investment on RTN's 2008 income before taxes?
2. Prepare the journal entries required by RTN, assuming that RTN elected the fair value option under SFAS 159. What is the carrying amount of this investment on RTN's balance sheet as of December 31, 2018? What's the effect of this investment on RTN's 2018 income before taxes?