Collins, Inc., purchased 10 percent of Merton Corporation on january 1, 2014 for 345,000 and classified the investment as an available-for-sale security. Collins acquires and additional 15 percent of Merton on January 1, 2015, for $580,000. The equity method of accounting is now appropriate for this investment. No intra-entity sales have occurred.
a. How does Collins initially determine the income to be reported in 2014 in connect with its ownership of Merton?
b. What factors should have influenced Collins in it s decision to apply the equity method in 2015?
c. What factors could have prevented Collins from adopting the equity method after his second purchase?
d. What is the objective of the equity method of accounting?
e. What criticisms have been leveled at the equity method?
f. In comparative statements for 2014 and 2015, how would Collins determine the income to be reported in 2014 in connection with its ownership of Merton? Why is this accounting appropriate?
g. How is the allocation of Collins's acquisition mad?
h. If Merton declares a cash dividend, what impact does it have on Collins's financial records under the equity method? Why is this accounting appropriate?
i. On financial statements for 2015, what amounts are included in Collin's's Investment in Merton account? What amount are included in Collins's Equity in Imcome of Merton account?