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On January 1, 2017, Pond Co. acquired 40% of the outstanding voting common shares of Ramp...

On January 1, 2017, Pond Co. acquired 40% of the outstanding voting common shares of Ramp Co. for $700,000. On that date, Ramp reported assets and liabilities with book values of $2.2 million and $700,000, respectively. A building owned by Ramp had an appraised value of $300,000, although it had a book value of only $120,000. This building had a 12-year remaining life and no salvage value. It was being depreciated on the straight-line basis. Ramp generated net income of $300,000 in 2017 and a loss of $120,000 in 2018. In each of these two years, Ramp paid a cash dividend of $70,000 to its stockholders. During 2017, Ramp sold inventory to Pond that had an original cost of $60,000. The merchandise was sold to Pond for $96,000. Of this balance, $72,000 was resold to outsiders during 2017 and the remainder was sold during 2018. In 2018, Ramp sold inventory to Pond for $180,000. This inventory had cost only $180,000. Pond resold $120,000 of the inventory during 2018 and the rest during 2019. Required: For 2017 and then for 2018, calculate the equity income to be reported by Pond for external reporting purposes.?

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Answer #1

For 2017 and then for 2018, calculate the equity income to be reported by Pond for external reporting purposes.?

Answer:-

For the year 2017:

pond co. paid 700000 for 40% share

net worth of Ramp is (2200000-700000-120000+300000) = 1680000

40% of $1680000 is $672000

Amount paid for Goodwill is $700000-672000 = $28000

total income of RAMP 200000

- inter sale (1000)

- excess amount charged on sale of 40% (28000)

Total net income 171000

equity income for Pond in 2017 is 171000*.4= $68400

in the year 2018

total loss (120000)

+ income on inter company sale now sold 1000

- profit on closing stock of inter sale (24000)

net loss for 2018 (143000)

equity income of 2018 for Pond is -143000*.4 = -57200 loss

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