Basic Company owns 40 percent of the voting stock of Oslo Company. The investment account for this

Question:

Basic Company owns 40 percent of the voting stock of Oslo Company. The investment account for this company on Basic’s balance sheet had a balance of $600,000 on January 1, 2010. During 2010, the Oslo Company reported the following quarterly earnings and dividends paid:

Dividends Paid Quarter Earnings $ 80,000 $ 40,000 60,000 40,000 3 160,000 (40,000) 40,000 4 40,000 $260,000 $160,000

Basic Company exercises a significant influence over Oslo’s operations and therefore uses the equity method to account for its investment.

Required

1. Prepare a T account for Basic’s investment in Oslo. Enter the beginning balance, the relevant entries for the year in total, and the ending balance.

2. What is the effect and placement of the entries in requirement 1 on Basic Company’s earnings as reported on the income statement?

3. What is the effect and placement of the entries in requirement 1 on the statement of cash flows?

4. How would the effects on the statements differ if Basic’s ownership represented only a 10 percent share of Oslo?

Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...