adapted) *P22.11B (LO 5) (Fair Value to Equity Method with Goodwill) On January 1, 2020, Phipps Inc. paid $500,000 for 20,000 shares of Payson Company's voting common stock, which was a 10% interest in Payson. At that date, the net assets of Payson totaled $4,000,000. The fair values of all of Payson's identifiable assets and liabilities were equal to their book values. Phipps does not have the ability to exercise significant influence over the operating and financial policies of Payson. Phipps received dividends of $1.25 per share from Payson on June 1, 2020. Payson reported net income of $340,000 for the year ended December 31, 2020. On July 1, 2021, Phipps paid $1,900,000 for 60,000 additional shares of Payson Company's voting common stock which represents a 30% investment in Payson. The fair values of all of Payson's identifiable assets net of liabilities were equal to their book values of $5,400,000. As a result of this transaction, Phipps has the ability to exercise significant influence over the operat- ing and financial policies of Payson. Phipps received dividends of $1.50 per share from Payson on June 1, 2021, and $2.00 per share on December 1, 2021. Payson reported net income of $520,000 for the year ended December 31, 2021, and $325,000 for the 6 months ended December 31, 2021. Instructions (a) Prepare a schedule showing the income or loss before income taxes for the year ended December 31, 2020, that Phipps should report from its investment in Payson in its income statement issued in March 2021. (b) During March 2022, Phipps issues comparative financial statements for 2020 and 2021. Prepare schedules showing the income or loss before income taxes for the years ended December 31, 2020 and 2021, that Phipps should report from its investment in Payson. (AICPA adapted) *P22.12B (LO 5) (Change from Fair Value to Equity Method) On January 2, 2019, Hudson Company purchased for $600,000 cash a 10% interest in Lawrence Corp. On that date, the net assets of Lawrence had a book value of $4,500,000. The excess of cost over the underlying equity in net assets is attributable to undervalued depreciable assets having a remaining life of 10 years from the date of Hudson's purchase. The fair value of Hudson's investment in Lawrence securities is as follows: December 31, 2019, $620,000, and December 31, 2020, $660,000. On January 3, 2021, Hudson purchased an additional 30% of Lawrence's stock for $2,240,000 cash when the book value of Lawrence's net assets was $5,650,000. The excess was attributable to depreciable assets having a remaining life of 8 years. During 2019, 2020, and 2021, the following occurred: Dividends Paid by Instructions Lawrence Net Income 2019 2020 $425,000 470,000 2021 610,000 Lawrence to Hudson $12,000 14,000 32,000 On the books of Hudson Company, prepare all journal entries in 2019, 2020, and 2021 that relate to its investment in Lawrence Corp., reflecting the data above and a change from the fair value method to the equity method.