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Exercise 2-6 (Algo) Investment Income LO 2-2, 2-3 Ravine Corporation purchased 40 percent ownership of Valley Industries for $120,000 on January 1, 20X6, when Valley

Exercise 2-6 (Algo) Investment Income LO 2-2, 2-3

Ravine Corporation purchased 40 percent ownership of Valley Industries for $120,000 on January 1, 20X6, when Valley had capital stock of $245,000 and retained earnings of $55,000. During the period of January 1, 20X6, through December 31, 20X9, the market value of Ravine's investment in Valley's stock increased by $12,000 each year. The following data were reported by the companies for the years 20X6 through 20X9:

Year Operating Income, Ravine Corporation Net Income, Valley Industries Dividends Declared
Ravine Valley
20X6 $ 144,000 $ 37,000 $ 80,000 $ 27,000
20X7 91,000 57,000 80,000 47,000
20X8 221,000 10,000 100,000 40,000
20X9 164,000 47,000 110,000 27,000

Required:

a. What net income would Ravine Corporation have reported for each of the years, assuming Ravine accounts for the intercorporate investment either by carrying the investment at fair value, or by using the equity method?

b-1. Give all appropriate journal entries for 20X8 that Ravine would make if it carries the investment at fair value.

b-2. Give all appropriate journal entries for 20X8 that Ravine would make if it uses the equity method.

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