Question
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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