(Investments with significant influence, LO 2) On May 1, 2006 Owlseye Inc.

(Owlseye) purchased 25% of the voting shares of Wyse Ltd. (Wyse) for $2,000,000 cash. As a result of the purchase, Owlseye has significant influence over Wyse because it can appoint two members to Wyse’s board of directors. For the year ended April 30, 2007, Wyse reported net income of $800,000. On the date that Owlseye purchased Wyse, the fair value of Wyse’s net assets exceeded the book value by $200,000. The difference is being amortized over four years. In addition, Owlseye’s share of profit on intercompany transactions included in Wyse’s net income was $25,000. During fiscal 2007 Owlseye received $30,000 in dividends from Wyse. Owlseye also has an April 30 year end.

Required:

a. Prepare the journal entry that would be made to record Owlseye’s investment in Wyse.

b. What amount would be reported on Owlseye’s April 30, 2007 income statement as income from its equity investment in Wyse?

c. What amount would be reported on Owlseye’s April 30, 2007 balance sheet for its investment in Wyse?

d. Why is the amount reported on Owlseye’s income statement as income from its equity investment in Wyse not simply Wyse’s reported net income multiplied by Owlseye’s ownership interest?