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Unformatted text preview: E2-1E2-2E2-31 abc (4)(1) Stock dividends, and cash dividends from equity method investments are not2 a (1)cd (5)treated as dividend income.3 ddc (6)(2) While an increase in current ratio is theoretically possible, b is the best available4 aa (3)danswer as this scenario will always increase net income.5 b (2)ad(3) Full consolidation brings the entire subsidiary onto the balance sheet, and reflects6 dthe part that the parent doesn't own as a minority interest in the equity section.7 d(4) The preferred stock is nonvoting. It does not give Green, or contribute to Green'sinfluence over Axel. It should be reported via the cost method.(5) 30% of net income is $30,000. 30% of the differential is $60,000; $4,000 peryear for 15 years. $250,000 + $30,000 - $4,000 = $276,000.(6) It's a change in accounting principle, requiring a switch from the 10% x $200,000income reported to the 10% x $600,000 they would have reported under the equitymethod. 20X9's investment income would include only the 30% of Penny's 20X9earnings ($195,000).E2-4Cost method1/1/X5Investment in Steam Co.70,000 Cash70,000 20X5Cash1,000 Remember, Roller is a 20% ownerDividend income1,000 20X6Cash3,000 Dividend income3,000 20X7Cash7,000 Dividend income7,000 Equity method1/1/X5Investment in Steam Co.70,000 Cash70,000 20X5Cash1,000 The dividend decreases the investment.Investment in Steam Co.1,000 Investment in Steam Co.4,000 Income increases it (again, at 20%).Investment income4,000 Investment income3,000 And the differential ($200k x 20% = $40kInvestment in Steam Co.3,000 and $70k - $40k = $30k) is amortized over10 years20X6Cash3,000 Investment in Steam Co.3,000 Investment in Steam Co.8,000 Investment income8,000 Investment income3,000 Investment in Steam Co.3,000 20X7Cash7,000...
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