On January1 2007 Plano Company acquired 8 percent (16,000 shares) of the outstanding voting shares of the Sumter Company for $192,000, an amount equal to Sumter's underlying book and fair value. Sumter pays a cash dividend to its stockholders each year of $100,000 on September 15. Sumter reported net income of $300,000 in 2007, $360,000 in 2008, $400,000 in 2009, and $380,000 in 2010. Each income figure can be assumed to have been earned evenly throughout its respective year. In addition, the fair value of these 16,000 shares was indeterminate, and therefore the investment account remained at cost.
On January 1, 2009 Plano purchased an additional 32 percent (64,000 shares) of Sumter for $965,750 in cash and began to use the equity method. This price represented a $50,550 payment in excess of the book value of Sumter's underlying net assets. Plano was willing to make this extra payment because of a recently developed patent held by Sumter with a 15-year remaining life. All other assets were considered appropriately valued on Sumter's books.
On July 1, 2010, Plano sold 10 percent (20,000 shares) of Sumter's outstanding shares for $425,000 in cash. Although it sold this interest, Plano maintained the ability to significantly influence Sumter's decision-making process. Assume that Plano uses a weighted average costing system.
Prepare the journal entries for Plano for the years of 2007 through 2010.
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