On January 1, 2014, Allan acquires 15 percent of Bellevue’soutstanding common stock for $83,750. Allan classifies theinvestment as an available-for-sale security and records anyunrealized holding gains or losses directly in owners’ equity. OnJanuary 1, 2015, Allan buys an additional 10 percent of Bellevuefor $61,200, providing Allan the ability to significantly influenceBellevue’s decisions.
During the next two years, thefollowing information is available for Bellevue:
Income
Dividends
CommonStockFair Value (12/31)
2014
$ 85,000
$35,000
$601,000
2015
111,200
48,100
640,300
In each purchase, Allan attributes any excess of cost over bookvalue to Bellevue’s franchise agreements that had a remaining lifeof 10 years at January 1, 2014. Also at January 1, 2014, Bellevuereports a net book value of $355,000.
a.
Assume Allan appliesthe equity method to its Investment in Bellevue account:
1.
On Allan’s December 31, 2015, balance sheet, what amount isreported for the Investment in Bellevue account?
2.
What amount of equity income should Allan report for 2015?
3.
Prepare the January 1, 2015, journal entry to retrospectivelyadjust the Investment in Bellevue account to the equity method.(If no entry is required for a transaction/event, select”No Journal Entry Required” in the first accountfield.)
b.
Assume Allan usesfair-value accounting for its investment in Bellevue:
1.
On Allan’s December 31, 2015, balance sheet, what amount isreported for the Investment in Bellevue account?
2.
What amount of income from its investment in Bellevue shouldAllan report for 2015?
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