Adjust investment account and determine income when additional investment qualifies for equity method of accounting
Summary balance sheet and income information for Pim Company for two years is as follows (in thousands):
|
January 1, 2011 |
December 31, 2011 |
December 31, 2012 |
|
|
Current assets |
$ 50 |
$ 60 |
$ 75 |
|
Plant assets |
200 |
240 |
250 |
|
$250 |
$300 |
$325 |
|
|
Liabilities |
$ 40 |
$ 50 |
$50 |
|
Capital stock |
150 |
150 |
150 |
|
Retained earnings |
60 |
100 |
$125 |
|
$250 |
$300 |
$325 |
|
|
2011 |
2012 |
||
|
Net income |
$100 |
$ 50 |
|
|
Dividends |
60 |
25 |
On January 2, 2011, Pim Corporation purchases 10 percent of Fed Company for $25,000 cash, and it accounts for its investment (classified as an available for sale security) in Fed using the fair value method. On December 31, 2011, the fair value of all of Fed’s stock is $500,000. On January 2, 2012, Pim purchases an additional 10 percent interest in Fed stock for $50,000 and adopts the equity method to account for the investment. The fair values of Fed’s assets and liabilities were equal to book values as of the time of both stock purchases.
REQUIRED
1. Prepare a journal entry to adjust the Investment in Fed account to an equity basis on January 2, 2012.
2. Determine Pim’s income from Fed for 2012.