On January 1, 2010, Big Company pays $70,000 for a 10 percent interest in Little Company. On that date, Little has a book value of $600,000, although equipment, which has a five year life, is undervalued by $100,000 on its books. Little Company’s stock is closely held by a few investors and is traded only infrequently.
Because fair values are not readily available on a continuing basis, the investment account is appropriately maintained at cost.
On January 1, 2011, Big acquires an additional 30 percent of Little Company for $264,000. This second purchase provides Big the ability to exert significant influence over Little and Big will now apply the equity method. At the time of this transaction, Little’s equipment with a four year life was undervalued by only $80,000. During these two years, Little reported the following operational results:
|
Year |
Net Income |
Cash Dividends Paid |
|
2010 |
$210,000 |
$110,000 |
|
2011 |
250,000 |
100,000 |
Additional Information
• Cash dividends are always paid on July 1 of each year.
• Any goodwill is considered to have an indefinite life.
Required
a. What income did Big originally report for 2010 in connection with this investment?
b. On comparative financial statements for 2010 and 2011, what figures should Big report in connection with this investment?