On January 1, 2010, Pond Co. acquired 40% of the outstanding voting common shares of Ramp Co. for $700,000. On that date, Ramp reported assets and liabilities with book values of $2.2 million and $700,000, respectively. A building owned by Ramp had an appraised value of $300,000, although it had a book value of only $120,000. This building had a 12-year remaining life and no salvage value. It was being depreciated on the straight-line basis.
Ramp generated net income of $300,000 in 2010 and a loss of $120,000 in 2011. In each of these two years, Ramp paid a cash dividend of $70,000 to its stockholders.
During 2010, Ramp sold inventory to Pond that had an original cost of $60,000. The merchandise was sold to Pond for $96,000. Of this balance, $72,000 was resold to outsiders during 2010 and the remainder was sold during 2011. In 2011, Ramp sold inventory to Pond for $180,000. This inventory had cost only $108,000. Pond resold $120,000 of the inventory during 2011 and the rest during 2012.
Required:
For 2010 and then for 2011, calculate the equity income to be reported by Pond for external reporting purposes.

Question

Quizplus · Accepted Answer

The Answer of On January 1, 2010, Pond Co. acquired 40% of the outstanding voting common shares of Ramp Co. for $700,000. On that date, Ramp reported assets and liabilities with book values of $2.2 million and $700,000, respectively. A building owned by Ramp had an appraised value of $300,000, although it had a book value of only $120,000. This building had a 12-year remaining life and no salvage value. It was being depreciated on the straight-line basis.
Ramp generated net income of $300,000 in 2010 and a loss of $120,000 in 2011. In each of these two years, Ramp paid a cash dividend of $70,000 to its stockholders.
During 2010, Ramp sold inventory to Pond that had an original cost of $60,000. The merchandise was sold to Pond for $96,000. Of this balance, $72,000 was resold to outsiders during 2010 and the remainder was sold during 2011. In 2011, Ramp sold inventory to Pond for $180,000. This inventory had cost only $108,000. Pond resold $120,000 of the inventory during 2011 and the rest during 2012.
Required:
For 2010 and then for 2011, calculate the equity income to be reported by Pond for external reporting purposes.