Prepare all entries necessitated by Heinrich's investment in Fink Company for 20X6 through 20X8 using the equity method for an influential investment. Supporting schedules should be in good form. Ignore taxes.
Problem 6-14 (LO 5) Equity income, taxation, inventory, fixed asset sale. On January 1, 20X6, Ashland Company purchased a 25% interest in Cramer Company for $195,000. Ashland Company prepared the following determination and distribution of excess schedule:
Price paid for investment $195,000
Less book value of interest acquired:
Paid-in capital in excess of par 200,000
Retained earnings 150,000
Total stockholders' equity $450,000
Interest acquired 25% 112,500
Excess of cost over book value (debit) $ 82,500
The following additional information is available:
a. Cramer Company sold a machine to Ashland Company for $30,000 on July 1, 20X7. At this date, the machine had a book value of $25,000 and an estimated future life of 5 years. Straight-line depreciation (to the nearest month) is being used. For income tax purposes, the gain on the sale was taxable in the year of the sale.
b. The following applies to Ashland Company sales to Cramer Company for 20X7 and 20X8:
Intercompany merchandise in beginning inventory $ 4,000
Sales for the year $10,000 15,000
Intercompany merchandise in ending inventory 4,000 5,000
Gross profit on sales 40% 40%
c. Internally generated net income, (before tax) for the two companies are as follows:
20X6 20X7 20X8
Ashland Company $140,000 $150,000 $155,000
Cramer Company 60,000 80,000 100,000
d. Cramer paid dividends of $5,000, $10,000, and $10,000 in 20X6, 20X7, and 20X8, respectively.
e. The corporate income tax rate of 30% applies to both companies. Assume an 80% dividend exclusion.
Prepare all adjustments to Ashland Company's investment in the Cramer Company account, as required by APB Opinion No. 18, on December 31, 20X6, 20X7, and 20X8. Consider income tax implications. Supporting calculations and schedules should be in good form.
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