On January 1, 2012, Allan acquires 15 percent of Bellevue’s outstanding common stock for 1 answer below »

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On January 1, 2012, Allan acquires 15 percent of Bellevue’s outstanding common stock for

$62,000. Allan classifies the investment as an available-for-sale security and records any un- realized holding gains or losses directly in owners’ equity. On January 1, 2013, Allan buys an additional 10 percent of Bellevue for $43,800, providing Allan the ability to significantly influ- ence Bellevue’s decisions.

During the next two years, the following information is available for Bellevue:

Income

Dividends Common Stock

Fair Value (12/31)

2012

$ 80,000

$30,000

$438,000

2013

100,000

40,000

468,000

In each purchase, Allan attributes any excess of cost over book value to Bellevue’s franchise agreements that had a remaining life of 10 years at January 1, 2012. Also at January 1, 2012, Bellevue reports a net book value of $280,000.

a. Assume Allan applies the equity method to its Investment in Bellevue account:

1. On Allan’s December 31, 2013, balance sheet, what amount is reported for the Invest- ment in Bellevue account?

2. What amount of equity income should Allan report for 2013?

3. Prepare the January 1, 2013, journal entry to retrospectively adjust the Investment in

Bellevue account to the equity method.

b. Assume Allan elects the fair-value reporting option for its investment in Bellevue:

1. On Allan’s December 31, 2013, balance sheet, what amount is reported for the Invest- ment in Bellevue account?

2. What amount of income from its investment in Bellevue should Allan report for 2013?

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