Chapter 2, Problem 2.8E

Carrying an investment at Fair Value versus Equity Method Reporting
Small Company reported 20X7 net income of $40,000 and paid dividends of $15,000 during theyear. Mock Corporation acquired 20 percent of SmalI’s shares on January 1, 20X7, for $105,000.At December 31, 20X7, Mock determined the fair value of the shares of Small to be $121,000.Mock reported operating income of $90,000 for 20X7.
Required
Compute Mock’s net income for 20X7 assuming it
a. Carries the investment in Small at fair value.
b. Uses the equity method of accounting for its investment in Small.