Reference no: EM133017784

Question - On January 1, 2020, a corporation purchased 5,500 common shares of Alpha Limited for $95,700. On that date, Alpha had 10,000 common shares outstanding and $134,000 in shareholders' equity on its balance sheet.

On January 1, the fair values of most of Alpha's assets and liabilities were equal to their book values with two exceptions. The fair value of its inventory was $14,000 more than its book value. Its equipment's fair value was $44,000 less than its book value and has a useful lifespan of 5-years. The fair values of the remaining assets and liabilities were equal to their book values.

During 2020, the corporation reported sales of $65,400 to Alpha, achieving a 40% mark up on sales. Thirty percent of those sales remained in Alpha's inventory at year end. Both companies have 25% marginal income tax rates. Alpha reported an after-tax profit of $153,000 for the year and declared $54,000 in cash dividends.

The investing company uses the equity method to record entries concerning its investment in Alpha within its own financial records. Answer the following questions. Debit and credit the correct accounts. Record dollar amounts to the nearest dollar without dollar sign ($) or commas, e.g. 15000.

1. What entry would you make when Alpha reports its 2020 profit?

2. What entry would you make concerning Alpha's dividends?

3. What entry would you make concerning acquisition differential?

4. What entry would you make concerning ending inventory?

5. What amounts concerning its investment in Alpha are presented in the company's financial statements?

A. Investment account (balance sheet)

B. Investment income (income statement)