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Question 2 1 pts On January 1, 2016, Osaka Technologies Co
Question 2 1 pts On January 1, 2016, Osaka Technologies Co. Ltd. bought 12,000 common shares of Murakami Co., Ltd. for $240,000 cash. Osaka Technologies Co. Ltd. accounts for these securities using the equity method. The share price of Murakami Co., Ltd. closed at $23 on December 31, 2016 and at $18 on December 31, 2017. Osaka Technologies Co. Ltd., received $20,000 cash dividends from Murakami Co., Ltd., on June 1, 2016 and $15,000 cash dividends from Murakami Co., Ltd., on June 1, 2017. Murakami Co., Ltd. has 30,000 shares outstanding. In addition, Murakami Co., Ltd. reported Net Income of $36,000 for fiscal year 2016 and Net Income of $30,000 for fiscal year 2017. On January 1, 2017 Osaka Technologies Co. Ltd., sold 1,500 shares of Murakami Co., Ltd. for $34,500. Assume that both companies close their books on December 31st. Further assume that Osaka continues to use equity method of accounting for its investments in Murakami even after the sale of these 1,500 shares. What is the impact of the above transactions on the Net Income reported by Osaka Technologies Co. Ltd., for the year ending December 2017? Assume that Osaka Technologies Co. Ltd. does not pay any taxes. A. No effect on net income B. Increase net income by $10,500 C. Increase net income by $15,700 O D. Increase net income by $15,000 E. Increase net income by $12,000
Expert Solution
Answer:
Option C: Increase net income by $15,700
.
Explanation:
35% of Net Income reported by Murakami Co., Ltd. = 0.35*30,000
=$10,500)
.
Gain on sale = Sale proceeds of $34,500– (carrying value of investments at the time of the sale ($240,000 +Equity income in 2016 $14,400dividends received in 2012) $20,000)*(1,500/12,000)
=$34,500 - $29,300
= $5,200
.
Effect on net income = 35% of Net Income reported by Murakami Co., Ltd + Gain on sale
= $10,500 + $5,200
= $15,700.
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