Parent accounting under the equity method
Pak purchased a 40 percent interest in Sco of Germany for $1,080,000 on January 1, 2011. The
excess cost over book value is due to a patent with a 10-year amortization period. A summary
of Sco's net assets at December 31, 2010, and at December 31, 2011, after translation into U.S.
dollars, is as follows:
Capital
Stock
Retained
Earnings
Equity
Adjustment
Net
Assets
December 31, 2010 $2,000,000 $400,000 $2,400,000
Net income 310,000 310,000
Dividends (192,000) (192,000)
Translation adjustment $212,000 212,000
December 31, 2011 $2,000,000 $518,000 $212,000 $2,730,000
Exchange rates for euros were $0.60 on January 1, 2011; $0.62 average for 2011; $0.64 when
dividends were declared; and $0.65 at December 31, 2011. Sco had net assets of Eu 4,000,000 at
January 1, 2011; net income of Eu 500,000 for 2011; and dividends of Eu 300,000. It ended the
year with net assets of Eu 4,200,000. Sco's functional currency is the euro.
REQUIRED
1. Calculate Pak's income from Sco for 2011.
2. Determine the balance of Pak's Investment in Sco account at December 31, 2011.
3. Develop a proof of your calculation of the Investment in Sco account balance at December 31, 2011.