Equity method, change in interest. Hanson Corporation purchases a 10% interest in Novic Company on January 1, 20X6, and an additional 15% interest on January 1, 20X8. These investments cost Hanson Corporation $80,000 and $110,000, respectively.
The following stockholders' equities of Novic Company are available:
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December 31, 20X5
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December 31, 20X7
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Common stock ($10 par)
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$500,000
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$500,000
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Retained earnings
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250,000
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300,000
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Total equity
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$750,000
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$800,000
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Any excess of cost over book value on the original investment is attributed to goodwill. Any excess on the second purchase is attributable to equipment with a 4-year life.
Novic Company has income of $30,000, $30,000, and $40,000 for 20X6, 20X7, and 20X8, respectively. Novic pays dividends of $0.20 per share in 20X7 and 20X8.
Ignore income tax considerations, and assume adjusting entries are made at the end of the calendar year only.
1. Prepare the cost-to-equity conversion entry, as required by APB Opinion No. 18, on January 1, 20X8, when Hanson's investment in Novic Company ?rst exceeds 20%. Any supporting schedules should be in good form.
2. Prepare the December 31, 20X8, equity adjustment on Hanson's books. Provide supporting calculations in good form.