Calculate income for a midyear investment
Sultan Corporation pays $500,000 for a 20 percent interest in Chula Corporation on July 1, 2016, when Chula’s capital stock is valued at $700,000, its retained earnings at $500,000, and the book value of Chula’s net assets equals fair value. Additional information about Chula Corporation is given below:
a. It paid dividends of $25,000 on March 1, 2016, and $25,000 on September 1, 2016.
b. Its net income in 2016 was $150,000 (evenly throughout the year).
REQUIRED
1. Calculate Sultan’s income from the investment if the fair value/cost method is applied.
2. Calculate Sultan’s income from the investment if the equity method is applied.