On January 1, 2010, Alison, Inc., paid $60,000 for a 40 percent interest in Holister Corporation’s common stock. This investee had assets with a book value of $200,000 and liabilities of $75,000. A patent held by Holister having a $5,000 book value was actually worth $20,000. This patent had a six-year remaining life. Any further excess cost associated with this acquisition was attributed to goodwill. During 2010, Holister earned income of $30,000 and paid dividends of $10,000. In 2011, it had income of $50,000 and dividends of $15,000. During 2011, the fair value of Allison’s investment in Holister had risen from $68,000 to $75,000.
(a) Assuming Alison uses the equity method, what balance should appear in the Investment in Holister account as of December 31, 2011?
(b) Assuming Alison uses the fair-value option, what income from the investment in Holister should be reported for 2011?
Tiberand, Inc., sold $150,000 in inventory to Schilling Company during 2010 for $225,000. Schilling resold $105,000 of this merchandise in 2010 with the remainder to be disposed of during 2011.
Assuming that Tiberand owns 25 percent of Schilling and applies the equity method, what journal entry is recorded at the end of 2010 to defer the unrealized gross profit?
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