Chapter 1, Problem 22P

Echo, Inc., purchased 10 percent of ProForm Corporation on January 1, 2017, for $345,000 and accounted for the investment using the fair-value method. Echo acquires an additional 15 percent of ProForm on January 1, 2018, for $580,000. The equity method of accounting is now appropriate for this investment. No intra-entity sales have occurred.

  a.    How does Echo initially determine the income to be reported in 2017 in connection with its ownership of ProForm?

  b.    What factors should have influenced Echo in its decision to apply the equity method in 2018?

  c.    What factors could have prevented Echo from adopting the equity method after this second purchase?

  d.    What is the objective of the equity method of accounting?

  e.    What criticisms have been leveled at the equity method?

  f.    In comparative statements for 2017 and 2018, how would Echo determine the income to be reported in 2017 in connection with its ownership of ProForm? Why is this accounting appropriate?

  g.    How is the allocation of Echo’s acquisition made?

  h.    If ProForm declares a cash dividend, what impact does it have on Echo’s financial records under the equity method? Why is this accounting appropriate?

  i.    On financial statements for 2018, what amounts are included in Echo’s Investment in ProForm account? What amounts are included in Echo’s Equity in Income of ProForm account?