Small Company reported 20X7 net income of $40,000 and paid dividends of $15,000 during the year. Mock Corporation acquired 20 percent of Small’s shares on January 1, 20X7, for $105,000. At December 31, 20X7, Mock determined the fair value of the shares of Small to be $121,000. Mock reported operating income of $90,000 for 20X7.

 Small Company reported 20X7 net income of $40,000 and paid dividends of $15,000 during the year. Mock Corporation acquired 20 percent of Small’s shares on January 1, 20X7, for $105,000. At December 31, 20X7, Mock determined the fair value of the shares of Small to be $121,000. Mock reported operating income of $90,000 for 20X7.

Required:
Compute Mock's net income for 20X7 assuming it

Carries the investment in Small at fair value.
Uses the equity method of accounting for its investment in Small.


Explanation

Fair value method:

Operating income reported by Mock    $ 90,000
Unrealized gain on increase in value of Small stock    16,000
Dividend income from Small ($15,000 × 0.20)    3,000
Net income reported by Mock    $ 109,000
Equity method:

Operating income reported by Mock    $ 90,000
Income from investee ($40,000 × 0.20)    8,000
Net income reported by Mock    $ 98,000