Chapter 2, Problem 2.22AP

Equity-Method Income Statement

Wealthy Manufacturing Company purchased 40 percent of the voting shares of Diversified Products Corporation on March 23, 20X4. On December 31, 20X8, Wealthy Manufacturing’s controller attempted to prepare income statements and retained earnings statements for the two companies using the following summarized 20X8 data:

Wealthy Manufacturing uses the equity method in accounting for its investment in Diversified Products. The controller was also aware of the following specific transactions for Diversified Products in 20X8, which were not included in the preceding data:

1. On June 30, 20X8, Diversified incurred a $5,000 extraordinary loss from a volcanic eruption near its Greenland facility.
2. Diversified sold its entire Health Technologies division on September 30, 20X8, for $375,000. The book value of Health Technologies division’s net assets on that date was $331,000. The division incurred an operating loss of $15,000 in the first nine months of 20X8.
3. During 20X8, Diversified sold one of its delivery trucks after it was involved in an accident and recorded a gain of $10,000.

Required

1. Prepare an income statement and retained earnings statement for Diversified Products for 20X8.
2. Prepare an income statement and retained earnings statement for Wealthy Manufacturing for 20X8.