Hope Company bought 30% of Faith Corporation in the beginning of 2024. Hope's purchase price of $3,000,000 equaled 30% of the book value of Faith's net identifiable assets, which also equaled 30% of the fair value of Faith. During 2024, Faith reported net income in the amount of $4,000,000 and declared and paid dividends in the amount of $300,000. At the end of 2024, Faith's fair value was $12,000,000. Hope mistakenly accounted for the investment using the fair value through net income method instead of using the equity method. What effect would this error have on the investment account and net income, respectively, for 2024? Multiple Choice I Overstated by $510,000; overstated by $510,000 Understated by $600,000; understated by $510,000 Understated by $510,000; understated by $510,000 Understated by $1,010,000, understated by $1,010,000
Hope Company bought 30% of Faith Corporation in the beginning of 2024. Hope's purchase price of $3,000,000 equaled 30% of the book value of Faith's net identifiable assets, which also equaled 30% of the fair value of Faith. During 2024, Faith reported net income in the amount of $4,000,000 and declared and paid dividends in the amount of $300,000. At the end of 2024, Faith's fair value was $12,000,000. Hope mistakenly accounted for the investment using the fair value through net income method instead of using the equity method. What effect would this error have on the investment account and net income, respectively, for 2024? Multiple Choice I Overstated by $510,000; overstated by $510,000 Understated by $600,000; understated by $510,000 Understated by $510,000; understated by $510,000 Understated by $1,010,000, understated by $1,010,000
Chapter7: Corporations: Reorganizations
Section: Chapter Questions
Problem 42P
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