Reference no: EM132782608

Question - Penston Company owns 36 percent (39,600 shares) of Scranton, Inc., which it purchased several years ago for $182,000. Since the date of acquisition, the equity method has been properly applied, and the book value of the investment account as of January 1, 2020, is 270,000. Excess patent cost amortization of $25,920 is still being recognized each year. During 2020, Scranton reports net income of $420,000, $360,000 in operating income earned evenly throughout the year, and a $60,000 extraordinary gain incurred on September 1. No dividends were paid during the year. Penston sold 9,900 shares of Scranton on June 1, 2020, for 72,000 in cash. However, despite this sale, Penston retains the ability to significantly influence the investee.

During the last quarter of 2019, Penston sold $76,000 in inventory (which it had originally purchased for only $60,000) to Scranton. By the end of that fiscal year, Scranton's had already sold $41,800 (at sales price) of this merchandise, and the remaining were subsequently sold in April 30, 2020.

On Penston's financial statements for the year ended December 31, 2020, determine the income effects that would be reported from its ownership in Scranton?

a) Income effects for year ending December 31, 2020.

b) Extraordinary gain - Scranton, Inc.

c) Gain or Loss on sale of investment in Scranton, Inc.