a. How does Einstein compute the book value of this investment on August 1 to determine its gain or loss on the sale?
Answer: Computation has to be done as below:
Book value = Beginning of the year balance + Percentage of net income or net loss – dividends received
b. How should Einstein account for this investment after August 1?
Answer: In case the investment doesn’t drop below 20% continue to use Equity method, however if it falls below 20% then switch to fair value method, based on the remaining percentage of ownership
c. If Einstein retains only a 2 percent interest in Brooks so that it holds virtually no influence over Brooks, what figures appear in the investor’s income statement for the current year?
— Dividend Income for dividends received after August 1
— Equity in Earnings to 1 Aug
— Gain/Loss on 1 Aug sale
d. If Einstein retains only a 2 percent interest in Brooks so that virtually no influence is held, does the investor have to retroactively adjust any previously reported figures?
Answer: No, the investor does not have to retroactively adjust any previously reported figures