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 A. Reporting a change to the equity method when the ability to significantly influence an
investee is achieved through a series of acquisitions.
1. Initial purchase(s) will be accounted for by means of the fair value method (or at
cost) until the ability to significantly influence is attained.
2. At the point in time that the equity method becomes applicable, a retrospective
adjustment is made by the investor to convert all previously reported figures to the
equity method based on percentage of shares owned in those periods.
3. This restatement establishes comparability between the financial statements of all
years.
B. Investee income from other than continuing operations
1. Income items such as extraordinary gains and losses and discontinued operations
that are reported separately by the investee should be shown in the same manner
by the investor. The materiality of these other investee income elements (as it
affects the investor) continues to be a criterion for separate disclosure.
2. The investor recognizes its share of investee reported other comprehensive
income (OCI) through the investment account and the investor’s own OCI.
C. Investee losses
1. Losses reported by the investee create corresponding losses for the investor.
2. A permanent decline in the fair value of an investee’s stock should be recognized
immediately by the investor.
3. Investee losses can possibly reduce the carrying value of the investment account
to a zero balance. At that point, the equity method ceases to be applicable and
the fair-value method is subsequently used.
D. Reporting the sale of an equity investment
1. The equity method is consistently applied until the date of disposal to establish the
proper book value.
2. Following the sale, the equity method continues to be appropriate if enough shares
are still held to maintain the investor’s ability to significantly influence the investee.
If that ability has been lost, the fair-value method is subsequently used.

IV. Excess investment cost over book value acquired

A. The price paid by an investor for equity securities can vary significantly from the
underlying book value of the investee company primarily because the historical cost
based accounting model does not keep track of changes in a firm’s fair value.
B. Payments made in excess of underlying book value can sometimes be identified with
specific investee accounts such as inventory or equipment.
C. An extra acquisition price can also be assigned to anticipated benefits that are
expected to be derived from the investment. For accounting purposes, these amounts
are presumed to reflect an intangible asset referred to as goodwill. Goodwill is
calculated as any excess payment that is not attributable to specific assets and
liabilities of the investee. Because goodwill is an indefinite-lived asset, it is not
amortized.
V. Deferral of unrealized gross profit in inventory

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 A. Profits derived from intra-entity transactions are not considered completely earned
until the transferred goods are either consumed or resold to unrelated parties.
B. Downstream sales of inventory
1. “Downstream” refers to transfers made by the investor to the investee.
2. Intra-entity gross profits from sales are initially deferred under the equity method
and then recognized as income at the time of the inventory’s eventual disposal.
3. The amount of gross profit to be deferred is the investor’s ownership percentage
multiplied by the markup on the merchandise remaining at the end of the year.
C. Upstream sales of inventory
1. “Upstream” refers to transfers made by the investee to the investor.
2. Under the equity method, the deferral process for unrealized profits is identical for
upstream and downstream transfers. The procedures are separately identified in
Chapter One because the handling does vary within the consolidation process.

Answers to Discussion Questions

The textbook includes discussion questions to stimulate student thought and discussion. These
questions are also designed to allow students to consider relevant issues that might otherwise be
overlooked. Some of these questions may be addressed by the instructor in class to motivate
student discussion. Students should be encouraged to begin by defining the issue(s) in each
case. Next, authoritative accounting literature (FASB ASC) or other relevant literature can be
consulted as a preliminary step in arriving at logical actions. Frequently, the FASB Accounting
Standards Codification will provide the necessary support.

Unfortunately, in accounting, definitive resolutions to financial reporting questions are not always
available. Students often seem to believe that all accounting issues have been resolved in the
past so that accounting education is only a matter of learning to apply historically prescribed
procedures. However, in actual practice, the only real answer is often the one that provides the
fairest representation of the transactions being recorded. If an authoritative solution is not
available, students should be directed to list all of the issues involved and the consequences of
possible alternative actions. The various factors presented can be weighed to produce a viable
solution.

The discussion questions are designed to help students develop research and critical thinking
skills in addressing issues that go beyond the purely mechanical elements of accounting.

Did the Cost Method Invite Manipulation?

The cost method of accounting for investments often caused a lack of objectivity in reported
income figures. With a large block of the investee’s voting shares, an investor could influence the
amount and timing of the investee’s dividend distributions. Thus, when enjoying a good earnings
year, an investor might influence the investee to withhold dividend distributions until needed in a
subsequent year. Alternatively, if the investor judged that its current year earnings “needed a
boost,” it might influence the investee to pay a current year dividend.

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The equity method effectively removes managers’ ability to increase current income (or defer
income to future periods) through their influence over the timing and amounts of investee
dividend distributions.

At first glance it may seem that the fair value method allows managers to manipulate income
because investee dividends are recorded as income by the investor. However, dividends paid
typically are accompanied by a decrease in fair value (also recognized in income), thus leaving
reported net income unaffected.

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Does the Equity Method Really Apply Here?
The discussion in the case between the two accountants is limited to the reason for the
investment acquisition and the current percentage of ownership. Instead, they should be
examining the actual interaction that currently exists between the two companies. Although the
ability to exercise significant influence over operating and financial policies appears to be a rather
vague criterion, ASC 323 "Investments—Equity Method and Joint Ventures," clearly specifies
actual events that indicate this level of authority (paragraph 323-10-15-6):

Ability to exercise that influence may be indicated in several ways, such as representation on the
board of directors, participation in policy-making processes, material intra-entity transactions,
interchange of managerial personnel, or technological dependency. Another important
consideration is the extent of ownership by an investor in relation to the concentration of other
shareholdings, but substantial or majority ownership of the voting stock of an investee company
by another investor does not necessarily preclude the ability to exercise significant influence by
the investor.

In this case, the accountants would be wise to determine whether Dennis Bostitch or any other
member of the Highland Laboratories administration is participating in the management of
Abraham, Inc. If any individual from Highland's organization is on Abraham’s board of directors or
is participating in management decisions, the equity method would seem to be appropriate.
Likewise, if significant transactions have occurred between the companies (such as loans by
Highland to Abraham), the ability to apply significant influence becomes much more evident.

However, if James Abraham continues to operate Abraham, Inc., with little or no regard for
Highland, the equity method should not be applied. This possibility seems especially likely in this
case since one stockholder, James Abraham, continues to hold a majority (2/3) of the voting
stock. Thus, evidence of the ability to apply significant influence must be present before the
equity method is viewed as applicable. The mere holding of 1/3 of the stock is not conclusive.

Should Investor-Investee Relations Determine Investor Accounting for Investee

Currently firms can simply “elect” fair value or equity method accounting for their significant
influence investments. If the FASB ultimately decides on adding a business relationship criterion
for equity method use, firms would no longer have the ability to elect either treatment. The
combination of significant influence and a “business relation” would require equity method
accounting. The lack of either a “business relation” or significant influence would require fair value
accounting for the investment.

Under present rules, the reporting decision (fair value vs. equity method) depends on factors
specific to the reporting entity and its management. These factors may not be fully known to
investors. The FASB’s decision provides criteria for the appropriate accounting and would reduce
if not eliminate managerial discretion in financial reporting for these investments. Also, under
current standards, similar investment situations may have divergent outcomes across reporting
entities. Consequently, consistent criteria across reporting entities may improve comparability.

If the two firms operate in completely unrelated businesses, the investor firm may have little
incentive to influence the investee’s decisions even if it has the ability to do so. Thus, fair value
might provide a more relevant valuation for the investment. Alternatively, firms often interact
cooperatively in conducting their businesses (e.g., intra-entity transactions, marketing
agreements, etc.). Thus, an investee may act as an extension of the investor (i.e., an additional
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productive asset) with accrual accounting providing more relevant reporting. By recording the
investment at cost with periodic adjustments to accrue investee income, the investor firms report
the results of both their initial investment decision and the related income stream that results from
its influence in decision making. In essence, the investor, to the extent of its ownership interest, is
responsible for the investee’s net assets and the income that derives from these net assets.

Answers to Questions

1. The equity method should be applied if the ability to exercise significant influence over the
operating and financial policies of the investee has been achieved by the investor. However, if
actual control has been established, consolidating the financial information of the two
companies will normally be the appropriate method for reporting the investment.

2. According to FASB ASC paragraph 323-10-15-6 "Ability to exercise that influence may be
indicated in several ways, such as representation on the board of directors, participation in
policy-making processes, material intra-entity transactions, interchange of managerial
personnel, or technological dependency. Another important consideration is the extent of
ownership by an investor in relation to the extent of ownership of other shareholdings." The
most objective of the criteria established by the Board is that holding (either directly or
indirectly) 20 percent or more of the outstanding voting stock is presumed to constitute the
ability to hold significant influence over the decision-making process of the investee.

3. The dividends are reported as a deduction from the investment account, not revenue, to avoid
reporting the income from the investee twice. The equity method is appropriate when an
investor has the ability to exercise significant influence over the operating and financing
decisions of an investee. Because dividends represent financing decisions, the investor may
have the ability to influence dividend timing. If dividends were recorded as income (cash basis
of income recognition), managers could affect reported income in a way that does not reflect
actual performance. Therefore, in reflecting the close relationship between the investor and
investee, the equity method employs accrual accounting to record income as it is earned by
the investee. The investment account is increased for the investee”s earned income and then
decreased as the income is distributed, through dividends. From the investor’s view, the
decrease in the investment asset (the dividends received) is offset by an increase in cash.

4. If Jones cannot significantly influence the operating and financial policies of Sandridge, the
equity method should not be applied regardless of the ownership level. However, an owner of
25 percent of a company's outstanding voting stock is assumed to possess this ability. This
presumption stands until overcome by predominant evidence to the contrary.

Examples of indications that an investor may be unable to exercise significant influence over
the operating and financial policies of an investee include (ASC 323-10-15-10):
a. Opposition by the investee, such as litigation or complaints to governmental regulatory
authorities, challenges the investor's ability to exercise significant influence.
b. The investor and investee sign an agreement under which the investor surrenders
significant rights as a shareholder.
c. Majority ownership of the investee is concentrated among a small group of shareholders
who operate the investee without regard to the views of the investor.

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 d. The investor needs or wants more financial information to apply the equity method than is
available to the investee's other shareholders (for example, the investor wants quarterly
financial information from an investee that publicly reports only annually), tries to obtain
that information, and fails.
e. The investor tries and fails to obtain representation on the investee's board of directors.
5. The following events necessitate changes in this investment account.
a. Net income earned by Watts would be reflected by an increase in the investment balance
whereas a reported loss is shown as a reduction to that same account.
b. Dividends paid by the investee decrease its book value, thus requiring a corresponding
reduction to be recorded in the investment balance.
c. If, in the initial acquisition price, Smith paid extra amounts because specific investee
assets and liabilities had values differing from their book values, amortization of this
portion of the investment account is subsequently required. As an exception, if the specific
asset is land or goodwill, amortization is not appropriate.
d. Intra-entity gross profits created by sales between the investor and the investee must be
deferred until earned through usage or resale to outside parties. The initial deferral entry
made by the investor reduces the investment balance while the eventual recognition of the
gross profit increases this account.

6. The equity method has been criticized because it allows the investor to recognize income that
may not be received in any usable form during the foreseeable future. Income is being
accrued based on the investee's reported earnings, not on the dividends collected by the
investor. Frequently, equity income will exceed the cash dividends received by the investor
with no assurance that the difference will ever be forthcoming.

Many companies have contractual provisions (e.g., debt covenants, managerial compensation
contracts) based on ratios in the main body of the financial statements. Relative to
consolidation, a firm employing the equity method will report smaller values for assets and
liabilities. Consequently, higher rates of return for its assets and sales, as well as lower debt-
to-equity ratios may result. Meeting such contractual provisions of may provide managers
incentives to maintain technical eligibility for the equity method rather than full consolidation.

7. FASB ASC Topic 323 requires that a change to the equity method be reflected by a
retrospective adjustment. Although a different method may have been appropriate for the
original investment, comparable balances will not be readily apparent if the equity method is
now applied. For this reason, financial figures from all previous years are restated as if the
equity method had been applied consistently since the date of initial acquisition.

8. In reporting equity earnings for the current year, Riggins must separate its accrual into two
income components: (1) operating income and (2) extraordinary gain. This handling enables
the reader of the investor's financial statements to assess the nature of the earnings that are
being reported. As a prerequisite, any unusual and infrequent item recognized by the investee
must also be judged as material to the operations of Riggins for separate disclosure by the
investor to be necessary.

9. Under the equity method, losses are recognized by an investor at the time that they are
reported by the investee. However, because of the conservatism inherent in accounting, any
permanent losses in value should also be recorded immediately. Because the investee's stock

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 has suffered a permanent impairment in this question, the investor recognizes the loss
applicable to its investment.

10. Following the guidelines established by the ASC, Wilson would recognize an equity loss of
$120,000 (40 percent) stemming from Andrews' reported loss. However, since the book value
of this investment is only $100,000, Wilson's loss is limited to that amount with the remaining
$20,000 being omitted. Subsequent income will be recorded by the investor based on the
dividends received. If Andrews is ever able to generate sufficient future profits to offset the
total unrecognized losses, the investor will revert to the equity method.

11. In accounting, goodwill is derived as a residual figure. It is the investor's cost in excess of its
share of the fair value of the investee assets and liabilities. Although a portion of the
acquisition price may represent either goodwill or valuation adjustments to specific investee
assets and liabilities, the investor records the entire cost in a single investment account. No
separate identification of the cost components is made in the reporting process.
Subsequently, the cost figures attributed to specific accounts (having a limited life), besides
goodwill and other indefinite life assets, are amortized based on their anticipated lives. This
amortization reduces the investment and the accrued income in future years.

12. On June 19, Princeton removes the portion of this investment account that has been sold and
recognizes the resulting gross profit or loss. For proper valuation purposes, the equity method
is applied (based on the 40 percent ownership) from the beginning of Princeton's fiscal year
until June 19. Princeton's method of accounting for any remaining shares after June 19 will
depend upon the degree of influence that is retained. If Princeton still has the ability to
significantly influence the operating and financial policies of Yale, the equity method continues
to be appropriate based on the reduced percentage of ownership. Conversely, if Princeton no
longer holds this ability, the fair-value method becomes applicable, based on the remaining
equity value after the sale.

13. Downstream sales are made by the investor to the investee while upstream sales are from the
investee to the investor. These titles have been derived from the traditional positions given to
the two parties when presented on an organization-type chart. Under the equity method, no
accounting distinction is actually drawn between downstream and upstream sales. Separate
presentation is made in this chapter only because the distinction does become significant in
the consolidation process as will be demonstrated in Chapter Five.

14. The unrealized portion of an intra-entity gross profit is computed based on the markup on any
transferred inventory retained by the buyer at year's end. The markup percentage (based on
sales price) multiplied by the intra-entity ending inventory gives the seller’s profit remaining in
the buyer’s ending inventory. The product of the ownership percentage and this profit figure is
the unrealized gross profit from the intra-entity transaction. This profit is deferred in the
recognition of equity earnings until subsequently earned through use or resale to an unrelated
party.

15. Intra-entity transfers do not affect the financial reporting of the investee except that the
related party transactions must be appropriately disclosed and labeled.

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16. Under the fair value option, firms report the investment’s fair value as an asset and changes
in fair value as earnings. Dividends received from an investee are included in earnings under
the fair value option. Dividends received are not in income but instead reduce the investment
account under the equity method. Also, under the equity method, firms recognize their
ownership share of investee profits adjusted for excess cost amortizations and intra-entity
profits.

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Answers to Problems
1. D

2. B

3. C

4. B

5. D

6. A Acquisition price ............................................................................. $1,600,000

Equity income ($560,000 × 40%) .................................................... 224,000
Dividends (50,000 shares × $2.00) ................................................. (100,000)
Investment in Harrison Corporation as of December 31 .............. $1,724,000

7. A Acquisition price ....................................................... $700,000

Income accruals: 2012—$170,000 × 20% ................ 34,000
2013—$210,000 × 20% ................ 42,000
Amortization (see below): 2012 ................................ (10,000)
Amortization: 2013 .................................................... (10,000)
Dividends: 2012—$70,000 × 20% ............................. (14,000)
2013—$70,000 × 20% .............................. (14,000)
Investment in Bremm, December 31, 2013 .............. $728,000

Acquisition price ....................................................... $700,000

Bremm’s net assets acquired ($3,000,000 × 20%) .. (600,000)
Excess cost to patent................................................ $100,000
Annual amortization (10 year life) ........................... $10,000

8. B Purchase price of Baskett stock .................... $500,000

Book value of Baskett ($900,000 × 40%) ....... (360,000)
Cost in excess of book value .................... $140,000 Life Annual
Payment identified with undervalued ............ Amortization
Building ($140,000 × 40%) ......................... 56,000 7 yrs. $8,000
Trademark ($210,000 × 40%) ..................... 84,000 10 yrs. 8,400
Total ................................................................. $ -0- $16,400

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 Cost of investment .......................................................... $500,000
Basic income accrual ($90,000 × 40%) .................... 36,000
Amortization (above) ................................................. (16,400)
Dividend collected ($30,000 × 40%) ........................ (12,000)
Investment in Baskett ..................................................... $507,600

9. D The 2012 purchase is reported using the equity method.

Purchase price of Goldman stock ................................................. $600,000

Book value of Goldman stock ($1,200,000 × 40%)........................ (480,000)
Goodwill ........................................................................................... $120,000
Life of goodwill ................................................................................ indefinite
Annual amortization ........................................................................ (-0-)

Cost on January 1, 2012 ................................................................. $600,000

2012 Income accrued ($140,000 x 40%) ......................................... 56,000
2012 Dividend collected ($50,000 × 40%) ...................................... (20,000)
2013 Income accrued ($140,000 × 40%)......................................... 56,000
2013 Dividend collected ($50,000 × 40%) ...................................... (20,000)
2014 Income accrued ($140,000 × 40%)......................................... 56,000
2014 Dividend collected ($50,000 × 40%) ...................................... (20,000)
Investment in Goldman, 12/31/14.............................................. $708,000

10. D

11. A Gross profit rate (GPR): $36,000 ÷ $90,000 = 40%

Inventory remaining at year-end .................................................... $20,000
GPR................................................................................................... × 40%
Unrealized gross profit .............................................................. $8,000
Ownership ........................................................................................ × 30%
Intra-entity gross profit—deferred ............................................ $ 2,400

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12. B Purchase price of Steinbart shares ............................................... $530,000
Book value of Steinbart shares ($1,200,000 × 40%) ..................... (480,000)
Trade name ...................................................................................... $ 50,000
Life of trade name............................................................................ 20 years
Annual amortization ........................................................................ $ 2,500
2012 Gross profit rate = $30,000 ÷ $100,000 = 30%
2013 Gross profit rate = $54,000 ÷ $150,000 = 36%
2013—Equity income in Steinbart:
Income accrual ($110,000 × 40%) ................................................... $44,000
Amortization (above) ....................................................................... (2,500)
Recognition of 2012 unrealized gross profit
($25,000 × 30% GPR × 40% ownership).................................... 3,000
Deferral of 2013 unrealized gross profit
($45,000 × 36% GPR × 40% ownership ..................................... (6,480)
Equity income in Steinbart—2013 ............................................ $38,020

13. (6 minutes) (Investment account after one year)

Purchase price ..................................................................................... $ 1,160,000
Basic equity accrual ($260,000 × 40%) - 2013 ................................... 104,000
Amortization of copyright:
Excess payment ($1,160,000 – $820,000 = $340,000)
to copyright allocated over 10 year life .................................... (34,000)
Dividends (50,000 × 40%) .................................................................... (20,000)
Investment in O’Toole at December 31, 2013.................................... $1,210,000

14. (7 minutes)
a. Purchase price ................................................................................. $ 2,290,000
Equity income accrual ($720,000 × 35%) ....................................... 252,000
OCI loss accrual ($100,000 × 35%) ................................................. (35,000)
Dividends (20,000 × 35%) ................................................................ (7,000)
Investment in Steel at December 31, 2013 .................................... $2,500,000

b. Equity in Earnings of Steel = $252,000 (does not include OCI share which is
reported separately).

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15. (10 minutes) (Investment account after 2 years with fair value option included)
a. Acquisition price ................................................................................. $60,000
Book value—assets minus liabilities ($125,000 × 40%) ............... 50,000
Excess payment ......................................................................... $10,000
Value of patent in excess of book value ($15,000 × 40%) ............ 6,000
Goodwill ........................................................................................... $ 4,000
Amortization:
Patent ($6,000 ÷ 6) ...................................................................... $1,000
Goodwill ...................................................................................... -0-
Annual amortization ............................................................. $1,000
Acquisition price ............................................................................. $60,000
Basic equity accrual 2012 ($30,000 × 40%) ................................... 12,000
Dividends—2012 ($10,000 × 40%) .................................................. (4,000)
Amortization—2012 (above) ........................................................... (1,000)
Investment in Holister, 12/31/12 ..................................................... $67,000
Basic equity accrual —2013 ($50,000 × 40%) ................................ 20,000
Dividends—2013 .............................................................................. (6,000)
Amortization—2013 (above) ........................................................... (1,000)
Investment in Holister, 12/31/13 ..................................................... $80,000
b. Dividend income ($15,000 × 40%) .................................................. $6,000
Increase in fair value ($75,000 – $68,000)...................................... 7,000
Investment income under fair value option—2013 ....................... $13,000

16. (10 minutes) (Equity entries for one year, includes intra-entity transfers but no
unearned gross profit)

Purchase price of Batson stock ..................................................... $210,000

Book value of Batson stock ($360,000 × 40%) .............................. (144,000)
Unidentified asset (goodwill).......................................................... $ 66,000
Life .................................................................................................... indefinite
Annual amortization ........................................................................ $ -0-

No unearned intra-entity profit exists at year’s end because all of the transferred
merchandise was used during the period.

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16. (continued)

Investment in Batson, Inc. ........................................ 210,000

Cash (or a Liability) .............................................. 210,000
To record acquisition of a 40 percent interest in Batson.

Investment in Batson, Inc. ........................................ 32,000

Equity in Investee Income ................................... 32,000
To recognize 40 percent income earned during period by Batson, an
investment recorded by means of the equity method.

Cash ............................................................................ 10,000

Investment in Batson, Inc. ................................... 10,000
To record collection of dividend from investee recorded by means of the
equity method.

17. (20 Minutes) (Equity entries for one year, includes conversion to equity
method)

The 2012 purchase must be restated to the equity method.

FIRST PURCHASE—JANUARY 1, 2012

Purchase price of Denton stock ....................................... $210,000
Book value of Denton stock ($1,700,000 × 10%) ............. (170,000)
Cost in excess of book value ........................................... $40,000
Excess cost assigned to undervalued land
($100,000 × 10%) ............................................................ (10,000)
Trademark .......................................................................... $30,000
Life of trademark ............................................................... 10 years
Annual amortization .......................................................... $3,000

BOOK VALUE—DENTON—JANUARY 1, 2013 (before second purchase)

January 1, 2012 book value (given) ................................. $1,700,000
2012 Net income ................................................................ 240,000
2012 Dividends .................................................................. (90,000)
January 1, 2013 book value .......................................... $1,850,000
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17. (continued)
SECOND PURCHASE—JANUARY 1, 2013
Purchase price of Denton stock ................................... $600,000
Book value of Denton stock (above) ($1,850,000 × 30%) (555,000)
Cost in excess of book value ....................................... $45,000
Excess cost assigned to undervalued land
($120,000 × 30%) ........................................................ (36,000)
Trademark ...................................................................... $9,000
Life of Trademark .......................................................... 9 years
Annual Amortization ...................................................... $1,000

Entry One—To record second acquisition of Denton stock.

Investment in Denton ................................................ 600,000
Cash ...................................................................... 600,000

Entry Two—To restate reported figures for 2012 to the equity method for
comparability. Reported income will be $24,000 (10% of Denton’s income) less
$3,000 (amortization on first purchase) for a net figure of $21,000. Originally,
$9,000 would have been reported by Waters (10% of the dividends). The
adjustment increases the $9,000 to $21,000 for 2012.

Investment in Denton ................................................ 12,000

Retained Earnings—Prior Period Adjustment—
2012 Equity Income .............................................. 12,000

Entry Three—To record income for the year: 40% of the $300,000 reported
income.
Investment in Denton ................................................ 120,000
Equity Income—Investment in Denton ............... 120,000

Entry Four—To record collection of dividends from Denton (40% of $110,000).

Cash ............................................................................ 44,000
Investment in Denton ........................................... 44,000

Entry Five—To record amortization for 2013: $3,000 from first purchase and
$1,000 from second.

Equity Income—Investment in Denton .................... 4,000

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 Investment in Denton ........................................... 4,000

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18. (5 minutes) (Deferral of unrealized gross profit)

Ending inventory ($225,000 – $105,000) ............................................ $120,000

Gross profit percentage (GP $75,000 ÷ Sales $225,000) ................. × 33⅓%
Unrealized gross profit ................................................................... $40,000
Ownership ............................................................................................ × 25%
Intra-entity unrealized gross profit—deferred............................... $10,000

Entry to Defer Unrealized Gross Profit:

Equity Income from Schilling ....................................... 10,000

Investment in Schilling ............................................. 10,000

19. (10 minutes) (Reporting of equity income and transfers)

a. Equity in investee income:

Equity income accrual ($100,000 × 25%).................................. $25,000
Less: deferral of intra-entity unrealized gross profit (below) (3,000)
Less: patent amortization (given) ............................................ (10,000)
Equity in investee income .................................................... $12,000

Deferral of intra-entity unrealized gross profit:

Remaining inventory—end of year ...................................... $32,000
Gross profit percentage (GP $30,000 ÷ Sales $80,000) ..... × 37½%
Profit within remaining inventory ........................................ $12,000
Ownership percentage ......................................................... × 25%
Intra-entity unrealized gross profit ............................................... $ 3,000

b. In 2013, the deferral of $3,000 will likely become realized by BuyCo’s

use or sale of this inventory. Thus, the equity accrual for 2013 will be
increased by $3,000 in that year. Recognition of this amount is simply being
delayed from 2012 until 2013, the year actually earned.

c. The direction (upstream versus downstream) of the intra-entity transfer

does not affect the above answers. However as discussed in Chapter Five,
a controlling interest calls for a 100% gross profit deferral for downstream
intra-entity transfers. In the presence of only signification influence,
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 however, equity method accounting is identical regardless of whether an
intra-entity transfer is upstream or downstream.

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20. (20 minutes) (Conversion from fair-value method to equity method with a
subsequent sale of a portion of the investment)

Equity method income accrual for 2013

30 percent of $500,000 for ½ year = ..................................... $ 75,000
28 percent of $500,000 for ½ year = ..................................... 70,000
Total income accrual (no amort. or unearned gross profit) .......... $145,000
Gain on sale (below) 23,133
Total income statement effect – 2013 $168,133

Gain on sale of 2,000 shares of Brown:

Cost of initial acquisition—2011 .................................................... $250,000
10% income accrual (conversion made to equity method) .......... 35,000
10% of dividends ............................................................................. (10,000)
Cost of second acquisition—2012 ................................................. 590,000
30% income accrual (conversion made to equity method) .......... 144,000
30% of dividends—2012 .................................................................. (33,000)
30% income accrual for ½ year - 2013 ........................................... 75,000
30% of dividends for ½ year - 2013 ................................................ (18,000)
Book value on July 1, 2013 ....................................................... $1,033,000

Cash proceeds from the sale: 2,000 shares × $46 ....................... $92,000
Less: book value of shares sold: $1,033,000 × (2,000 ÷ 30,000) 68,867
Gain on sale ................................................................................ $23,133

21. (25 minutes) (Verbal overview of equity method, includes conversion to equity
method)

a. In 2012, the fair-value method (available-for-sale security) was appropriate.

Thus, the only income recognized was the dividends received. Collins
should originally have reported dividend income equal to 10 percent of the
payments made by Merton.

b. The assumption is that Collins’ level of ownership now provides the

company with the ability to exercise significant influence over the operating
and financial policies of Merton. Factors that indicate such a level of
influence are described in the textbook and include representation on the
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 investee’s board of directors, material intra-entity transactions, and
interchange of managerial personnel.

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Other documents randomly have
different content
 The coach drew up in front of the largest building in the place. It
gave out a pleasant odour as of new pine and clean shavings; across
its front was hung a large sign which announced it to be the
Metropolitan Hotel.
A tall man in his shirt-sleeves, with a sandy beard, and a quill
toothpick held negligently between his teeth, stepped to the coach.
Stephen conjectured that this was no less a person than Mr. Jim
Youtsey himself.
“Friends of the general's?” he inquired affably.
“Yes,” said Stephen, stepping to the ground.
“The general asked me to keep an eye peeled for you. He's over in
the next county, will be back to-morrow if nothing happens—a
splendid man! You couldn't have a stronger indorsement, sir, I'm
glad to know you, glad to welcome you into our midst!” And Mr.
Youtsey shot him a sunny smile over the tip of his toothpick and held
out his hand. “Present me to the Madame—Youtsey's my name.”
Stephen did so, and Mr. Youtsey removed his hat with one hand
and his toothpick with the other; his hat was returned to his head,
and his toothpick to his mouth by a common movement of his two
hands, and he led the way toward his hotel.
“What you see, sir, is the newest thing in Kansas. A year ago there
was nothing here but sunshine and jack-rabbits.”
He further begged Stephen to particularly note that Grant City was
not a cow town; its wealth being derived entirely from the cultivation
of the soil; where were the farms? Just scattered about. Yonder was
the general's office; and through the falling twilight down the street,
Stephen, following the direction of Mr. Youtsey's useful toothpick,
was able to distinguish a very small building with a very large sign;
indeed the number and size of these signs greatly astonished him,
since no building seemed complete without one. Commenting upon
this fact, Mr. Youtsey kindly paused to explain that Grant City had
assembled itself on the prairie with such haste, and with so little
regard for the proper housing of its citizens, that such buildings as
had been erected were not only places of residence, but were used
as offices and stores as well—hence the signs. Having made this
point clear, Mr. Youtsey personally conducted them to their room,
still accompanied by his hat and toothpick, with both of which he
seemed loath to part.
He left them, and presently a small coloured boy appeared with a
pitcher of ice-water, and the information that supper was served. On
going down-stairs to the dining-room, they found Mr. Youtsey at the
head of a long table at which were seated half a score of men.
There immediately followed numerous introductions. Of the ten men,
five, Stephen gathered, were in the real estate business; four were
recent arrivals like himself who were looking about.
The last to be introduced was a small elderly man with a very red
face and a generally dissipated air, whom Mr. Youtsey presented as
Dr. Arling.
“I hope you'll find things home-like here, ma'am,” and Mr. Youtsey
addressed himself to Marian. “We are shy on ladies, it's strictly a
voting population.” Then he permitted his duties as host to absorb
him, and when he had seen that his guests were served, he seated
himself with a pleasant:
“Any one that hasn't had, just holler!”
Stephen's first impression of Grant City had been distinctly
unfavourable, but he said nothing of this to Marian; he felt it would
be wiser to wait until he saw Gibbs before he committed himself to
an opinion.
He saw Gibbs the next morning; on going down to the hotel office
he was welcomed by his friend who fell upon him and fairly
embraced him, then he held him at arm's length.
“Well, Landray, I am glad indeed,” he ejaculated.
The general was not less florid than of yore, but his face had a
battered look; for the rest, he was sleek and prosperous to the eye.
“They tell me you've brought your wife, Landray—that looks as
though you'd come to stay! I'm so sorry my Julia ain't here, but
she's visiting friends in St. Louis. What do you think of this year-old
child of mine? Something to have accomplished in a twelve month?”
and the general patted Stephen affectionately on the back.
Then Stephen must drink with him, and they retired to Mr. Yout-
sey's bar accompanied by Dr. Arling.
“This is to success, Landray!” said Gibbs smiling over the rim of his
glass, and Stephen smiled and nodded, too; Dr. Arling merely tilted
his glass into a toothless cavity and drew the back of his hand across
his lips, for as Mr. Youtsey was accustomed to observe, “He shot his
slugs without a rest.”
“Another round, Jim!” commanded the doctor.
Mr. Youtsey took the toothpick from between his teeth, he had
apparently acquired it along with his clothes when he was dressed,
and said affably:
“Ain't you a little early, Doc? You'll have a pair of hard-boiled eyes
for breakfast if you keep on.”
“Shove along the drinks, don't keep the gentlemen waiting!”
ordered the doctor huskily.
And Mr. Youtsey spun the glasses jingling across the bar.
The breakfast bell sounded a moment or two later, and they left
Dr. Arling leaning limply against the bar, while they repaired to the
dining-room where Gibbs met Marian, and did the honours with
great gallantry.
“Now, my dear lady,” said he, as they rose from the table, his
manner breathing benevolence and urbanity, “I am going to take this
husband of yours down to my office for a chat and smoke.”
When they reached the street, Landray said:
“Well, general, prosperity seems to be smiling on you.”
“It's grinning from ear to ear; Grant City ain't pretty;
architecturally she belongs to the year one—she's about the way
Rome was when Remus got himself disliked by jumping over the
wall; but it's as good as money in the bank.”
“It seems to offer an inviting field for real estate agents,” said
Stephen.
 The general laughed.
“Oh, don't let that trouble you, Landray! It's Gibbs's eggs that'll
hatch out first, so don't you worry. We'll stand shoulder to shoulder.
You haven't any capital? Well, no matter—here brains and character
will see you far; and you got both, for you're a Landray.”
They had reached the office by this time, and Gibbs forced his
friend into his best chair; he then provided Stephen and himself with
cigars, and was ready for business.
“I want you to take right hold, Landray, and look after things,” he
said. “I'm going to branch out; I find I can't tie myself down—the
office work don't suit me. We're not only going to sell lots, we're
going to put up the buildings on them as well—this will be in your
department. I'm going to make it my business to keep Grant City
before the public. I'll have a weekly paper running here inside of the
next thirty days, and I got my eye on a seat in the State Legislature,
too; I want to play strong for that, or a worse man may fill it; but
you ain't interested in all this yet; naturally you're wanting to know
where you come in and what I got to offer you. I'm going to make
you the right sort of a proposition here and now, a proposition you
can't afford to turn down.”
And Gibbs was rather better than his word, for just twenty-four
hours later Stephen was established in his office with a satisfactory
salary and an interest in the business as well.
He had been inclined to look upon the town as something of a
farce, but he soon decided that in this hasty opinion he had formed,
his judgment had been at fault. Men straggled in by stage and
prairie schooner; there was a steady demand for lots, indeed the
demand was only exceeded by the supply; and he was rather
dubious as to the wisdom of the town-site speculators who with the
aid of tape line and stakes seemed willing to apportion the greater
part of Kansas to the future needs of Grant City.
“They'll overdo it,” he told Gibbs.
“I guess not,” said Gibbs. “You can't really overdo a good thing,
and Grant City's the best thing in Kansas. It's getting about that it is,
too—the public's waking up to the fact.”
But while Stephen never quite believed in the methods Gibbs
seemed to consider so admirable, he saw that the cheap and hastily
erected houses they were building, principally on credit, all found
tenants the moment they were habitable.
He and Marian lived in one of these houses, one of several that
formed an unpainted row that overlooked the dusty Main Street
which later when the winter rains set in, became a bog that the
citizens—knowing its perils—navigated with caution. It was here that
a son was born them, who was christened Stephen Mason Landray.
Gibbs would have had this event celebrated in some public
manner; for, as he said, little Stephen was the first native-born
citizen of Grant City, but out of consideration for Stephen's wishes in
the matter, he compromised by deeding the child a town lot.
“It will probably be worth thousands by the time he comes of age,
Landray,” he told the father. “But how is Marian?”
Stephen looked grave.
“Why, she don't seem to rally,” he said.
“What does Dr. Arling say?” asked Gibbs.
“He seems to think she will have her strength back as soon as it
gets warmer.”
“To be sure she will, a few mild days will see her up and about. I
have all confidence in Arling; I know—I know, his habits are not
what you'd look for in a man of his attainments; but it's no use to
expect him to be different from what he is.”
Gibbs had established his newspaper, the Kansas Epoch, which he
conducted with much noise and vigour.
“There's no use my denying it,” he told Stephen, “but I got the
editorial faculty. A newspaper in my hands becomes a personal
organ in the best sense. I reckon you can see me in every line. I
take the responsibility pretty seriously, too. I know you don't just
believe in the Epoch, because it don't show a profit in dollars and
cents; but the loss in money's a gain in prestige.”
 Which was quite true, for Gibbs was the great man locally; an
admired and respected presence at Mr. Youtsey's bar. It was the
general here, and the general there; the echo of his name constantly
filled the ear. He was vain, bustling, ostentatious; the small fry of
struggling country newspapers heralded his passing to and fro in the
State with much noise; for that fall there had been a hotly contested
State election, and Gibbs with an eye single to his own advancement
had taken the stump. Even so far away as St. Louis one of the big
dailies had chanced to speak of him as “General Gibbs of Kansas,” a
tribute to his growing fame which seemed to argue that he had
already become almost a national figure. Perhaps it was this divided
interest that was responsible for his business methods, for they
struck Stephen as being entirely haphazard, nor could he induce him
to make any change here.
Mrs. Gibbs had returned to Grant City during the winter fully
prepared to make friends with Marian; but Marian conceived a dislike
for her which she was at no pains to conceal, and in the end Julia
informed Gibbs that Landray's wife was a stuck-up little fool, which
seemed to amuse the general immensely.
Stephen felt that it might have been to their advantage had
Marian sought to conciliate Mrs. Gibbs, since he did not know how
Gibbs himself might be affected; but Gibbs was affected not at all;
he commented upon their mutual hostility with characteristic
candour.
“God bless 'em! The ladies can't help it, Landray, and it might be
worse if they were intimate. Now, my Julia can't carry to Marian any
little thing I chance to let drop about you, and Marian can't take up
any slighting criticism you may make of me. I don't know but that
we have a good deal to be thankful for; anyhow—God bless 'em, let
'em fight it out! It won't upset our friendship. I knew from the first
that we were cut out for a business connection; you're long-headed
and conservative; I own I'm something of an idealist—my
imagination runs away with me. You're the steady hand, and by the
time we've talked a scheme over we get together on a pretty sane
conclusion.”
 To Stephen this was a flattering opinion that he hoped the general
might never have cause to reconsider.
Apart from his anxiety concerning Marian, Stephen was on the
whole, happy and well content in Grant City. But Marian grew no
better; indeed as the summer advanced, he sometimes fancied he
noted a change for the worse, though Arling, still the only doctor in
the place, pooh-poohed this fear of his.
“Yes, but why don't she get better?” Stephen would demand.
“She will, Landray; give her time. I'm free to say it ain't just a
usual case, but there's no organic trouble, she ought to be a well
woman.” And he would scuttle off in the direction of Mr. Youtsey's
bar, where he could always be found when wanted.
And all this while Grant City seemed to grow and prosper. The
huddle of houses increased by the roadside; there were side streets
sparsely built upon it is true, but there was the beginning of a
perceptible movement in this direction. The place was taking on the
semblance of a town.
The stage carried a constantly increasing traffic; the tri-weekly
gave place to a daily service; next there was both a midmorning and
afternoon stage, but even this failed to entirely meet local needs, for
as Mr. Youtsey said, the town was throwing a fifty-inch chest.
There was talk of issuing bonds for what Gibbs called municipal
improvements; the town-site speculators clamoured for graded
streets and gas, and the general, in the Epoch, demanded a speedy
settlement of the vexing question of the county seat. More than this
he announced that he would personally make it his business to see
that they secured the county seat; and he took himself together with
the logic of the situation to the capital there to lobby for the
measure; and all this while the wilderness of pegs grew out upon
the prairie.
Winter came again and brought a lull to the trafficking; but early
in the spring a corps of railroad engineers pitched their camp on the
outskirts of the town, and more additions were plotted and more
pegs driven to keep pace with the impetus given by this most recent
development.
Gibbs was still at Topeka in the matter of the county seat which he
had not been able to adjust, since Grant City had a rival that dared
to claim this honour for itself, though no one seriously regarded its
claim—certainly no one in Grant City, where the town-site
speculators ridiculed the idea when it was advanced in their hearing,
and Gibbs, in the Epoch, wrote sarcastic editorials that were much
admired, and that proved as clearly as pen and ink can prove
anything, the county seat must come to Grant City.
But one night after Stephen had gone home to his sick wife, he
heard a loud knock at his door, and on going down to answer this
summons, found Gibbs, whom he had supposed to be still in Topeka,
standing on the threshold.
 CHAPTER THIRTY-SEVEN

G
IBBS, his battered face red and perspiring, tramped the
length of the room without speech; then he turned and
tramped back again.
“When did you get to town?” asked Stephen, putting down the
lamp he carried. He knew that Gibbs had not come on the afternoon
stage for he had been in the crowd at the hotel when it arrived.
“Oh, I missed the stage, and got a man to drive me across,” said
the general, pausing and moodily mopping his face. “Well, what they
did to us up at Topeka ain't a little. We don't get the county seat! I
don't know who gets it, but we won't—you can everlastingly make
up your mind to that!”
“Is there nothing you can do?”
“Do!” cried the general in a tone of infinite disgust. “I didn't have
a chance to do!”
Stephen looked his dismay.
“A little public spirit and we might have landed it, but I was left to
give my time and spend my money, as if my personal influence
unsupported, was all that was needed! I been made to look foolish!
Well, when they ask me where those county buildings are, I'll tell
'em they can search me!” and the general shrugged his shoulders to
indicate the indifference he did not feel. “It's news to sleep on, ain't
it?” continued Gibbs. “Grant City's given itself county seat airs from
the start, now all we got to do is to lose the railroad, and we might
just as well shut up shop. Well, we ain't lost the railroad.”
“No,” said Stephen clutching at this hope. “The engineers are in
camp here now.”
“It's going to give us a set back,” said the general, who was still
thinking of the county seat. “But I reckon we're strong enough to
stand it—annoying though, ain't it?” and he paused in his tramping
which he had resumed, to stare hard at Stephen. “How do you feel
about it anyhow?” he asked.
“It's a calamity,” said Landray gravely.
“It certainly is,” agreed the general. “We thought we had it sure,
didn't we? Well, there is such a thing as being too sure. I tell you,
Steve, we ain't the only fellows in Kansas with land to sell; there was
plenty of others in the same line, and I went up against 'em hard at
the capital, and they sat down pat on our little scheme. We got to go
slow, things will come steady presently, but until they do we got to
slack off on the building. I am sorry I got you up to tell you nothing
better than this; don't worry though. How's Mrs. Landray?”
“About the same.”
“Humph! What does Arling say? I wonder if you hadn't better get
away from here, Steve?” asked the general with kindly concern.
“And leave you to face the crisis?”
“It won't be the first one I've faced,” and Gibbs expanded his
chest. “Maybe the climate just don't agree with her.”
“No, I sha'n'. leave you; and I doubt if Marian could make the
change now.”
“Well, you know best, Landray, only don't let any sense of honour
hold you here when it's to your interest to leave. I'm willing to split
with you to-morrow if you say the word, and I'll think none the less
of you. I ain't always been above running away myself. Just
remember there's some money to divide now, and there may not be
a red cent six months hence.”
“I'll chance it,” said Stephen firmly.
“Just as you like, but I want you to know that I don't consider you
in any ways obligated to me. You have earned all you have had out
of the business; it wouldn't set well for me to pretend otherwise.”
“Thank you, general,” said the younger man gratefully.
“Well, it's so. You sleep on what I've said.”
 Then the general took his leave, and Stephen went back to his
bed, but not to sleep. He had thought himself on the high road to
fortune, and all at once things began to look black. In the morning
he went early to the office where Gibbs soon joined him. He looked
into Stephen's grave face and smiled.
“I guess my call didn't give you pleasant dreams, Landray. I've
thought it over and I guess we'll just keep quiet and see what
happens.”
But before the day was over, it was evident that the information
Gibbs brought from Topeka was not held by him alone. Before
night there was a well-developed stampede among the owners of
lots. This acted on Gibbs rather differently from what might have
been expected.
“We'll show 'em,” he said, “that we got confidence; let 'em get in a
panic, let 'em get rid of their lots, let 'em play the damn fool, Grant
City's here to stay! It's got a future in the very nature of things. We
don't need the county seat; they can locate that wherever they
blame please; but we do want to get rid of these speculators, I
always been opposed to speculation. I'd rather see things go back to
the normal, even if we do lose; I would so, Stephen.”
But hard on the news that Grant City was not to get the county
seat, came the news that neither was it to get the railroad.
“It's a lie! They can't afford to ignore us!” cried Gibbs when he
heard this. “It's a trick to depress real estate! Any one who's fooled
by it deserves to get skinned out of his last dollar.”
But the rumour was verified, and even Gibbs was forced to own
that for the present at least they had lost the railroad.
“You ain't involved, Landray,” he told Stephen. “You stood to share
only in the profits; and I can't lose much, for I hadn't five hundred
dollars when I came here, and I got seventy or eighty lots that are
worth something, and fifteen or twenty houses.”
Here Stephen recalled to his mind the fact that these houses were
in the main unpaid for, and that his creditors might swoop down
upon him at any moment.
 “My creditors? Oh, hell—let 'em sweat!” and the general snapped
his fingers almost gaily, and said in the same breath, “I expect
you're cussing me, Steve, for fetching you here.”
“Nothing of the kind, general!” said Stephen stoutly.
“If I fooled you, I fooled myself, Steve; I knew there was some
foxy gentlemen in this part of Kansas, but I thought I was the foxiest
thing on two legs. I have had my ambitions too, Steve, and they
ain't dead yet, a man of my calibre don't give up readily; but I'm
adaptable. I don't sit down to weep over an unpropitious occasion,
in some fashion I dominate it. For the present I suppose there is
nothing for us to do but wait and see how things turn out.”
And through one long hot summer they watched things turn out.
They saw the departure of the town-site speculators; they saw the
settlement of tents and prairie schooners disappear from the waste
beyond the town, until at last there was only the rolling plain, with
its thousands of pegs that marked the lots of the various
subdivisions, or the streets by which they were to be reached; and
with this swift panoramic change came a leaden depression which
ate into the very soul. There was no more poker at the Metropolitan,
once a feature of the nightly gatherings there; the wilderness of
signs creaked idly in the breeze; half the houses stood tenantless;
the stages ceased to rumble in and out of town; the remnant of a
population loafed in heavy lethargetic idleness.
Gibbs and Stephen sat through that long summer, idly for the
most part, in their shirt-sleeves in the shade of their office; the only
business they had was to see Gibbs's creditors, and in the end these
ceased to trouble them.
At first Stephen had been somewhat sustained by Gibbs's
confidence; for Gibbs had been sure things would come right, that
the depression was only temporary; but in the end even his fine
courage failed him. He spent less and less time in the shade of his
office, and more and more time at Mr. Youtsey's bar; but at last Mr.
Yout-sey announced that he was about to leave to seek fortune
elsewhere.
 “I've sat up with the corpse,” he told Gibbs jocosely, “and now I'm
going to pull out. I leave the last words to you, for you seem to be
chief mourner; I reckon you'll stay to the finish.”
“I don't know about that,” retorted Gibbs briskly. “You can't keep a
squirrel on the ground; but I'm free to say I don't want to make any
mistakes next time. I'm getting along to a time in life when I don't
expect to make more than two or three more fortunes before I quit.”
“Well, you don't squeal none, general, that's what I admire about
you; win or lose, there's a kind word still coming,” said Mr. Youtsey
admiringly.
In private to Stephen, Gibbs deplored the conditions which he
semed to think were largely responsible for their present situation;
he was seeing deeper than the mere surface of things.
“The war was a mistake, Steve; patriotism and sentiment aside, it
was a big mistake. It's knocked half the country into a cocked hat.
The South is dead, and in my opinion we won't live long enough to
see it come to life. If it had been just left alone, it would have been
mighty interesting to have seen how it would have settled the nigger
question. And what's been the result to the nation at large; we've
lost over half a million of men—young men who'd a pushed out into
the West here, and made this country a wonder. We wouldn't be
waiting for population if they'd lived. But it wasn't to be! The
country's filling up with all sorts of riff-raff from Europe, a class that
never used to come; not the good English and Scotch and Irish, who
came because they wanted elbow room; but greasy serfs, who ain't
caring a damn for anything but wages. I tell you in twenty years an
American will be a curiosity. And to think the way they were wasted,
just thrown at each other by the thousands, in the greatest and
crudest war of modern times.”
But Stephen could not sit there gossiping with Gibbs while Grant
City sank into the prairie, or its shabbily built houses collapsed about
his ears; he must do something, yet what was he to do? Gibbs came
to his rescue with a suggestion.
 “I been thinking of your luck, Steve,” he said one day with kindly
concern. “I can hold up this building quite a while by myself just by
leaning against it; I reckon it will be about a hundred years before
anybody sells a lot again in Grant City, and you can't wait on that, on
the chance that you will be the lucky fellow.”
“If I could go!” cried Stephen, with savage earnestness.
“But you can't! Now look here, the farmers have had a pretty good
season; you can always sell a farmer improved machinery, and I
understand you can secure an agency without any capital to speak
of.”
“Why don't you try something of the sort?” asked Landray.
Gibbs shook his head.
“I'm too old a man, Steve, to knock about the country the way I'd
have to; besides, I'm getting ready to start up in business.”
“Start up in what?” cried Stephen.
“In a small way in the licker business,” said the general with
dignity.
“You mean a saloon?”
The general averted his eyes.
“Well, yes—it will have to be retail—I suppose you might almost
call it a saloon,” he admitted reluctantly.
“We are coming down between us, general,” said Landray with a
scornful laugh.
“Not at all, Steve, not at all. I've never claimed more than that I
was up to the occasion, and Youtsey's quit here; fact is, before he
left I made a dicker for what was left of his stock. His going makes
an opening for a commercial enterprise of this sort—in a small way,
of course.”
“Very small, I should say.”
“No, Steve, you must own there are a few people left; not many,
but a few; and they are not going to be any less thirsty in the future
than they have been in the past. I'm not counting on riches, but
merely enough to tide me over until I see an opening. Maybe the
venture might justify a partnership; if you think it will, I'm ready to
whack up,” concluded Gibbs generously.
“Excuse me, general,” said the young man haughtily, “but we'll
reserve that until the last.” He saw that Gibbs was hurt by his words
and manner, and hastened to add, “I think your first suggestion was
the best, do you know where I should write?”
“There are all sorts of catalogues in the office. I'd write to half a
dozen different firms. I merely suggested this as a temporary
makeshift; you might add insurance and lightning-rods.”
“We'll stop with the farm implements, more than that would only
be funny; and I'm in desperate need.”
“I really shouldn't wonder if you didn't do quite well, Landray, after
you get started,” Gibbs said, with ready faith in this new enterprise.
“The farmers farm the land, you'll farm the farmers;” and Stephen's
letters not appearing sufficiently hopeful in tone to his critical mind,
he ended by drafting them for him. “Now I reckon they'll get you
consideration,” said he, when their labours came to an end. “What!
You ain't got any stamps? Why didn't you tell me you were that hard
put? I ain't got much myself, but I always put down a little nest-egg.
I hoped you'd done the same—why didn't you tell me?”
He brought from an inner pocket an old leathern wallet; it was
limp enough, but it contained two twenty dollar bills, one of which
he forced Stephen to accept.
“I never give up quite all; and if I'd known about the county seat a
week earlier, there'd a been a few more gone broke here, but it
wouldn't been you or me, Steve?”
A week later Stephen was present at the formal opening of the
Golden West Saloon in their former office, Gibbs presiding with
typical versatility.
There still lingered in Grant City those who either could not get
away or were too indifferent to try, whose imagination had utterly
failed them; and occasionally, though rarely, the wagons of
emigrants paused for repairs at the blacksmith's; thus there was still
the semblance of life, though half the houses in the town stood
vacant; these seemed to fade away, to disappear in the rank grass
that had come back to flourish in the small trampled lots, and in the
midst of this universal decay, this final phase of the small tragedy of
settlement, Stephen waited and organized the business Gibbs had
suggested, but with no large measure of faith in it.
If Marian's condition would only improve sufficiently so that they
might quit Grant City, he was almost certain that by some
tremendous effort the money he would then require would be
forthcoming.
However when he finally got to work the effect on him was that of
a tonic; and through that fall, and the ensuing winter, over
desperately bad roads, he travelled far and wide; and by spring
when he began to reap the benefits of his winter's work, he saw that
he was not only clear of debt but that he had actually made some
money.
And while he toiled for her, Marian was left alone with a slatternly
unattached female, who was both housekeeper and nurse; and for
medical attendant there was Dr. Arling, who found Grant City entirely
congenial. Drunk and sodden, he was not unskillful; and when he
was needed he could always be found at the Golden West Saloon,
where he loafed tirelessly, and where he played countless games of
checkers with Gibbs.
It never occurred to Stephen that Marian might not recover. To
him it seemed only a question of time until her strength would
return; but he was the only one who was really ignorant of her
condition. Arling had no doubts as to what the end would be, nor
had Mrs. Bassett, the sick woman's attendant.
The end, when it came, came when he was least prepared to
meet it. It was fall again, and he had driven in from the country to
be with Marian over Sunday. He had stabled his horse, and had
come up from the barn, lantern in hand, cold and stiff from his drive
home from a farm far out on the plains.
Mrs. Bassett was in the little kitchen fussing over his supper when
he entered the house by the back door. She had seen his light in the
stable.
“I'll have your supper ready for you in just a minute, Mr. Landray,”
she said. “You've got time to run up and see Mis' Landray. She
knows you're back, I called up and told her you'd come.”
“How is she?” asked Stephen.
“Well, she seems to be about the same, I don't see no difference,”
answered Mrs. Bassett guardedly. She turned and followed him with
her eyes as he went through the sitting-room and entered the
narrow front hall from which the stairs led to the floor above.
He was gone but a moment, then he came quickly into the
kitchen, his face very white.
“She is worse!” he said in a husky whisper. “Why didn't you tell me
so?” but he did not wait for an answer. “Where is the child?” he
demanded.
“I carried him across the back lots to Mis' Gibbs a spell ago. I
couldn't tend him and her, too, he was real fretful.”
“I must go for the doctor,” said Stephen.
“You needn't, Mr. Landray, Mis' Gibbs said she'd go to the saloon
for him; I seen her lantern just a moment ago. You'd best have
something to eat,” she urged.
He turned away impatiently.
“I'm not hungry. Have the doctor come up-stairs as soon as he
gets here.”
But when Arling arrived a few moments later, accompanied by
Gibbs, and joined Stephen in the chamber above where he sat
holding his wife's hand in both his own, he merely shook his head. It
was as he had expected, only the end had been longer deferred
than he had thought possible. He stole from the room and rejoined
Gibbs in the kitchen.
“You tell him, Gibbs—I can't,” he said.
Gibbs rubbed his straggling unkempt beard with a tremulous
hand.
 “Maybe he don't need to be told,” he suggested. “But if you think
he should be, I'll do it;” and he stood erect, with something of his
old air.
He mounted the creaking stairs. Stephen must have heard him
coming, for he opened the door and stepped out into the narrow
hall, that was barely large enough to hold the two men and the
small stand, where Mrs. Bassett had placed a smoky lamp with a
dirty chimney.
“Where's the doctor—why don't he come back?” Landray
demanded in a fierce whisper. “Is the drunken fool going to do
nothing?”
“Steve,” began the general, with white shaking lips, “Steve, bear
up, Arling says there ain't anything he can do.”
Stephen looked at him, scarce comprehending what it was he
said.
“He don't know what he's talking about—the fool's drunk!” he said
roughly.
“I reckon he is,” lamented Gibbs weakly. “I'd'a had him under the
pump if there'd been time, but my Julia said for him to hurry, and I
closed up and brought him along just as he was, he wasn't fit to
come by himself.”
“Send him up here again,” said Stephen with stern insistence.
“There is something he can do—my God—” and he broke off
abruptly and re-entered his wife's room.
“Come!” said Gibbs, when he had returned to the kitchen. “Come,
stir around!” he ordered, laying a hand on Arling's shoulder. “Come,
there's something you can do, and you've got to do it.” He was in a
panic of haste. He snatched up his dingy medicine case and thrust it
into Arling's shaking hands. “He's waiting for you, go up and do what
you can.”
“Haven't you told him, Gibbs? She is dying, all he's got to do is to
look at her to see that.”
 “You're the one to tell him then—poor Steve—you go to him. I
must go fetch my Julia and the baby;” and he stumbled out into the
darkness with neither hat nor lantern, and fled across the back lots
toward the light that burned in his own window.
He soon returned with Julia, who went at once to the room above.
In the narrow hall she encountered Arling, who had just come from
Marian's bedside, where he had administered to her some simple
restorative. She brushed past him without a word.
“Thank you for coming, it's good to have a woman about,”
murmured Stephen, glancing toward the door as she entered.
Marian lay on the bed without speech or movement, but her eyes,
now brilliant and filled with a strange light, followed every
movement of the two. Julia, with Stephen's help, made her more
comfortable; they smoothed her pillows and raised her higher on
them, for Mrs. Gibbs had been quick to see that her breath came
with difficulty.
She had never liked Marian, and Marian had never liked her—but
she had forgotten all this—which, after all, was only that chance
which determines who shall love and who shall hate. Now she was
all tenderness, this brisk energetic woman, with the lines of a
shrewish temper already stamped upon her face; and her glance
always softened when she looked at Stephen.
There was little either could do but wait; and Marian, save for the
look in her eyes and their restless turning, gave no sign that she
knew what was passing about her.
Presently Julia stole down-stairs to the kitchen. She found Mrs.
Bassett, the general, and Arling still there; the boy fast asleep in her
husband's arms.
“Law!” she cried. “Haven't any of you had sense enough to put
that child to bed?” and she whisked him out of Gibbs's arms and
carried him into the adjoining room.
After that the four fell to watching the clock as if the slow moving
hands would tell them when all was over; and as they watched, the
row of ragged lights in the uncurtained windows that looked out
upon Grant City's Main Street, disappeared one by one, and it was
midnight and very still.
At last Julia rose from her chair and without a word went up-
stairs; she seemed to know that all was over. She noiselessly pushed
open the door and entered the room.
Stephen's face was buried in the pillow beside his wife's. A glance
told her what had happened during her absence from the room. She
stepped to the bedside and placed her hand gently on the man's
shoulder; she felt him shrink from the sudden touch.
“Come,” she said kindly. “You mustn't stay here any longer, Mr.
Landray. You go on down-stairs and ask Mrs. Bassett to come up
here to me.”
“Is she—” he gasped chokingly.
He had risen to his feet, and she urged him away from the
bedside with gentle but determined force.
“You must go down-stairs, Mr. Landray,” she insisted.
“She never spoke—never once,” he cried, turning his bloodshot
eyes on her.
“But she knew you; do go down-stairs, Mr. Landray, indeed, you
mustn't stay here any longer.”
She had pushed him from the room as she spoke, and he crossed
the hall and went slowly and heavily down the narrow steps.
 CHAPTER THIRTY-EIGHT

I
F Virginia had been unable to influence Stephen's life as she
wished, this was far from being the case with Jane and Harriett,
who had wholly abandoned themselves to her care and control,
which had to do, unselfishly enough, with their comfort and
convenience. They were also indebted to her for their mental
outlook. They echoed her opinions and acquired her convictions, by
which they endured with unshaken pertinacity, and she had
furnished them with such prejudices as had found a home in their
gentle unworldly hearts. In sentiment they were quite as much
Landray as she was herself; and their pride in the name was quite
equal to her own pride in it; while their affection for her was, aside
from their affection for each other, quite the deepest emotion in their
simple lives.
Under these conditions Harriett had grown into young
womanhood, a shy pretty girl, who looked out upon the world with
soft, inexperienced eyes. But her father's death, and Stephen
Landray's, and perhaps more than all, Virginia's beauty and silent
devotion to her dead husband, had supplied a background of
romance and mystery of which she was never wholly unconscious.
Of society, as it was understood in Benson, she knew nothing; her
mother had never made any friends in the town, and Virginia's own
circle had narrowed; she went nowhere.
Some day Harriett knew she would teach; this Virginia and Jane
had decided for her. It was their conviction that it was the one thing
a young lady could do without compromising her position, it was
entirely dignified, a polite and unexceptional occupation where one
was so unfortunate as to have her own future to consider; and so to
teach, Harriett was fitting herself, when something happened which
materially changed all her plans.
 Mr. Stark, who for many years had been the pioneer banker in
Benson, had long since gone to his reward, and now there were
several banks in the town; chief of these was the County Bank
where the interest on certain loans which Benson had made for
Virginia, with the money he had given her for the land in Belmont
County, was regularly paid. Here Harriett often went for Virginia, and
it was here she first met Mark Norton, whose uncle, Judge Norton,
was interested in the fortunes of the bank; indeed, young Norton
was supposed to be mastering the intricacies of the banking
business under the judge's eye.
He came of an excellent family in the county, and Harriett had
frequently observed the young fellow. She had even noted that after
business hours, the easy hours of banks, he indulged himself in the
pleasure of driving most excellent horses. His father was a rich
farmer, which doubtless had much to do with the soundness of the
son's judgment in the matter of horse-flesh; it also explained why it
was that he was able to keep fast horses, a luxury not within the
reach of the ordinary bank clerk. Harriett had seen all this, as he
frequently drove past the cottage presumably on his way into the
country beyond. It afterward developed that Norton had observed
the slight figure of the girl on the lawn in front of the cottage with
the two elder ladies, and he had noted that she was very pretty—
singularly pretty, he would have said.
But it was Harriett's privilege not only to see him in his hours of
recreation, but also when she went to the bank on some errand for
Virginia. He never ventured on anything that could be termed
conversation, though he occasionally appeared to be anxious to
discover Miss Walsh's opinion on such impersonal subjects as the
weather; or if it was a warm day he obligingly called her attention to
that fact. He always addressed her as Miss Walsh. He had been
almost the first person who found such formality necessary, and that
he did, had provoked her to a new and gratifying emotion.
But on one occasion when she stopped at the bank, he was rather
more disposed to talk than was usual with him, but Miss Walsh was
in some haste to go, once the business that had brough her there
was transacted; indeed, so great was her haste that she did not
observe that she had left her check-book.
Later in the afternoon, as she sat on the lawn with Virginia and
her mother, Norton appeared, striding briskly up the street. He
opened the gate, and crossed the lawn to them, smiling and at ease.
“I didn't give Miss Walsh her check-book,” he said. He addressed
himself to Virginia. “I thought she would find it out and come back—
but you didn't”—he turned to Harriett as he spoke—“and so I've
brought it.”
They were all very grateful to him; that is, Virginia and Jane
expressed their gratitude. They thought he had been most kind and
had put himself to a great deal of trouble in a really unimportant
matter. Harriett said nothing, but she suffered an accusing pang
when she recalled that she had shown no interest in the weather.
Virginia asked him to be seated, for though he had given the book
into her keeping, he still stood before them hat in hand.
Norton sat down with alacrity.
He was not under ordinary circumstances a garrulous young
fellow, but on the present occasion he talked hard and fast, as one
will who is trying to gain time; but the burden of what he had to say
was directed to Virginia. Instinct warned him that it would be her
opinion that would have weight with the others, that if he was ever
to return there, as he hoped he might be permitted to do, it would
be because she was willing he should come; and though Virginia
regarded him a little critically at first perhaps, there was nothing of
unkindness in her glance.
At last he quitted his chair; but he was manifestly most reluctant
to go; they rose, too; and the four walked slowly across the lawn.
Norton lagged more and more as they neared the gate; it involved a
positive effort for him to tear himself away. In this extremity he fell
to admiring the flowers; he was particularly fond of flowers, it
seemed; no doubt because he had always lived in the country and
was accustomed to having growing things about; he even ventured
the hope that Mrs. Landray would let him come later when the roses
were in bloom.
“I hope you may come again, Mr. Norton,” responded Virginia
kindly.
“Thank you—if it won't be an intrusion, I'll be only too glad to
come;” and he stole a swift glance at Harriett.
It may have been the merest chance, but after this in one way
and another, Harriett saw a good deal of Norton, for his love of the
country took him past the cottage very often. Harriett knew this
because she read much by the window in the small parlour.
One night as the three sat in the parlour, the girl's quick ear
caught the sound of wheels, and a horse at a rapid trot drew up at
the curb. She hid her face in the book she was reading, and her
heart beat rapidly. There was a brisk step on the path, and a brisk
knock at the door, which Mrs. Walsh opened, and there stood
Norton. To the girl's eyes he seemed wonderfully confident,
wonderfully sure of himself, and later she might have added,
wonderfully discreet, for he devoted himself almost exclusively to
Virginia.
He had, it developed, a lively interest in local history; his own
maternal grandfather having been a contemporary in the county
with General Landray; during the last war with England he had
served as a captain in the company of riflemen which the former had
raised; furthermore his father had known Mrs. Landray's husband, a
fact of which Mrs. Landray herself was well aware. These were all
points that were calculated to make her feel a certain liking for the
young fellow himself, which was only intensified by his quite evident
respect for the very name of Landray; nothing could have been more
commendable or better calculated to show him a person of proper
instincts. Virginia recalled that as a girl she had been a guest at his
mother's wedding; and that General Harrison—to whom Mrs. Norton
was distantly related—had been present.
But while they talked of these matters, his glance drifted on past
Virginia to the pretty silent girl.
 When at last Norton took his leave, he was hospitably urged to
call again, an invitation he professed himself as fully determined to
make the most of.
He was the first young man who had ever called there, though
this was not because there was any dearth of young men in the
town; but Harriett was aware that Virginia's point of view regarding
strangers was conservative to say the least; here, however, was a
young man whose grandfather had been a prominent man in the
county when a Landray had been the prominent man of all that
region.
So Norton was welcomed graciously whenever he chose to call.
Yet somehow after that first call they avoided all mention of him;
even repeated visits did not provoke them to discussion; and at this,
Harriett wondered not a little.
At last Virginia astonished her small household by announcing that
she had invited Norton to tea. They dined in the middle of the day,
but on this particular evening tea became a very elaborate affair
indeed, for it was the first time in twenty years, or since Stephen
Landray's death, that Virginia had bidden a guest to her home. Even
Harriett, who thought she knew all the resources of the household,
was astonished at the old silver and glass and china that was
brought out for the occasion; nor had she ever before seen Virginia
dressed with such richness; and she did not wonder that Norton
whispered to her as Virginia quitted the room on some errand:
“What a beautiful woman Mrs. Landray is, I wonder she never
married again.”
“She will never marry, she is devoted to her husband,” said
Harriett.
“Odd, isn't it, that one should always be thinking of that?” he said.
“You mean her devotion to his memory?”
“No, not that—I mean that one should always wonder why a
pretty woman doesn't marry.”
“But when you have lost some one you love.”
 “Of course—I suppose love only seems so important in our own
lives because we know what it has meant to some, and so hope it
may mean the same to us.”
“Does it seem so important?” she asked, the colour coming into
her cheeks.
“Doesn't it?” he asked quietly.
“Really I don't know, I had never thought of it—in that way.”
“It's a part of what we call success in life; it may be the better
part—it should be, Harriett.” His voice dwelt lingeringly and
caressingly on her name.
She gave him a frightened, embarrassed glance. It was the first
time he had ever called her anything else than Miss Walsh. She
hoped all at once that her mother or Virginia would come into the
room; but she knew they were busy elsewhere and would not
appear until tea was served.
“Don't you think that?” he asked.
“I don't know. I have never thought of it,” she said faintly.
“I wish you'd think of it now,” he insisted.
“Why?” she faltered.
“Can't you guess?” he asked. “As something that might affect you,
as something that might affect—us.” He leaned forward in his chair
until his face was very close to hers. “Don't you understand what I
mean, Harriett?” he went on, and his voice had become suddenly
tender. “I wonder if you could think it worth while to care for a
fellow like me; don't you know why I've been coming here?”
“To see my Aunt Virginia,” she faltered.
“Well, no—hardly, Harriett; but I fear you are not quite honest
with me. You know that you have brought me here. I wanted to
come long enough before I did; but there seemed no way. What are
you going to tell me about caring for a fellow like me; caring in a
particular way—I mean?”
The colour came and went in the girl's face.
 “Of course I can wait—after all you don't know me so very well
yet; but I'd like to think that my case is not entirely hopeless. Won't
you tell me what I want to know, Harriett,”—he heard the swish of
heavy silks in the hall, it was Virginia returning. “I'm going to come
to-morrow for your answer,” he said quickly.
The next day, after the young man had taken his leave of her,
Harriett fled up-stairs to her mother's room with a burning face;
while Norton drove away from the house apparently in the best of
spirits, for he had the unmistakable air of a man who has just heard
something that was unqualifiedly pleasant to hear. The girl hesitated
nervously.
“Mr. Norton has just left,” she said.
“I thought I heard him, or some one, drive up to the gate.”
“It was he,” said Harriett.
Her mother went placidly on with her sewing.
“He wants me to tell you that he wishes to come and see you very
soon, mama,” said Harriett at last, with a little gasp.
“Wants to see me, dear?” in mild surprise.
“Yes.”
“But what about?”
“About—about me—he wants to tell you something.”
“He seems to have told you already,” said Mrs. Walsh.
The girl dropped on her knees before her mother, burying her face
in her lap. There was a little silence between them, and then Mrs.
Walsh said.
“We must tell Virginia. I hope, dear, that she will approve.”
Harriett glanced up quickly at this. She was very white of face.
“Oh, you don't think she won't—you don't think that?”
“Then you want her to approve?”
And Harriett nodded; a single little emphatic inclination of the
head.