Kim Company bought 30% of the shares of Phelps, Inc., at the start of 2018. Kim
ID: 2336897 • Letter: K
Question
Kim Company bought 30% of the shares of Phelps, Inc., at the start of 2018. Kim paid $10 million for the shares. Thirty percent of the book value of Phelps's net assets is $8 million, and the difference of $2 million is due to land that Phelps owns that has appreciated in value. During 2018, Phelps reported net income of $1 million and paid a cash dividend of $0.5 million. What amount does Kim carry the Phelps investment on its balance sheet as of December 31, 2018? (Enter your answers in millions rounded to 2 decimal places (i.e., 5,500,000 should be entered as 5.50).) Amount of investment reported in Kim balance sheet millionExplanation / Answer
As Kim company had brought 30% shares of Phelps inc .
Any share holding of 20% and beyond shows substantial interest of the share holder
Therefore, equity method of accounting investment should be used
EQUITY METHOD :
In this method the investments are initially recorded at cost , subsequently the propotionate share in the net income Phelps Inc is added to the carrying value of investments and when the dividends are paid propotionate share of dividend is reduced from the carrying value of investments
the journal entries are :
debit
$
credit
$
( being investment in 30% shares of phelps inc)
debit
$
credit
$
( being the 30 % share of net income of phelps inc added to the value of investments)
debit
$
credit
$
(being propotionate share of divdends to kim accounted )
hence the carrying value of investment:
cost of investment $ 10 million
add : propotionate share of net income $ 0.30 million
less: propotionate share of dividend recieved $ 0.15 million
CARRYING VALUE OF INVESTMENTS $ 10.15 million
particularsdebit
$
credit
$
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