P1. XYZ Company had the following transactions related to ABC Company over a two

Question

P1. XYZ Company had the following transactions related to ABC Company over a two-year period: Year 1 I. 2. 3. On January 1, XYZ purchased 35% ownership of ABC Company for $700,000 cash. ABC Company had net income of $70,000 for the year. At year-end, ABC Company paid its shareholders dividends of S60,000. Year 2 XYZ Company purchased on January 1 an additional 5% of ABC Company's stock for $75,000 cash ABC Company had net income of $150,000 for the year. At year-end, ABC company paid its shareholders dividends of $100,000 1. 2. 3. What amounts will appear on the financial statements? $ AMOUNTS Accounts/Descriptions Y ear Year 2 I/S Evaluate the performance of your investment. (explain and show supporting amounts/calcs)

Explanation / Answer

Year1 Year 2 BS Investment 703500 =700000+(70000-60000)*35% 798500 =703500+75000+(150000-100000)*40% I/S Dividend Income 21000 =60000*35% 40000 =100000*40% Income from Investment 3500 =(70000-60000)*35% 20000 =(150000-100000)*40% SCF Investing Activities Investment (700,000.00) -75000 Dividend 21000 40000 Performance evaluation Total income from investment 24500 =21000+3500 60000 =40000+20000 Investment 700000 775000 =700000+75000 % Return 3.5 =24500/700000 7.74 =60000/775000 Increase in investment value 1% value of investment at start of year 1 20000 =700000/35 1% value of investment at start of year 2 15000 =75000/5 Decresae in % terms 25% The return on investment increased from 3.5% in year 1 to 7.74% in year 2. But the value of shares decreased by 25%.

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