Company A purchased a certain number of Company B\'s outstanding voting shares a

Question

Company A purchased a certain number of Company B's outstanding voting shares at $20 per share as a long term investment. Company B had outstanding 20,000 shares of 410 par value stock. Complete the following table relating to the measurement and reporting by Company A after acquisition of the shares of Company B stock.

                                                                              Fair Value             Equity Method
                                                                                Method
A. What level of ownership by Company A of
Company B is required to apply the method? ?% ?%

***For B, e, F, and g assume the following:
Number of shares acquired of Company B stock 2,500 7,000
Net income reported by Company B in first year 59,000 59.000
Dividends declared by Company B in first year 12,000 12,000
Market price at end of first year, Company B stock 17 17

B. At acquisition, the investment account on the books
of Company A should be debited at what amount?

C. When should Company A recognize revenue earned
on the stock of Company B? Explanation required.

D. After the acquisition date, how should Company A
change the balance of the investment account with
respect to the stock owned in Company B (other than
for disposal of the investment)? Explanation required.

E. What is the balance in the investment account on
the balance sheet of Company A at the end of the
first year?

F. What amount of revenue from the investment in
Company B should Company A report at the end of
the first year?

G. What amount of unrealized loss should Company A report
at the end of the first year?

Explanation / Answer

a.2,500/20,000=.125 0r 12.5% Fair value 7,000/20,000=.35 or 35% Equity Method more than 20% b. Investment(2,500*20) 50,000(debit) Cash 50,000(credit) Investment(7,000*20) 140,000(debit) Cash 140,000(credit) c. When using Equity Method d. It depens on the % of the A's investment in B. 2500sh is 12.5% of the B's company. In this case A using Fair value 7000sh is 35% ...... A using Equity Method e. f. 59,000*.35=20,650 increase in investment 12,000*.35=4,200 decreased in investment Investment 20,650(debit) Revenue on investment 20,650(credit) 140,000+20,650-4200=156,420 Equity Method Cash 4,2000(debit) Investment 4,200(credit) Fair Value- no entry for revenue recognetion on the investment(No entry). No deduction from the investment on the divident received(Cash4,200(debit)Div Revenue4,200(credit). Balance of the Investment 50,000(Fair Value Method) g. Fair Value Method 2,500sh.*(20 -17)=7,500unrealized loss will be reported No Loss reported when Using Equity Method.

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