Case 10-3 Equity Method and Disclosures On July 1, 2017, Dynamic Company purchas

Question

Case 10-3 Equity Method and Disclosures

On July 1, 2017, Dynamic Company purchased for cash 40 percent of the outstanding capital stock of Cart Company. Both Dynamic and Cart have a December 31 year-end. Cart, whose common stock is actively traded in the over-the-counter market, reported its total net income for the year to Dynamic and also paid cash dividends on November 15, 2017, to Dynamic and its other stockholders. Required:

a. How should Dynamic report the foregoing facts in its December 31, 2017, balance sheet and its income statement for the year then ended? Discuss the rationale for your answer.

b. If Dynamic should elect to report its investment at fair value, how would its balance sheet and income statement differ from your answer to part (a)?

Explanation / Answer

(a) Since Dynamic purchased more than 20% stake in Cart, Dynamic should report this investment at Purchase Cost under the Long Term Investment head as "Investment in associates".

Dividend received is to be treated as an Income in income statement.

(b) If Dynamic wants to report this onveasment at fairvalue then they shold report thr differnce between cost and fairvalue as either (Notional Gain if Cr difference / Loss if Dr difference). Cr difference as "Notional Gain" under Retained Earnings. Dr balance under the same head but as a negative figure.

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