Question

Raleigh Corp. has an investment with a carrying value (equity method) on its books of $170,000 representing a 30% interest in Borg Company, which suffered a $620,000 loss this year. How should Raleigh Corp. handle its proportionate share of Borg’s loss?

Answer 1

Solution: There are 2 methods to answer this question.

Method: A

1) Raleigh Corporation should discontinue equity method and stop providing additional loss incurred above its original investment cost of $ 170,000.

2) Here total loss is $ 186,000 ($ 620,000 * 30% ) but it is restricted to $ 170,000, which is original investment value.

Sl No.	Account title and explanation	Debit	Credit
1	Equity Investment	$        170,000
	Cash		$        170,000
	[Being equity investment made]
2	Investment Loss / Equity Loss	$        170,000
	Equity Investment		$        170,000
	[To record loss]

Method: B

1) Raleigh Corporation should recognize the entire loss of $ 186,000 ($ 620,000 * 30% ) by taking guarantee that Borg`s Corporation will make imminent returns by its continuing operations and future performances.