Question

Class exercise - Comparison of results of methode Assume: 1. P bought 20,000 of the 100,000 outstanding shares of on January 1, Year s cach. At that time. I owned a patent that had 3 years left to go, worth $45.000, which had zero value on l's books 2. Company I paid dividends during the year of 50.50 per share to all its shareholders 3. During the year. Company I had net income of $100.000, not counting any adjustment that might be needed for its undervalued patent 4. During the year, Company I had a positive foreign exchange translation adjustment, which affected I's other comprehensive income, of $15,000 5. The market value of I's stock increased during the year from $10 on January 1 to $11.50 on December 31 Fill in the table below, by compute the ending balances for the following accounts, not all of which might be applicable, depending on which of the three methods used in class were used: Equity Comparison of ending balances on P's books - not all may be applicable Cost method Fair value Investment in I Dividend income Equity in Income from I I Unrealized gains Valuation allowance on investment in I Other comprehensive income If you have time, before we go over it in class, list the journal entries that would be used for e method.

Answer 1

Solution As per Below image:

1) Cost Method:The cost method is used when making a passive, long-term investment that doesn't result in influence over the company. Under the cost method, the stock purchased is recorded on a balance sheet at the historical purchase price, and is not modified unless shares are sold, or additional shares are purchased. Any dividends received are recorded as income, and can be taxed as such. 2) Equity Method: The equity method of accounting should generally be used when an investment results in a significant amount of influence or control. Under the equity method, the investment is initially recorded in the same way as the cost method. However, the amount is subsequently adjusted to account for your share of the company's profits and losses.Dividends are not treated as income under this method. Rather, they are considered a return of investment, and reduce the listed value of your shares. 3) Fair Value Method: Under the fair value method, you create a non-current asset at the purchase price of the If possible, you periodically update the book value of the investment to reflect fair value -- the price the shares would sell for in the open market. Under This method you update the book value of the investment to reflect the fair value and record any dividends you receive on your investment as income Comparison of ending balances on P's Books Cost Method Fair Value 200000 200000 Investment in Dividend Income Equity 200000 -10000 (20000 x 0.50) 20000 Equity in Income From Unrealized Gains 30000 (20000 x 1.5) Valuation Allowance on Investment in Other Comprehensive Income Total 3000 213000 200000 230000