I’ve made a pact with myself to try to do at least 10 questions a day on weekdays. Baby steps people, baby steps. Neither of these are hard, just need practice to remember how to treat them. Enjoy! Company X owns 15 percent of company S and exerts significant control over the operations of the company. The book value of the investment on December 31, 2001, is $48,000. In 2002, company S earned $100,000 and paid dividends of $20,000. The impact of the investment on the income statement of company X is: A) $15,000. B) $3,000. C) $12,000. D) $0. Company X owns 15 percent of company S and exerts significant control over the operations of the company. The book value of the investment on December 31, 2001, is $48,000. In 2002, company S earned $100,000 and paid dividends of $20,000. The value of the investment account on December 31, 2002, is: A) $60,000. B) $63,000. C) $51,000. D) $48,000.
For some reason I am blacking out thinking I am forgetting something. My answers are C and A. If they are correct I will write up a little solution.
Thought the ownership is less than 20%, but company X still exerts significant control over the operations of company S, so we would use Equity Method of Accounting Hence, Income Statement = 100000*0.15 - 3000 = 12000 [Q1 Ans C] And, Investment Account = 48000 (Initial BV of the investment) + 100000*0.15 (Our share of the earnings) - 3000 (Dividends Paid are reduction in an investment account) = 60000 [Q2 Ans A] Am I talking junk here?? - Dinesh S
I think A for the first Q 15% of Net Income of S Agree with A for the second Q
1st one is A- Because company X exerts significant control over company S, the investment will be treated using the equity method, even though the ownership is less than the 20 percent guideline. The impact on the income statement is the proportionate income of company S, which is 0.15 × 100,000 = 15,000. 2nd one is A also- Because company X exerts significant control over company S, the investment will be treated using the equity method, even though the ownership is less than the 20 percent guideline. The value of the investment account is equal to the beginning balance plus the proportionate income of company S minus the dividends received from company S, which equals 48,000 + (0.15 x 100,000) − (0.15 x 20,000) = 60,000. I screwed up the 1st one also and included the dividend. So equity method on income statment, do the proportion of the income. On the value of the investment account, there’s where you need to remember to subtract out the dividends. Seriously, how am I going to remember all of this sh*t for June I wonder? So many little things to remember for this test. I guess practice is the only way. Nice work Clio.
A,A - equity method
My question is, when do you account for the dividends? Prop Consolidation?
A, A. I was thinking C for #1 at first but after realizing dividends should be excluded because of the “significant control”, I changed my mind.
Niblita75 Wrote: ------------------------------------------------------- > My question is, when do you account for the > dividends? Prop Consolidation? Balance sheet, methinks?
Cost Method: Dividends are income unless they are greater than earnings and then they are a return of your investment. Equity Method: Dividends are a return of your investment and not income. I think under either consoldiation method dividends are accounted for under the same was as the equity method? But I am not 100% on that.
A,A Dividends and interest are always counted as Income. Under Equity method, the balance sheet value of the investment is equal to company X’s share of the earnings (15k) - dividends paid (3k), the dividends are instead debited to CASH. Investment = 60k, Cash = 3k.
Oh darn… I messed up the first part, too. Oh well. This is only my first time through FSA. I do the whole FSA section again the week I do the John Harris seminar. It will sink in along the way!
good problem, bannisja. How would the answers change without significant control?
Without significant control it would be D,D since Company X owns less than 20% of Company S
Wouldn’t the answer be B for the first question? I think I am losing it.
Niblita, I agree, with no significant control, then the dividends would be considered income. The answer to the second question would be 3000 as well? (considering that you don’t value the investment until the gains/losses are realized)
actually, I guess the “investment account” would carrry the investment at its book value and then report the gains or losses at time of realization, but the dividend would still be recorded, thus the value would be 51K, answer B?
Oh yeah, I forgot about the dividends… make that B,D
B,D in case of no significant control