You should not mix up things. to be clear, the accounting entries show the evidence: receive dividends: dr cash / cr income 3’000 account for share of income: dr equity / cr income 15’000 (share of increased retained earnings S, increasing equity) dr income / cr. equity 3’000 (share of reduced retained earnings S, reducing equity) You end up with increased income of 15’000 and increased equity of 12’000
agree it’d be B, D without significant control.
so it would be B,D and $12,000 would be recognized in comprehensive income as unrealized gain - that should be it.
What would the investment account on the b/s be classified as? Current asset or L-T asset?
bannisja Wrote: ------------------------------------------------------- > 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. I’ll go with A) and A)
gz2nyc Wrote: ------------------------------------------------------- > What would the investment account on the b/s be > classified as? Current asset or L-T asset? From what I remember we have to use market method for marketable securities (those are current assets), cost method can be used for investments available for sale (those are not current assets). In this question we analyzed the second kind of investments.
For investments where we do not have significant influence - (<20% is indication but verbiage more important) we can use Cost Method (if privately held - not publicly traded) and Market Method (if publicly traded) Marketable securities would be classified as 1)HTM - for Debt Held to Maturity - Long Term Assets 2)AFS Securities - Debt and Equity securities - Equity securities that we dont intend to trade in short term - Could be either Current Assets/Long Term 3)Trading Securities - Debt and Equity securities that we intend to trade short term (Current Assets)
bannisja Wrote: ------------------------------------------------------- > 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. What if the investor had paid more than the book value of 48000 for the investment ? What if they paid 60000 and there is a note that investments over book value will be amortized over 4 years. Then how would it affect the income statement and the value of the investment account ?
maratikus and sejal, you’re both right. The equity method (20-50%, significant influence) also calls for a new line in the asset section on the B/S called “Investment in subsidiary”. This is the account that uses the below formula and is the account I was referring to in my question. Is this account current or longterm? Beg. Balance + %Control * (NI - Div) = End Balance
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gz2nyc Wrote: ------------------------------------------------------- > maratikus and sejal, you’re both right. > > The equity method (20-50%, significant influence) > also calls for a new line in the asset section on > the B/S called “Investment in subsidiary”. This > is the account that uses the below formula and is > the account I was referring to in my question. Is > this account current or longterm? > > Beg. Balance + %Control * (NI - Div) = End Balance Not sure - but i’d guess longterm.
Wait, I agree it is the equity method but the investment in S is reduced by dividends received- Investment in S increases by $15k, but also reduced by 3k in dividends. Second ? Just ad the 12k to 48 k. I go with C, A. I think you guys are getting mixed up with consolidation with minority interest. Remember, it is always the equity method when talking about reducing investment in S by share of dividends…
rowaytonite Wrote: ------------------------------------------------------- > Wait, I agree it is the equity method but the > investment in S is reduced by dividends received- > Investment in S increases by $15k, but also > reduced by 3k in dividends. Second ? Just ad the > 12k to 48 k. > > I go with C, A. I think you guys are getting mixed > up with consolidation with minority interest. > Remember, it is always the equity method when > talking about reducing investment in S by share of > dividends… I think you have it mixed up. Q1 is asking about the income statement so you are not concerned with the cost of the investment, just the income that you need to claim. Since it is the equity method, you need to claim 15% of your investments income, or $15k in this case.
Yeah- you are right, I was actually coming back to forum to post after looking it up-
What if the investor had paid more than the book value of 48000 for the investment ? What if they paid 60000 and there is a note that investments over book value will be amortized over 4 years. Then how would it affect the income statement and the value of the investment account ? I think you would need more information. Is the premium reported as goodwill? Goodwill is not amortized so it would not affect the income statement. If inventory was written up, then COGS and depreciation would ne higher so net income would be lower.
bannisja Wrote: ------------------------------------------------------- > I’ve made a pact with myself to try to do at least > 10 questions a day on weekdays. Where do you get all your questions? Q bank?