Port Company purchased 44,400 of the 111,000 outstanding shares of Sund Company common stock on January...
Port Company purchased 44,400 of the 111,000 outstanding shares
of Sund Company common stock on January 1, 20X2, for $196,000. The
purchase price was equal to the book value of the shares purchased.
Sund reported the following:
| Year | Net Income | Dividends | ||||||
| 20X2 | $ | 41,000 | $ | 26,000 | ||||
| 20X3 | 31,000 | |||||||
| 20X4 | 7,000 | |||||||
Required:
Compute the amounts Port Company should report as the carrying
values of its investment in Sund Company at December 31, 20X2,
20X3, and 20X4.
Homework Answers
Ans:
Port Company purchased 42,400 shares out of 106,000 shares outstanding in Sund Company. Here Port Company acquired 40% ( 44,400/111,000) of shares of Sund Company. If a Company acquire 20 to 50% of shares of another company with a significant influence on financial and operating decisions of Sund company, can follow equity method to record investment value in the books of investor company i.e Port Company.
In Equity method of investment valuation, the following formula will be used to find the investment carrying amount
Carrying amount of investment = Acquisition cost of investment + share of subsequent net income of investee company - share of subsequent cash dividend announced by investee company i.e Sund company
Carrying amount of investment in the book of Port Company in the year 2002 = $ 196,000 + 40% of $ 41,000 net income - $ 40% of 26,000 dividend
= $ 196,000 + $ 16400 - $ 10,400 = $ 202000
Hence, Carrying amount of investment in the books of Port Company for the year 2002 is $ 198,000.
2. Carrying amount of investment in the books of Port Company for the year 2003 = $ 202,000 + 40% of 31,000 net income of Sund company = $ 202,000 + $ 19,200 = $ 214,400
3. Carrying amount of investment in the books of Port company for the year 2004 = $ 217,200 + 40% of 7,000 net income of Sund company = $ 214,400 + $ 2,800 = $ 217,200
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