Exercise 22-22
On January 1, 2017, Headland Co. purchased 22,000 shares (a 10%
interest) in Elton John Corp. for $1,480,000. At the time, the book
value and the fair value of John’s net assets were
$12,100,000.
On July 1, 2018, Headland paid $3,340,000 for 44,000 additional
shares of John common stock, which represented a 20% investment in
John. The fair value of John’s identifiable assets net of
liabilities was equal to their carrying amount of $13,200,000. As a
result of this transaction, Headland owns 30% of John and can
exercise significant influence over John’s operating and financial
policies. (Any excess fair value is attributed to goodwill.)
John reported the following net income and declared and paid the
following dividends.
Net Income |
Dividend per Share |
|||
Year ended 12/31/17 | $630,000 | None | ||
Six months ended 6/30/18 | 490,000 | None | ||
Six months ended 12/31/18 | 754,000 | $1.50 |
Determine the ending balance that Headland Co. should report as its
investment in John Corp. at the end of 2018.
Investment in Elton John Corp. | $
|
Date |
Particulars |
Debit ($) |
Credit ($) |
01.01.2017 |
Investment in Elton John |
1,480,000 |
|
Cash |
1,480,000 |
||
(To record investment) |
|||
01.07.2018 |
Investment in Elton John |
3,340,000 |
|
Cash |
3,340,000 |
||
(To record investment) |
In the year 2017, the dividend has not been paid and net income is 690,000.
The share of Headland would be $ 690,000 = $ 69,000
Hence, total carrying amount = 69000 +1480,000 =$ 1,549,000
For half of 2018, net income is $ 450,000, the share of Headland = 10% 0f 490,000 = $ 49,000
Total carrying amount = 1549,000 + 49,000 = $ 1,598,000
Now after July 2018,
Total investment in Elton john would be = 1598,000 + 3,340,000 =$ 4,938,000
Share in net income would be 30% of 754,000 = $ 226,200
Dividend received = 1.50 X 22000 X 3 = $ 99,000
It ought to be adjusted in carrying amount
Adjusted carrying amount = 4938,000 + 226,200 – 99000 = $ 5065,200
Hence, current investment in Elton John would be $ 5065,200.
Note that on 31/12/2018, 30% interest is there instead of 10%( 22,000 shares). So, 22000 has been multiplied by 3 to reflect current 30% interest share.
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Exercise 22-22 On January 1, 2017, Headland Co. purchased 22,000 shares (a 10% interest) in Elton...
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