Question

BUS 203 - Review 4. P Company invests $100,000 in s Company and subsequently owns 15% of S Company's common stock. As a result, P Company classifies the investment in stock using the Fair Value Method of accounting for its investment. During the year, S Company reports income of $30,000 and pays dividends of $20,000. The market value of S Company at year-end is $85,000. P Company has no other investments in common stock. What effect would these transactions have on P Company's account - Investment in Common Stock - S Company? a) The balance in the account would increase by $1,500. b) The balance in the account would decrease by $3,000. C) There would be no effect on the account because P Company uses the Fair Value method of accounting for its long-term investments d) The balance should be reduced by $15,000 by means of an adjustment account. Assuming the same facts in number 4, what effect would these transactions have on P Company's account - Investment in Common Stock - S Company, if P Company used the Equity method of Accounting? a) The balance in the account would increase by $1,500. b) The balance in the account would decrease by $3,000. c) There would be no effect on the account because P Company uses the Cost method of accounting for its long-term investments. d) The balance should be reduced by $15,000 by means of an adjustment account.

Answer 1

4- The correct answer is C)

The reason behind that is since the company P is using Fair Value method of accounting for its accounting of Investments. So the value of investments would be carried at Fair Value and the income which P will receive will be credited to the Income Account

5- The Correct answer is B)

In this case, since the company is using the equity method of accounting, so the share of Dividend which the company will receive, will going to reduce the value of Investment of the Company. The share of dividend would be 20,000*15% = 3,000