Question

Situation 2: Goebel Company acquired a 30% interest in Dobbs Company on December 31, 2018 for $350,000. During 2019 Dobbs Company had net income of $150,000 and paid a cash dividend of $60,000. (Dobbs Company paid $60,000 cash dividend to all of its shareholders.) 14. Asom Assuming no other factors need to be considered, 30% interest acquired by Goebel enables them to exercise "significant influence over the Dobbs Company. Goebel should account for the investment a. by using the equity method. b. by using the fair value method. c. by using the effective interest method. d. by consolidation. 15. On December 31, 2018, the amount of the debit to Equity Investments (Dobbs) would have been a. $278,000. b. $230,000. c. $350,000. d. $360,000.

Answer 1

Answer to Q.14

As per Accounting standards, if an entity holds more than 20% shares  in another entity it becomes an associate company. In the given case, Goebel company holds 30% shares in Dobbs Company. Therefore Dobbs company becomes Associate of Goebel Company. As per Accounting Standards, Equity Method is applied in case of Investment in Associates. Therefore Goebel company should adopt Equity method.

Answer to Q.15

Amount of Debit to Equity Investments : $3,50,000

As per Equity method, Investments are recorded at Cost Value

Answer to Q.16

Cash Dividend of Received by Goebel company should accounted as Revenue

Total Amount Cash Dividend recorded as Revenue : $18,000 ($60,000*30%)

Answer to Q.No 17

Addition to the Carrying value of Investment(Dobbs) :

Net Income of Reported by Dobbs Company : $ 1,50,000

Addition to Investment to be recorded in Goebel Accounts : Net Income of Dobbs company x % of shareholding

= $45,000 ($1,50,000*30%)