On January 2, Year 1, Barber Company purchased 5,000 shares of Convell Company for $60,500. Convell...
On January 2, Year 1, Barber Company purchased 5,000 shares of Convell Company for $60,500. Convell Company has a total of 25,000 shares of common stock outstanding and it is presumed the Barber Company will have a significant influence over Convell. During each of the next two years, Convell declared and paid cash dividends of $0.85 per share, and its net income was $72,000 and $67,000 for Year 1 and Year 2, respectively. What is the book value of Barber’s investment in Convell at the end of Year 2?
Homework Answers
The book value of investment at the end of year 2 is $79,800 and it is calculated as follows
Compute the percentage of ownership interest in the investee’s voting stock as follows
Ownership percentage = Number of shares purchased ÷ Total number of shares in investee
= 5,000 shares ÷ 25,000 shares
= 20%
The company owns 20% of investee’s voting stock and therefore investment is accounted according to equity method as follows
| Particulars | Amount |
| Cost of shares purchased | $60,500 |
| Add: Equity in income - Year 1 ($72,000 × 20%) | $14,400 |
| Add: Equity in income - Year 2 ($67,000 × 20%) | $13,400 |
| Deduct: Cash dividends received - Year 1 (5,000 shares × $0.85) | ($4,250) |
| Deduct: Cash dividends received - Year 2 (5,000 shares × $0.85) | ($4,250) |
| Book value of the investment in subsidiary | $79,800 |
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