Question

Analyzing and Interpreting Equity Method Investments

Concord Company purchases an investment in Bloomingdale Company at a purchase price of $2 mil-

lion cash, representing 30% of the book value of Bloomingdale. During the year, Bloomingdale reports

net income of $300,000 and pays cash dividends of $90,000. At the end of the year, the market value of

Concord’s investment is $2.4 million.

Questions:-

a.What amount does Concord report on its balance sheet for its investment in Bloomingdale?

b. What amount of income from investments does Concord report? Explain.

c. Concord’s $364,000 unrealized gain in the market value of the Bloomingdale investment (choose one and explain):

(1) Is not reflected on either its income statement or balance sheet.

(2) Is reported in its current income.

(3) Is reported on its balance sheet only.

(4) Is reported in its accumulated other comprehensive income

Answer 1

Concord holds 30% of book value in bloomingdale which indicates concord has significant influence on bloomingdale
Thus the equity investment would be valued based on equity method
a.
Calculation of value of investment to be reported by concord
Cost of investment	$2,000,000
Share in net income	$90,000	300000*30%
Share in dividend	-$27,000	90000*30%
Value of investment	$2,063,000
Thus, concord would report value of equity investment as $2,063,000
b.
Concord would report its share in net income of $90,000 as income from investments in income statement.
c.
In case of equity method, the value of investment is adjusted for share in net income and dividend.
The investment is not valued based on fair value and thus is ignored
Thus, unrealized gain on investment is not reported on either its income statement or balance sheet
Option (1) is correct answer