Question

Chapter 2 Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential 85 E2-4 Carrying an Investment at Fair Value versus Equity Method Reporting Winston Corporation purchased 40 percent of the stock of Fullbright Company on January 1, 20X2, at underlying book value. During the period of January 1, 20X2, through December 31, 20X4, the market value of Winston's investment in Fullbright's stock increased by $20,000 each year. The companies reported the following operating results and dividend payments during the first three years of intercorporate ownership: Fullbright Company Net Income Dividends Year 20X2 20X3 20X4 Winston Corporation Operating Income Dividends $100,000 $ 40,000 60,000 80,000 250,000 120,000 $70,000 40,000 25,000 $30,000 60,000 50,000 Required Compute the net income reported by Winston for each of the three years, assuming it accounts for its investment in Fullbright by (a) carrying the investment at fair value, or (b) using the equity method.

(a) carrying the investment at FAIR VALUE

please do not copy others answer, thank you.

Answer 1

A)Investments recorded at fair value -

1. When the investments are recorded at fair value, the increase/(decrease) in fair value of investment is charged to profit & Loss. As mentioned in the question, the fair value is being increasing each year by $20,000. hence, Profit and Loss will also increase by $20000 every year along with operating income.

20X2 = 100000+20000 =$120000

20X3 = 60000+20000 =$80000

20X4 = 250000+20000 =$270000

B)Investments recorded using equity method-

When investments are recorded using equity method, the proportionate share in the associate company will the parent's share of income. Hence. the income will be reported as follows-

20X2 = 100000+(70000*0.4) =$128000

20X3 = 60000+(40000*0.4)=$76000

20X4 = 250000+(25000*0.4)=$260000