Question

On January 1st 2020, B Ccompany Acquired 12,500 of the 50,000 shares (25%) of the common stock of C company for $30 per share. Per C company's annual report for the year ending 12/31/2020 they reported a net income of $210,000 and declared/paid total cash dividends of $100,000. C Company's stock price had a fair value of $31 per share on December 31, 2020.

After considering the impact of the above information, complete the table below assuming significant influence and no significant influence.

  

	Significant Influence	No Significant Influence
Investment Amount reported on the B/S 12/31/20
Impact on the Income Statement for Year ending 12/31/2020

Answer 1

1. When the company has significant influence:

The equity method is used when the investor company holds more than 20 percent but less than 50 percent of another company's stock. In this case, the investor has significant power, influence and control over the investee's operations.

Under the equity method, dividends are not treated as income, but, instead, they are considered a return of investment. When an investee reports a certain income, the value of the investor's investment increases by an amount proportional to the percentage of ownership.

So the Investment Amount reported on the B/S 12/31/20 will be as follows:

Particulars		Amount in $
Purchase Cost	A = 12,500 shares * $30	375,000
Less: Divididend Received	B = $100,000 * 25%	-25,000
Add: Share in income	C = $210,000 * 25%	52,500
Closing Balance as at December 31,2020		402,500

Impact on the Income Statement for Year ending 12/31/2020:

The income statement will show the proportianate income i.e. $210,000*25% = $52,500 in its Income Statement.

2. When the company does not have significant influence:

When the company intends to sell the investments are held for trading, they are generally classified through income. At each reporting period, the value of investment is marked to the market and any difference is classified as profit/loss on financial asset.

So the Investment Amount reported on the B/S 12/31/20 will be as follows:

Closing Investment amount = No of shares * Fair Value of Shares = 12,500 * $31 = $387,500

Impact on the Income Statement for Year ending 12/31/2020:

The company will only record the amount of dividend receivend in its income statement as it does not have singnificant influence over C Company which is = $100,000 * 25% = $25,000