Question

After a year operation, United Alliance Inc. has extra cash on hands and the board and directors have voted to invest in its long term supplier, Power Tools Inc. On January 1, 2018, United Alliance purchase 35% of the outstanding voting stock of Power Tools with the price of $500,000. The equity method is used to account for the investment. The following data relate to this investment. (20 marks) 2017 Net income reported by Power Tools Inc. was $250,000. Dividends payment was declared by Power Tools Inc. amounted to $10,000. on December 31, 2016 the market value of United Alliance Inc. investment was $300,000. 2018 Dividends received from English Court Corporation amounted to $10,000 on January 2nd, 2019 The investment was sold on January 3rd, 2019, for $320,000. Prepare all journal entries for 2018 and 2019 relating to United Alliance's investment in Power Tools Inc.

Answer 1

1)Under GAAP there are three ways of Investment Valuation , Cost Method , Equity and , Consolidated Financial Statement .

Under Equity method of accounting, the Investor Company reports the Income earned by the Investee company on its Income statement, in an amount proportional to the percentage of its Equity investment in the Investee company.

2) A Investee company in which investor holds upto 20% to 50% of a company's Stock, it will consider that investor has significant influence in Investee Co.. Using the Equity method, a Investor reports the carrying value of its investment independent of any fair value change in the market.

3) Any payment by Investee company for distribution of Income will get reduce from this carrying amount.

Following are the Entry for 2018 and 19 in the books of United Alliance's investment in Power Tools Inc

		Debit	Credit
Jan 1, 2018	Investment in Power tools	$500000
	Cash		$500000
	(Being Investment made in Power tools )

As the Net Income and Dividend Details are for Prior Period , 2017, and investment are acquired on 2018, it will not included in the investment value .

Calculation. If the Income of Power Tools  Pertains to 2018 or If assume same income will be there in 2018 then  , the investmentwill be adjusted as below  

Dec 31, 2018	Investment in Power tools	$87500
	Invesment Income		$87500
	( Being Income in percentage of share in Investee income is recognised in Investment)
Dec 31, 2018	Cash	$3500
	Investment in Power Tools		$3500
	(Being Income received by way of dividend)

Income in share of Power tools , will be added to investment amount $250000×35% = 87500

On payment of Dividend the above income which included in Investmemt carrying value will decrease by the amount of income distributed amd paid $10000×35% =3500

Under Equity Method Investment are reported on there purchase price , and get increase or decrease in future income and Loss of Investee Income .

As entry for investment in Power tools is ask hence data related to English court is of no use.