Question

ew Ro... 12 А" A B I ULAA Ev Eve A Q2. a) RHS Financial Grouppaid $500,000 for a 25% investment in the common shares of Silk Corporation. For the first year, Silk reported net income of $200,000 and at year-end declared and paid cash dividends of $100,000. On the balance sheet date, the fair value of RHS Financial Group's investment in Silk Corporation shares was $384,000. Requirements: a) Which method is appropriate for RHS Financial Group to use in accounting for its investment in Skill Corporation? Why? b) Show everything that RHS Financial Group would report for the investment and any investment revenue in its year-end financial statements. I

Answer 1

Part A

RHS company has 25% investment in Silk share, which is more than 20%.
RHS Company have significant influence over Silk Company. Equity method should be used to record this investment.
Method : -		Equity method

Event	General Journal	Debit	Credit
1	Equity Investment In Silk Company	500,000
	Cash		500,000
	(To record Purchase of Investment.)
2	Equity Investment In Silk Company	50,000
	Income from Equity Investment		50,000
	(To record Income from Equity Investment. ) (200000*25%)
3	Cash	25,000
	Equity Investment In Silk Company		25,000
	(To record Dividend Received.) (100000*25%)

Purchase of Investment	500,000
Add: Income from Equity Investment	50,000
Less: Dividend Received	(25,000)
Equity Investment In Silk Company (Reported on balance sheet)	525,000

RHS Financial
Partial Income statement
Other income
Income from Equity Investment	50,000

RHS Financial
Partial Balance sheet
Assets
Non-current assets
Equity Investment In Silk Company	525,000

Part B

Date	General Journal	Debit	Credit
May 1, 2014	Cash	10,000.00
	Bond payable		10,000.00
	(To record issued of bond payable at par)
Oct 31, 2014	Interest expense (10000*6.25%*6/12)	312.50
	Interest payable		312.50
	(To record accrued interest expense) (May to Oct = 6 months)
Nov 1, 2014	Interest expense	312.50
	Cash		312.50
	(To record interest expense)
Apr 30, 2020	Bond payable	10,000.00
	Cash		10,000.00
	(To record payments of bond payable at maturity.)