The following events occurred in 2020 and 2021 in relation to Beaver Inc.’s investment in Big...
The following events occurred in 2020 and 2021 in relation to
Beaver Inc.’s investment in Big Lion Corporation:
• On January 1, 2020 Beaver Inc. acquired 25,000 shares of Big
Lion for $50 a share. Because Beaver Inc owns 25,000 of the 100,000
outstanding shares of Big Lion it accounts for its investment using
the equity method.
• Big Lion and Beaver Inc. both have fiscal years ending on
December 31. For fiscal 2020, Big Lion Corporation reported income
of $450,000 and paid a dividend of $300,000.
• On December 31, 2020 shares of Big Lion Corporation were
trading at $40 per share
• For fiscal 2021, Big Lion Corporation reported income $150,000
and paid a dividend of $100,000
• On December 31, 2021 shares of Big Lion Corporation were
trading at $60 per share
Required:
1) What entry does Beaver Inc. make to record its investment in Big
Lion Corporation on January 1, 2020?
2) What amount of income/loss does Beaver Inc. record on its
2020 Income Statement related to its investment in Big Lion
Corporation?
3) What is the book value of Beaver Inc.’s investment in Big Lion Corporation at the end of 2020? At the end of 2021?
Homework Answers
1) Journal Entry in the book of Beaver Inc on January 1, 2020
Investment in Big Lion Corporation Share A/c Dr 1,250,000
To Bank A/c 1,250,000
Working Note:
Beaver Inc purchased 25000 Shares at Rs. $50 per Share.
So Toal cost of shares is 25000*$50 = $ 1,250,000
2) Income/loss does Beaver Inc. record on its 2020 Income Statement related to its investment in Big Lion Corporation
Income Recorded is $ 75,000
Working Note:
Big Lion Corporation paid a dividend of $300,000 for fiscal 2020.
Total Shares in Big Lion Corporation is 100,000.
Hence each share is paid a dividend of $3.
Beaver Inc has 25000 shares.
Thus it recieves dividend of $75,000 (25000*3)
3) Book value of Beaver Inc.’s investment in Big Lion Corporation
a) At the end of 2020
Book Value is 1,250,000 (Even if the market value is $40 per share its book value remains the same as the purchase value)
b) At the end of 2021
Book Value is 1,250,000 (Even if the market value is $60 per share its book value remains the same as the purchase value)
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