Question

On January 2, 2018, Baltimore Company purchased 16,000 shares of the stock of Towson Company at $12 per share. Baltimore obtained significant influence as the purchase represents a 40% ownership stake in Towson Company. On August 1, 2018, Towson Company paid cash dividends of $25,000. Baltimore Company intended this investment to a long-term investment. On December 31, 2018, Towson Company reported $55,000 of net income for FY 2018. Additionally, the current market price for Towson Company's stock increased to $19 per share at the end of the year. Use this information to determine, how much Baltimore Company should report for its investment in Towson Company on December 31, 2018. (Round to the nearest dollar.)

Answer 1

Baltimore company purchase shares of towson company of 40% and gain significant influence over the towson company and tend to hold this investment for long term, so Baltimore company cannot value its investment in towson company as per cost method or fair value method. Baltimore has to value its investment in Towson company as per equity method.

In equity method investment is recorded at purchase cost first after that it will be decreased by dividend amount when it received dividend and will be increased by share in income amount at the end of year and result end figure will be carrying amount for the investment under equity method.

So now calculate for given problem

Purchase Cost = Share No. X Price per share = 16000 X 12 = $192000

Share in dividend

Total Dividend by towson = $25000

Share of Baltimore in dividend = 40% of 25000 = $10000

Share in Net Income of Towson

Net income of Towson = 55000

Share of Baltimore = 40% of 55000 = $22000

So value of investment in Towson company as on Dec 31 will be as below

= Purchase Cost - Share in Dividend + Share in Income  

= 192000- 10000 + 22000

= $204000

So $204000 will be reported in Baltimore balance sheet as on Dec 31, 2018 for investment in Towson company.