Question

if 25% of the common stock of an investee company is purchased as a long-term investment, the appropriate method of accounting for the investment is a. the cost method. b. the equity method. C. the preparation of consolidated financial statements. d. determined by agreement with whomever owns the remaining 90% of the stock. On January 1, 2020, Jamestina Corp. paid $1,800,000 for 100,000 shares of Belinda Company's common stock, which represents 25% of Belinda's outstanding common stock. Belinda reported net income of $1,200,000 and paid cash dividends of $600,000 during 2020. Jamestina Corp should report the investment in Belinda Company on its December 31, 2020, balance sheet at: a. $1,800,000 b. $1,758,000 c. $1,818,000 d. $1,950,000 8) Bonda Corporation's trading portfolio at the end of the year is as follows: Security Cost Fair Value Common Stock CSS $110,000 $112.000 Common Stock AAD 19,000 15,000 $129.000 $127.000 At the end of the year, Bonda Corporation should a. set up a Fair Value Adjustment account for Stock AAD. b. set up a Fair Value Adjustment account for the portfolio. c. recognize an Unrealized Loss -Income for $2,000. d. report a loss on the income statement for $4,000 under "Other expenses and losses."

Answer 1

6. Option B

Equity method.

If an investor holds between 20% and 50% of investee's common stock and has significance influence then Equity method of accounting for long term investments in stock is followed.

Cost method of accounting is followed if investor holds less than 20% of the investee's common stock.

7. Option D

$1,950,000

Assuming equity method of accounting, when dividends are paid by investee company they are debited to cash account and credited to stock investment account,which decreases the stock investment in the books of investor.

Dr Stock Investment $300,000 ( $1,200,000 * 25%)

Cr Revenue from Investment $300,000

Dr Cash $150,000 ( 600,000 * 25% )

Cr Stock investment $150,000

Stock investment has increased by $150,000 ( 300,000 - 150,000)

Therefore, in balance sheet, Jamestina Corp. should report $1,950,000 ( 1,800,000 + 150,000) as investment in Belinda Company.

8. Option C

Recognize an Unrealized loss for $2000.($4000 - $2000)

Gain to be recognized on Stock of CSS = $2000 ($112,000 - $100,000)

Loss to be recognized on Stock of AAD = $4000 ($15,000 - $19,000)

Net Loss to be recognized = $4000 - $2000 = $2000.