Question

6. Jack Corporation purchased a 20% interest in Jill Corporation for $1,500,000 on January 1, 2018. Jack can significantly influence Jill. On December 10, 2018, Jill declared and paid SI million in dividends. Jill reported a net loss of $6 million for the year. What amount of loss should Jack report in its income statement for 2018 relative to its investment in Jill? A) $1,000,000 B) $1,200,000. C) $1,400,000. D) $1,500,000

Answer 1

Ans. Option B $1,200,000

Jack corporation has purchased 20% share of Jill corporation, so 20% of Jill corporation's loss should be reported in the income statement of Jack corporation if the carrying value before net loss is greater than the loss recognized.

So, we will calculate the carrying value before net loss, first.

Carrying value = Purchase consideration - (Dividend * share of purchase)

= $1,500,000 - ($1,000,000 * 20%)

= $1,500,000 - $200,000

= $1,300,000

Loss recognized = $6,000,000 * 20%

= $1,200,000

The amount of loss recognized is less than carrying value before net loss, so the answer would be $1,200,000.