Question

Peace Company issued common shares with a par value of $59,000 and a market value of $165,900 in exchange for 30 percent ownership of Symbol Corporation on January 1, 20X2. Symbol reported the following balances on that date:

SYMBOL CORPORATION Balance Sheet January 1, 20X2
	Book Value					Fair Value
Assets
Cash		$	55,000				$	55,000
Accounts Receivable			81,000					81,000
Inventory (FIFO basis)			126,000					156,000
Land			51,000					66,000
Buildings & Equipment			502,000					329,000
Less: Accumulated Depreciation			(242,000)
Patent								32,000
Total Assets		$	573,000				$	719,000
Liabilities & Equities
Accounts Payable		$	25,000				$	25,000
Bonds Payable			141,000					141,000
Common Stock			146,000
Additional Paid-In Capital			15,000
Retained Earnings			246,000
Total Liabilities & Equities		$	573,000

The estimated economic life of the patents held by Symbol is 4 years. The buildings and equipment are expected to last 6 more years on average. Symbol paid dividends of $10,000 during 20X2 and reported net income of $81,000 for the year.

Required:
Compute the amount of investment income (loss) reported by Peace from its investment in Symbol for 20X2 and the balance in the investment account on December 31, 20X2, assuming the equity method is used in accounting for the investment.

A. Investment income (loss)
B. Balance in the investment account

Answer 1

Equity Method: In this method the investment is initially recorded in the balance sheet at cost. In subsequent period, the carrying amount is adjusted recognise the investor's proportionate share of the investee's earnings or losses, and these earnings or losses is reported in income statement of the investor. Dividend or other distribution received from investee is treated as return of capital which is reduced from the carrying amount of investment. Excess price paid above the book value of Net assets should be allocated to the Tangible and intangible assets based on their fair value and any remaining amount will be considered as goodwill. The excess amount allocated to assets will be amortised over the useful life of the assets. The amortisation would reduce the investor's share of the investees reported income and balance in the investment account will reduce by the amortisation amount.