Question

Ramtha Company bought 40% ownership in UAE company on 1-1-2017, at book value. In 2017, 2018, and 2019, UAE reported net income of $16,000, $24,000, and $ $40,000, and dividends of $30,000, $20,000, and $20,000 respectively. During the periods from 2017 to 2019 the market value of Ramtha’ investment in UAE’ stock increased by $4000 each year. The balance in Ramtha company’s investment account on December 31, 2019, was $104,000

Determine the amount that Ramtha paid for it is investment in UAE stock assuming that Ramtha accounted for it is investment using:

Fair Value Method

Answer 1

Solution:

Year 2017:

Let amount paid by Ramtha for it's investment in

UAE stock as on Jan 01,2017 = x

Proportionate sharei.e 40% of Ramtha in the net

income of UAE stock in 2017 = $16000*40%   

= $6,400

Amount of Investment of Ramatha in UAE stock to be

reduced by the proportionate share i.e 40% in the

dividend declared in 2017    = $30,000*40%

= $12,000

So, the Value of investment at end of year 2017 = x + $6,400 - $12,000

= x - $5,600

Year 2018:

Proportionate share of Ramtha in the net income of

UAE stock in 2019    = $24,000*40%

= $9,600

Amount of Investment of Ramatha in UAE stock to be

reduced by the proportionate share i.e 40% in the

dividend declared in year 2018    = $20,000*40%

= $8,000

So, the Value of investment at end of year 2018 = Investment at end of year 2017 + $9,600 - $8000

i.e (x - $5,600 + $9,600 - $8000)

= x - $4,000

Year 2019:

Proportionate sharei.e 40% of Ramtha in the net

income of UAE stock in 2019 = $40,000*40%

= $16,000

Amount of Investment of Ramatha in UAE stock to be

reduced by the proportionate share i.e 40% in the

dividend declared in year 2019 = $20,000*40%

= $8,000

So, the Value of investment at end of year 2019 = Investment at end of year 2018 + $16,000 - $8000

i.e (x - $4,000 + $16,000 - $8000)

= x + $4,000

Given that,

The value of investment of Ramatha as on December 31,2019 = $1,04,000

Hence,

=> $1,04,000 = x + $4,000

=> $1,04,000 - $4,000 = x

=> x = $1,00,000

Ans. Amount of value at which investment in UAE Stock on Jan 01,2017 was $1,00,000.