Question

On January 2, 2018, All Good Company purchased 5,000 shares of the stock of Big Bad Company, and DID obtain significant influence. The investment is intended as a long-term investment. The stock was purchased for $17 per share, and represents a 30% ownership stake. Big Bad Company made $400,000 of net income in 2018, and paid dividends to All Good Company of $40,000 on December 15, 2018. Big Bad Company's stock was trading on the open market for $17 per share at the end of the year. Use this information to determine the book value of the investment that should be reported at year end by All Good Company. Round to nearest whole dollar.

Answer 1

Since the holding by All Good Company is 30% of stock in Big Bad Company, it can be called an associate company.                              An influential investment( Between 20% to 50%) in an associate is accounted for using the equity method of accounting. The original investment is recorded on the balance sheet at cost (fair value). Subsequent earnings by the investee are added to the investing firm's balance sheet ownership stake (proportionate to ownership), with any dividends paid out by the investee reducing that amount. The dividends received from the investee by the investor, however, are recorded on the income statement.
Calculating the Closing value of the investment:
Particulars	Working	Amount
Opening balance of investment	(5,000 shares*$17)	$    85,000.00
Add: Net Income	($400,000*30%)	$ 120,000.00
Less: Dividend received		$ (40,000.00)
Closing value of investment		$ 165,000.00