Question

ABC, Inc. acquired 15% of EFG Corporation on January 1, 2019, for $125,000 when the book value of EFG's net assets was $950,000. During 2019, EFG reported net income of $530,000 and paid dividends of $40,000. On January 1, 2020, ABC purchased an additional 15% of EFG for $550,000. Any excess of cost over book value was attributable to goodwill (No amortization). On that same date, ABC changed to the equity method. During 2020, EFG reported net income of $730,000 and paid dividends of $90,000.

Required:

A. What type and amount of income(s) did ABC record from EFG in 2019?

B. What type and amount of income(s) did ABC record from EFG in 2020?

C. What was the balance in the Equity Investment in EFG account at December 31, 2020?

Answer 1

A.
Shareholding of 15% would not result in ABC Inc.,
holding a substantial interest and hence it will not
have any share in the net income of EFG Corporation
but will only receive the dividend income for it's
share of stocks held in EFG Corporation.
Hence, the income would be Dividend Income
Total dividends declared by EFG Corp.	$40,000
% shareholding of ABC inc.,	15%
Dividend income earned by ABC inc.,	$6,000
B.
With additional purchase of 15% equity in 2020,
ABC would be holding substantial interest in EFG
Corporation. Hence, from 2020 onwards, it would
record it's investment in EFG Corporation using the
Equity method.
In this method of recording the equity investments
the income received from EFG Corporation would
be added to the equity investment which would
result in increase/(decrease) in the value of the
equity investment.
C.
Balance of Equity investment on December 31,2020
Value of Equity Investment on Jan 1,2020	$675,000
Add: Share in net income of EFG Corp.
($ 730,000 * 30%)	$219,000
Less: Dividend received from EFG Corp.
($ 90,000 * 30%)	($27,000)
Value of Equity Investment on Dec 31,2020	$867,000