Question

Boomer Inc. purchased for cash 40% of Small Corporation’s 30,000 outstanding common shares at a cost of $ 10 per share on January 2, 2020. The purchase price of $ 10 per share was based solely on the book value of Small’s net assets. Therefore, there was no acquisition differential. On October 21, 2020, Small declared and paid a total cash dividend of $ 30,000 to all its shareholders. On December 31, Boomer’s year end, Small reported net income of $ 15,000 for the year. Small shares had a fair value of $ 14.75 per share at December 31. Boomer Inc., a private Canadian corporation, applies IFRS. Prepare all the journal entries related to Boomer’s investment in Small for the year.

Answer 1

The equity method is used when the investor company holds more than 20 percent but less than 50 percent of another company's stock. In this case, the investor has significant power, influence and control over the investee's operations.

Under the equity method, the initial investment is recorded at cost. Afterward, that value gets adjusted periodically to reflect fluctuations in the investment's income and losses. When an investee reports a certain income, the value of the investor's investment increases by an amount proportional to the percentage of ownership.

If the investee pays a dividend, the investor receiving the dividend will record the cash amount but will also record a decrease in the value of the investment on its balance sheet. Under the equity method, dividends are not treated as income, but, instead, they are considered a return of investment.

As,Boomer Inc. purchased 40% of Small Corporation’s, hence they have significant influence over Small corporation and Equity method will be used.

Journal Entries will be as follows:

There is no fair value adjustment recorded for any change in value of shares under Equity Method.