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Phillips Company bought 40 percent ownership in Jones Bag Company on January 1, 20X1, at underlying...

Phillips Company bought 40 percent ownership in Jones Bag Company on January 1, 20X1, at underlying book value. During the period of January 1, 20X1, through December 31, 20X3, the market value of Phillips' investment in Jones' stock increased by $2,000 each year. In 20X1, 20X2, and 20X3, Jones Bag reported the following:

Year Net Income Dividends
20X1 $ 8,000 $ 15,000
20X2 12,000 10,000
20X3 20,000 10,000

The balance in Phillips Company’s investment account on December 31, 20X3, was $54,000.

Required:
In each of the following independent cases, determine the amount that Phillips paid for its investment in Jones Bag stock assuming that Phillips accounted for its investment by carrying the investment at fair value, or using the equity method.
  

Fair value $
Equity method $

Solutions

Expert Solution

Change in Investment account
Share of 40%
Net Income N Dividend declared D Net Income 40%*N Dividend 40% *D Differnce
20x1 $       8,000 $              15,000 $3,200 $6,000 ($2,800)
20X2 $     12,000 $              10,000 $4,800 $4,000 $800
20X3 $     20,000 $              10,000 $8,000 $4,000 $4,000
Total $2,000
Ans a Cost method= $54000+2800 $               56,800
Ans b Equity method= $54000-2000 $               52,000

ekkarill92 answered 4 days ago
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