Question

Lieb Ltd. is public company that trades on the TSX. On 3 March 2020, the company purchased 5,000 common shares of RO Inc. for total proceeds of $140,000, representing 30% of the total outstanding shares of RO Inc. Lieb Ltd. It was determined that at the time of purchase, it was able to exercise significant influence over RO Inc. On 30 September 2020, Lieb Ltd. received a dividend of $1.20 per share from RO Inc. On 31 December 2018, the market value of the RO Inc. investment had dropped to $18 per share. RO Inc.’s net income for the year ended 31 December 2020 was $63,000.

Required:

a)     Prepare all the required 2020 journal entries for transactions above.

b)    If Lieb Ltd. were not able to exercise significant influence over its investment in RO Inc. what other accounting choice(s) does it have to report the investment?

Answer 1

a.)	Equity Method:	Significant influence present
	Date	Account Titles & Explanation	Debit $	Credit $
	3 March,2020	Investment in RO Inc.	140,000
		Cash		140,000
		( To Record investment in RO Inc. )
	30 September ,2020	Cash	6,000
		Investment in RO Inc.		6,000
		( 5,000 x 1.20 )
		( To record the dividend received )
	31 December,2020	Investment in RO Inc.	18,900
		Investment Revenue		18,900
		(63,000 x 30% )
		( To record the share of net income of subsidiary )
b.)	Fair value Method:	No Significant Influence
	Date	Account Titles & Explanation	Debit $	Credit $
	3 March,2020	Investment in RO Inc.	140,000
		Cash		140,000
		( To Record investment in RO Inc. )
	30 September ,2020	Cash	6,000
		Dividend Revenue		6,000
		( 5,000 x 1.20 )
		( To record the dividend received )
	31 December,2020	Unrealized holding gain or loss	50,000
		Fair Value Adjustment		50,000
		(140,000 - ( 5,000 x 18 ) )
		( To bring investment at fair value )