Question

In: Accounting

Phillips Company bought 30 percent ownership in Jones Bag Company on January 1, 20X1, at underlying...

Phillips Company bought 30 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 $1,500 each year. In 20X1, 20X2, and 20X3, Jones Bag reported the following:

Year Net Income Dividends
20X1 $ 22,000 $ 29,000
20X2 26,000 24,000
20X3 34,000 24,000


The balance in Phillips Company’s investment account on December 31, 20X3, was $71,000.

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

Answer:

Fair value method:

The balance in Phillips Company’s investment account on December 31, 20X3 = $71,000

Market value of investment increased each year = $1,500

Total increase in market value = $1,500*3 = $4,500

Amount that Phillips paid for its investment in Jones Bag stock = Carrying value on Dec 31, 20X3 - Increase in fair value

= $71,000 - $4,500= $66,500

Therefore, The Amount that Phillips paid for its investment in Jones Bag stock is $66,500

Equity method:

The balance in Phillips Company’s investment account on December 31, 20X3 = $71,000

Share of income recognized during 3 years = ($22,000 + $26,000 + 34,000)* 30% = $24,600

Carrying value of investment reduced on receipt of dividend = ($29,000 + $24,000 + $24,000)*30% = $23,100

Net Increase in investment carrying value in 3 years = $24,600- $23,100 = $1,500

Amount that Phillips paid for its investment in Jones Bag stock = Carrying value on Dec 31, 20X3 - Increase in carrying value

= $71,000 - $1,500 = $69,500

Therefore, The Amount that Phillips paid for its investment in Jones Bag stock is $69,500

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ekkarill92 answered 1 day ago
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