Question
In: Accounting
Gant Company purchased 20 percent of the outstanding shares of Temp Company for $71,000 on January...
Gant Company purchased 20 percent of the outstanding shares of
Temp Company for $71,000 on January 1, 20X6. The following results
are reported for Temp Company:
| 20X6 | 20X7 | 20X8 | |||||||
| Net income | $ | 43,000 | $ | 38,000 | $ | 60,000 | |||
| Dividends paid | 11,000 | 28,000 | 16,000 | ||||||
| Fair value of shares held by Gant: | |||||||||
| January 1 | 71,000 | 90,000 | 87,000 | ||||||
| December 31 | 90,000 | 87,000 | 98,000 | ||||||
Required:
Determine the amounts reported by Gant as income from its
investment in Temp for each year and the balance in Gant’s
investment in Temp at the end of each year assuming that Gant uses
the following options in accounting for its investment in
Temp:
A.Carries the investment at fair value.
B.Uses the equity method.
Do both methods for all three years
Solutions
Expert Solution
By applying the principles as per IAS 28 Investments in Associates or Joint Ventures, it can be concluded that Temp comapany is an associate of Grant Company as tts 20% holding of outstanding share capital of Temp company leads to significant influence on the policies of Temp Company.
However, IAS 28 recommends to use only equity method for holding of investment in associate.
Calculation of Goodwil or Profit on acquisition of Investment From Temp:
Purchase Consideration paid = $71,000
Fair Value on acuisition date = $ 71,000
Since both are equal, no goodwill arises.
b. Calulation under equity method:
| BOOKS OF GANT | |||
| UNDER EQUITY METHOD | |||
| Income from Associate | |||
| 2016 | 2017 | 2018 | |
| Net income of Temp | 43000 | 38000 | 60000 |
| Share of Net Income of Temp @ 20% | 8600 | 7600 | 12000 |
| Total Income | 8600 | 7600 | 12000 |
| BOOKS OF GANT | |||
| UNDER EQUITY METHOD | |||
| Investment Account | |||
| 2016 | 2017 | 2018 | |
| Investment in Temp at the beginning | 71000 | 68600 | 48200 |
| Share of Net Income of Temp | 8600 | 7600 | 12000 |
| Less: Amount Received from Temp | 11000 | 28000 | 16000 |
| Closing Balance | 68600 | 48200 | 44200 |
a. Calulation under fair value method:
| BOOKS OF GANT | ||||
| UNDER INVESTMENT AT FAIR VALUE METHOD | ||||
| Income from Associate | ||||
| 2016 | 2017 | 2018 | ||
| a | Dividends Received(Income) | 11000 | 28000 | 16000 |
| Fair value at the end of the year | 90000 | 87000 | 98000 | |
| Fair value at the beginning of the year | 71000 | 90000 | 87000 | |
| b | Change in the Carrying value(OCI) | 19000 | -3000 | 11000 |
| Total Income(a+b) | 30000 | 25000 | 27000 |
| BOOKS OF GANT | |||
| UNDER INVESTMENT AT FAIR VALUE METHOD | |||
| Investment Account | |||
| 2016 | 2017 | 2018 | |
| Investment in Temp at the beginning | 71000 | 90000 | 87000 |
| Total income from Investment (income + OCI) | 30000 | 25000 | 27000 |
| Less: Amount Received from Temp | 11000 | 28000 | 16000 |
| Closing Balance | 90000 | 87000 | 98000 |
ekkarill92 answered 1 week agoRelated Solutions
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