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On January 2, 2017, Esposito Corp. purchased 200 of the 1,000 outstanding common shares of Bob...

On January 2, 2017, Esposito Corp. purchased 200 of the 1,000 outstanding common shares of Bob Ltd. for $120,000. During 2017, Bob declared total cash dividends of $20,000 and reported net income for the year of $80,000. If Esposito uses the cost model to account for its investment in Bob, what is the balance in Espoito's Investment in Bob Ltd. account at December 31, 2017?

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On January 2, 2017, Esposito Corp. purchased 200 of the 1,000 outstanding common shares of Bob Ltd. for $120,000. During 2017, Bob declared total cash dividends of $20,000 and reported net income for the year of $80,000. If Esposito uses the cost model to account for its investment in Bob, what is the balance in Espoito's Investment in Bob Ltd. account at December 31, 2017?

Answer

Under Cost model the investment is shown at cost of purchase as an asset in the balance sheet and when any dividend received from such investment same will be recognize as income received.

And when investor (Esposito Corp) sell the common stock of Bob Ltd the loss and profit will be recognize in the books of Esposito Corp.

The journal entry for investment is

Investment in Bob Ltd                 Dr.          $1,20,000

                To Cash/Bank A/c            Cr.          $1,20,000

When Dividend Received the entry will be

Bank A/c                              Dr.          $4,000

Dividend Income A/c      Cr.          $4,000                  

Calculation

Total Shares of Bob Ltd                                                  1,000 shares

Holding by Esposito Corp                                              200 shares

% Holding 200/1000*100 = 20%

Dividend Declared by Bob Ltd                                     $20,000

Dividend will be received by Esposito Corp           $20,000*20% = $4,000                   

Conclusion

Therefore as per cost model to account the investment the investment will be valued at $1,20,000 as on December 31st

ekkarill92 answered 2 years ago
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