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On January 2, 2018, All Good Company purchased 7,000 shares of the stock of Big Bad Company, and DID obtain significant influence.


On January 2, 2018, All Good Company purchased 7,000 shares of the stock of Big Bad Company, and DID obtain significant influence.  The investment is intended as a long-term investment.  The stock was purchased for $15 per share, and represents a 30% ownership stake. Big Bad Company made $450,000 of net income in 2018, and paid dividends to All Good Company of $20,000 on December 15, 2018.  Big Bad Company's stock was trading on the open market for $21 per share at the end of the year.  Use this information to determine the book value of the investment that should be reported at year end by All Good Company. Round to nearest whole dollar.

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Expert Solution

Book Value of the Investement reported by All Good Company at the end of year:

Initial Investment [7000* $15 ] $105,000
ADD: Net Income [450,000* 30%] $135,000
LESS: Dividend ($20,000)
Ending Balance of Investment $220,000

Final or Closing Balance of Investment is $220,000

The end of the year trading price will not affect the current financial reports of the company as the traded price varies time to time, till the time investment is not liquidated, the price of the investment doesnt require to be mention. Hence, the current traded price doesn't play any role.

Too, Dividends are deducted as they are the part of the Statment of Profit and Loss and should not be clubbed for the closing balance of investment.

ekkarill92 answered 2 years ago
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