Question
In: Accounting
Gant Company purchased 20 percent of the outstanding shares of Temp Company for $78,000 on January...
Gant Company purchased 20 percent of the outstanding shares of
Temp Company for $78,000 on January 1, 20X6. The following results
are reported for Temp Company:
| 20X6 | 20X7 | 20X8 | |||||||
| Net income | $ | 48,000 | $ | 43,000 | $ | 58,000 | |||
| Dividends paid | 13,000 | 29,000 | 18,000 | ||||||
| Fair value of shares held by Gant: | |||||||||
| January 1 | 78,000 | 97,000 | 94,000 | ||||||
| December 31 | 97,000 | 94,000 | 105,000 | ||||||
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:
- Uses the equity method.
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 equity method in accounting for its investment in Temp.
|
Solutions
Expert Solution
Answer:
Equity Method:
Recognition oon income under equity method:
| Particulars | 20X6 | 20X7 | 20X8 |
| Income (A) | 48000 | 43000 | 58000 |
| Investment share (B) | 20% | 20% | 20% |
| Income (AxB) | 9600 | 8600 | 11600 |
Calculate the balance of investment in Temp Company:
| Particulars | 20X6 | 20X7 | 20X8 |
| Investment | 78000 | 97000 | 94000 |
| Add: Income | 9600 | 8600 | 11600 |
| Investment share | 20% | 20% | 20% |
| Less: Dividend x 20% | (2600) | (5800) | (3600) |
| Total investment | 85000 | 99800 | 102000 |
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