Question

On January 2, 2018, Baltimore Company purchased 9,000 shares of the stock of Towson Company at $14 per share. Baltimore did NOT obtain significant influence as the purchase represents a 5% ownership stake in Towson Company. On August 1, 2018, Towson Company paid cash dividends of $15,000. Baltimore Company intended this investment to a long-term investment. On December 31, 2018, Towson Company reported $80,000 of net income for FY 2018. Additionally, the current market price for Towson Company's stock increased to $25 per share at the end of the year. Use this information to determine, how much Baltimore Company should report for its investment in Towson Company on December 31, 2018. (Round to the nearest dollar.)

Answer 1

Explalations

Investment in shares of another company includes investment for a short-term period in order to make profits called trading securities or for a long-term investment. There are two ways in which investments are reported at the balance sheet and they include the cost method and the equity method. The equity method is used when the investment in shares of another company gives an ownership holding of 20% or more but less than 50%

Baltimore Company should report $126,000 for its investment in Towson Company on December 31, 2018

In the given case of Baltimore Company, the company intends to hold this investment as a long-term investment and it is also seen that that purchase does not result in obtaining significant influence as the purchase represents a 5% ownership stake.

In such a case, the cost method is being used to record the investment and not the equity method

As per the cost method, the investment is recorded at its cost of acquisition, and any income from dividends is recognized when received.

Therefore,

• Cost of acquisition = 9,000 shares * $14
• Cost of acquisition = $126,000

Note: The revised price of a share is not considered under the cost method.