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On July 1, 2020, Dynamic Company purchased for cash 40% of the outstanding capital stock of...

On July 1, 2020, Dynamic Company purchased for cash 40% of the outstanding capital stock of Cart Company. Both Dynamic and Cart have a December 31 year-end. Cart, whose common stock is actively traded in the over-the-counter market, reported its total net income for the year to Dynamic and also paid cash dividends on November 15, 2020, to Dynamic and its other stockholders.

Required:

a. How should Dynamic report the foregoing facts in its December 31, 2020, balance sheet and its income statement for the year then ended? Discuss the rationale for your answer.

b. If Dynamic should elect to report its investment at fair value, how would its balance sheet and income statement differ from your answer to part (a)?

Solutions

Expert Solution

a.) The 40% Investment in Cart Company will be dealt as per the Equity Method assuming significant influence exists.
Balance Sheet Reporting:
Assets:
Investment in Associates XXXX
Working:
Purchase Cost on July 1,2020 XXXX
Add: Share of post acqusition Net income @40% XXXX
Less: Share of Dividend ( Dividend paid x 40% ) XXXX
Investment in Associates XXXX
Income Statement Reporting:
Investment revenue ( Share of post acquisition net income @40% ) XXXX
b.) Under Fair value Method:
Balance Sheet Reporting:
Assets:
Investment in Cart Company XXXX
( At Fair value at year end )
Income Statement Reporting:
Dividend revenue ( Dividend Paid x 40% ) XXXX
Unrealized holding gain or (loss) -Other comprehensive income XXXX

ekkarill92 answered 2 years ago
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