On January 1, Hershey Company, a calendar-year entity, purchased 72,000 shares of Mars Company’s 240,000 outstanding...

On January 1, Hershey Company, a calendar-year entity, purchased 72,000 shares of Mars Company’s 240,000 outstanding voting shares of common stock for $900,000. The fair value and the carrying amount of Mars’ net assets equaled $3 million on that date. Mars reported $630,000 of net income for the year and paid $240,000 of dividends on December 28. If Hershey did not elect the fair value option, what is the change in the investment balance during the year?

Solutions

Expert Solution

Concept:

Since it is given in the question that Hershey company has not elected the fair value option, the accounting for investment in Mars Company will be done as per "Equity Method" of accounting.

Equity method is applied where the acquiring company exerts significant influence over the acquired company. Generally it is determined so if the ownership percentage is between 20 to 50%.

As per the equity method, the investor company's share of the net income of the investee company is to be recognized as an increase in the value of investment and similarly a dividend received from the investee company is to be reduced from the value of the investment.

Answer:

Ownership % of Hershey in Mars = 72,000/240,000 = 30%

Investment balance as on December 31 (Year end) is calculated as follows:

Particulars	Amount ($)
Investment Balance as on January 1	9,00,000
Less: Dividend received on 28th December	-2,40,000
Add: Share of Net income	1,89,000	($630,00030%)*
*Investment Balance at year end date*	*8,49,000*

Hence change in investment balance during the year is a decrease of $51,000.

ekkarill92 answered 1 year ago

Next > < Previous

Related Solutions

15-11 Equity Method for Stock Investment On January 4, Year 1, Ferguson Company purchased 72,000 shares...

15-11 Equity Method for Stock Investment On January 4, Year 1, Ferguson Company purchased 72,000 shares of Silva Company directly from one of the founders for a price of $48 per share. Silva has 200,000 shares outstanding, including the Daniels shares. On July 2, Year 1, Silva paid $194,000 in total dividends to its shareholders. On December 31, Year 1, Silva reported a net income of $647,000 for the year. Ferguson uses the equity method in accounting for its investment...

On January 1, Year 4, Handy Company (Handy) purchased 70% of the outstanding common shares of...

On January 1, Year 4, Handy Company (Handy) purchased 70% of the outstanding common shares of Dandy Limited (Dandy) for $7,000. On that date, Dandy’s shareholders’ equity consisted of common shares of $390 and retained earnings of $5,900. The financial statements for Handy and Dandy for Year 9 were as follows: BALANCE SHEETS At December 31, Year 9 Handy Dandy Cash $ 1,480 $ 920 Accounts receivable 2,940 1,190 Inventory 3,540 3,060 Property, plant, and equipment—net 4,480 3,150 Investment in...

On January 1, 2017, Fisher Corporation purchased 40 percent (72,000 shares) of the common stock of...

On January 1, 2017, Fisher Corporation purchased 40 percent (72,000 shares) of the common stock of Bowden, Inc. for $984,000 in cash and began to use the equity method for the investment. The price paid represented a $54,000 payment in excess of the book value of Fisher's share of Bowden's underlying net assets. Fisher was willing to make this extra payment because of a recently developed patent held by Bowden with a 15-year remaining life. All other assets were considered...

On January 1, Year 1, Present Inc. purchased 80 percent of the outstanding voting shares of...

On January 1, Year 1, Present Inc. purchased 80 percent of the outstanding voting shares of Sunrise Co. for $3,000,000. On that date, Sunrise’s shareholders’ equity consisted of retained earnings of $1,500,000 and common shares of $1,000,000. Sunrise’s identifiable assets and liabilities had fair values that were equal to their carrying values on January 1, Year 1. Account balances for selected accounts for the Year 5 financial statements were as follows: Present Sunrise Property, plant, and equipment (net) $ 2,100,000...

The Alford Group had 240,000 shares of common stock outstanding at January 1, 2021. The following...

The Alford Group had 240,000 shares of common stock outstanding at January 1, 2021. The following activities affected common shares during the year. There are no potential common shares outstanding. 2021 Feb. 28 Purchased 30,000 shares of treasury stock. Oct. 31 Sold the treasury shares purchased on February 28. Nov. 30 Issued 120,000 new shares. Dec. 31 Net income for 2021 is $1,495,000. 2022 Jan. 15 Declared and issued a 2-for-1 stock split. Dec. 31 Net income for 2022 is...

On January 1, 2008, Bacil Company purchased 80 percent of the outstanding shares of Lou Company...

On January 1, 2008, Bacil Company purchased 80 percent of the outstanding shares of Lou Company at a cost of P910,000. On that date, Lou Company had P390,000 worth of outstanding shares and P650,000 worth of accumulated profits. For 2008, Bacil Company had income of P390,000 from its own operations and paid dividends of P130,000. For 2008, Lou Company reported a net income of P195,000 and paid dividends of P65,000. All of the assets and liabilities of Lou Company had...

At January 1, Strunk Corp. had 1,200,000 common shares outstanding. Strunk issued 240,000 additional common shares...

At January 1, Strunk Corp. had 1,200,000 common shares outstanding. Strunk issued 240,000 additional common shares on March 1 and 180,000 more on June 1. On November 1, Strunk repurchased 60,000 common shares as treasury stock. For purposes of basic earnings per share, the weighted average shares outstanding for the year is 1,090,000 shares 1,190,000 shares 1,380,000 shares 1,560,000 shares None of the above 2. Davies Inc. had 1,400,000 outstanding shares of common stock at the beginning of the current...

On January 1, Year 5, Blake Corporation purchased 25% of the outstanding common shares of Stergis...

On January 1, Year 5, Blake Corporation purchased 25% of the outstanding common shares of Stergis Limited for $2,150,000. The following relates to Stergis since the acquisition date: Year Net Income Other Comprehensive Income Dividends Paid Year 5 $ 60,200 $12,600 $86,000 Year 6 172,000 34,400 86,000 Required: (a) Assume that Blake is a public company and the number of shares held by Blake is enough to give it significant influence over Stergis. Prepare all the journal entries that Blake...

Problem 4-1 On January 1, 2011, Perelli Company purchased 90,000 of the 100,000 outstanding shares of...

Problem 4-1 On January 1, 2011, Perelli Company purchased 90,000 of the 100,000 outstanding shares of common stock of Singer Company as a long-term investment. The purchase price of $4,974,200 was paid in cash. At the purchase date, the balance sheet of Singer Company included the following: Current assets $2,909,500 Long-term assets 3,887,900 Other assets 756,100 Current liabilities 1,547,800 Common stock, $20 par value 1,996,500 Other contributed capital 1,900,500 Retained earnings 1,605,500 Additional data on Singer Company for the four...

On January 1, 2011, Perelli Company purchased 90,000 of the 100,000 outstanding shares of common stock...

On January 1, 2011, Perelli Company purchased 90,000 of the 100,000 outstanding shares of common stock of Singer Company as a long-term investment. The purchase price of $5,003,400 was paid in cash. At the purchase date, the balance sheet of Singer Company included the following: Current assets $2,904,100 Long-term assets 3,888,100 Other assets 764,000 Current liabilities 1,547,100 Common stock, $20 par value 2,001,400 Other contributed capital 1,888,600 Retained earnings 1,612,000 Additional data on Singer Company for the four years following...

Subjects