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?

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 2 years ago

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