Question

On January 2, 2018, Baltimore Company purchased 7,000 shares of the stock of Towson Company at $13 per share. Baltimore did NOT obtain significant influence as the purchase represents a 10% ownership stake in Towson Company. On August 1, 2018, Towson Company paid cash dividends of $25,000. Baltimore Company intended this investment to a long-term investment. On December 31, 2018, Towson Company reported $60,000 of net income for FY 2018. Additionally, the current market price for Towson Company's stock increased to $26 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

Computation of Value of Investments                                     Amount in dollars

Initial Cost of investments 91000                   

(7000 x 13)

Add: Share of profit                                                                            6000

(10% X 60000)

Add: Increase in equity reserves 9100

({26-13} x 7000) * 10%

Less: Dividends received (2500)

(10% X 25000)                         

Value of investments                                                                    103600

Notes:

1) Since the percentage of holding is only 10% and the former entity does not exercise any significant control therefore the later company is an associate company.

2) Share of profits and reserves have been added to the initial cost of investments

3) Assumed dividends is paid out of pre acquisiton profits therefore part of cost of investments not a part of income statements therefore reduced from the cost of investments.