Change in Reporting for Equity Investment Stream Company buys 10 percent of Topsia Company’s stock for...

Change in Reporting for Equity Investment

Stream Company buys 10 percent of Topsia Company’s stock for $2 million in cash on January 1, 2020, and reports the investment as having no significant influence. Fair value of the investment on December 31, 2020 is $2.1 million. On January 1, 2021, Stream acquires another 30 percent of Topsia’s stock for $8 million in cash, and changes to the equity method of reporting for this investment. Fair value of the 40 percent interest on December 31, 2021, is $12 million. Topsia reported the following amounts for the years 2020 and 2021:

	2020	2021
Net income	$300,000	$400,000
Cash dividends (paid at year-end)	200,000	300,000

Topsia reported no other comprehensive income, and any basis difference is attributed to goodwill. Stream and Topsia have no intercompany transactions.

Required

Calculate the balances appearing in the following accounts of Stream Company for 2020 and 2021:

a. Investment in Topsia, reported on Stream’s December 31, 2020 and December 31, 2021 balance sheets.

b. Dividend income reported on Stream’s income statements, 2020 and 2021.

c. Unrealized gain on investment in Topsia, reported on Stream’s 2020 and 2021 income statements.

d. Equity in net income of Topsia, reported on Stream’s 2020 and 2021 income statements.

Account	2020	2021
Investment in Topsia	$Answer	$Answer
Dividend income	Answer	Answer
Unrealized gain on investment	Answer	Answer
Equity in net income of Topsia	Answer	Answer

Expert Solution

1	Investment in Topsia
	Investment in Equity with no significant influence is reported at Fair value when held as trading securities or available for sale securities,
	thus on Dec 31, 2020, it will be reported at fair value.
	Investment in Equity with significant influence (equity investment more than 20%) are reported at investment value plus investment
	income for the year less dividend received
		2020	2021
	Investment in Topsia	$2.1 million	$10.14 million

	Fair value of 10% equity investment	$2.1 million
	Cost of 30% equity investment	$8 million
	Add: 40% share of income of Topsia	$0.16 million
	Less: Cash dividend received (40%)	$0.12 miilion
	Value of Investment	$10.14 million

2	Dividend income reported on Income statement
	Under equity method, dividend income received reduce the balance of investment value and not recorded in income statement

		2020	2021
	Dividend Income	$20,000	$0
	(10% in 2020)

3	Unrealized gain on investment in Topsia
		2020	2021
	Unrealized gain on investment	$100,000
	Under equity method, investor does not recognize unrealized gain

4	Equity in net income
	Under cost method, equity in net income is not recognized only dividend income is reported when received

		2020	2021
	Equity in net income	$0	$160,000

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