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On January 2, 2018, Baltimore Company purchased 20,000 shares of the stock of Towson Company at...

On January 2, 2018, Baltimore Company purchased 20,000 shares of the stock of Towson Company at $12 per share. Baltimore obtained significant influence as the purchase represents a 40% ownership stake in Towson Company. On August 1, 2018, Towson Company paid cash dividends of $15,000. Baltimore Company intended this investment to a long-term investment. On December 31, 2018, Towson Company reported $50,000 of net income for FY 2018. Additionally, the current market price for Towson Company's stock increased to $22 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.)

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Expert Solution

As per IAS 28, an entity in which the company has significant influence is known as an associate and investment in associate is to be recorded as per equity method, where investment is first recorded at and subsequently adjusted to reflect the investor's share of the net assets of the associate.

In the above case Baltimore company acquired significant influence in Towson Company therefore Towson is Baltimore company's associate and recording of investment will be made as per equity method.

Particulars Amount $
Purchase cost (20000 x $12) 240000
Less: Dividend Recieved ($15000 x 40%) (6000)
Add: Share in Net Income ($50000 x 40%) 20000
Value of Investment to be shown in BS of Baltimore Company 254000

Therefore investment is to be reported at $254000 in the closing Balance Sheet of Baltimore Company

NOTE: Change in current market price of share of Towson compnay willnot have any effect in the carrying amount of investment of Baltimore Company.

ekkarill92 answered 1 year ago
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