Question

Analyzing and Interpreting Equity Method Investments

Stober Company purchases an investment in Lang Company at a purchase price of $1.2 million cash, representing 30% of the book value of Lang. During the year, Lang reports net income of $110,000 and pays cash dividends of $50,000. At the end of the year, the fair value of Stober's investment is $1.25 million.

a. At what amount is the investment reported on Stober's balance sheet at year-end?

$Answer

b. What amount of income from investments does Stober report?

$Answer

c. Stober's $200,000 unrealized gain in investment fair value (choose one):

(1) Is not reflected on either its income statement or balance sheet
(2) Is reported in its current income
(3) Is reported on its balance sheet only
(4) Is reported in its other comprehensive income

Answer(1) Is not reflected on either its income statement or balance sheet(2) Is reported in its current income(3) Is reported on its balance sheet only(4) Is reported in its other comprehensive income

d. Prepare journal entries to record the transactions and events above.

General Journal
	Description	Debit	Credit
1.	AnswerCashInvestment in Lang CompanyInvestment Income	Answer	Answer
	AnswerCashInvestment in Lang CompanyInvestment Income	Answer	Answer
	To purchase stock in Lang Company.
2.	AnswerCashInvestment in Lang CompanyInvestment Income	Answer	Answer
	AnswerCashInvestment in Lang CompanyInvestment Income	Answer	Answer
	To recognize share of Lang income.
3.	AnswerCashInvestment in Lang CompanyInvestment Income	Answer	Answer
	AnswerCashInvestment in Lang CompanyInvestment Income	Answer	Answer
	To record dividend received.

e. Post the journal entries from d to their respective T-accounts.

Cash (A)
1.	Answer	Answer
2.	Answer	Answer
3.	Answer	Answer

Investment Income (R)
1.	Answer	Answer
2.	Answer	Answer
3.	Answer	Answer

Investment in Lang Company (A)
1.	Answer	Answer
2.	Answer	Answer
3.	Answer	Answer

f. Record each of the transactions from d in the financial statement effects template.

Balance Sheet Transaction Cash Asset + Noncash Assets = Liabilities + Contrib. Capital + Earned Capital Purchase stock in Lang Company $Answer + $Answer = $Answer + $Answer + $Answer Recognize share of Lang income Answer + Answer = Answer + Answer + Answer Receive dividend from Lang Answer + Answer = Answer + Answer + Answer

Income Statement Revenues - Expenses = Net Income $Answer - $Answer = $Answer Answer - Answer = Answer Answer - Answer = Answer

Answer 1

Given the share of investment is 30%. There is significant influence and the investment must be accounted for using the Equity method of investment.

a). Amount at which the investment reported on Stober's balance sheet at year-end is:
Beginning balance = $1,200,000
Add: Land Income earned 30%          $33,000 (110000*30%)
Less: Dividends received                   $15,000    (50000*30%)
Ending Balance                               $1,218,000

b). Stober reports income from investments of $33,000 ($110,000*30%). Equity-method earnings are computed as the reported net income of the investee (Lang Company) multiplied by the percentage of the outstanding common stock owned by the investor (30%).

c). In contrast to the fair-value method of accounting for investments, the equity method does not report investments at fair (or market) value. Neither the balance sheet nor the income statement reflects the unrealized gain of $200,000.

d).