4. On January 1, 2019, Roberts Inc. purchased 10% of the outstanding 1,000,000 common shares of...

4. On January 1, 2019, Roberts Inc. purchased 10% of the outstanding 1,000,000 common shares of Sunk for $200,000. Roberts Inc. considers this investment to be a non-strategic investment. At the

December 31, 2020-year end, the fair value of this investment was $208,000. Sunk's profit in 2020 was $100,000. Sunk paid a dividend of $.60 per common share. On January 1, 2021, Robert decided to buy an additional 25% of Sunk's 1,000,000 common shares for $500,000. This second purchase allowed Robert to significantly influence Sunk. In 2021, Sunk's profit was $140,000. Sunk paid dividends of $.50 per common share in 2021.

For 2020, the investment is considered to be a fair value through profit and loss investment:

Required:

Make journal entries for 2020 and 2021 on Robert’s books with respect to the Investment in Sunk.

For 2020, the investment is considered to be a fair value through profit and loss inv.

Which method of Investment Accounting is Robert Inc using? Justify your response.

Solutions

Expert Solution

Answer :

(a).

Roberts Inc Journal Entries
Date	Particulars	Debit	Credit
Dec31.2020	Investment in Sunk	8,000	-
	Profit or loss account		8,000
	(To Record the investment at fair value)

Dec 31.2020	Cash	60,000	-
	Dividend income	-	60,000
	(To Record the dividend income received at $0.60/ share)

Jan 1.2021	Investement in Sunk	5,00,000	-
	Cash	-	5,00,000
	(To Record additional purchase of shares in Sunk)

Dec 31.2021	Investment in Sunk	49,000	-
	Share in income from associate	-	49,000
	*(To Record the income (14000035%) from associate using equity method)**

Dec 31.2021	Cash	1,75,000	-
	Investment in Sunk	-	1,75,000
	(To Record the dividend received at $0.50/share)

(b). If a company purchases 20% - 50% of the outstanding common of a company, the investment becomes its associate and it must apply the equity method to account for such investments. Under the equity method, investment income equals the investor's proportionate share in the net income of the associate. Dividends from investments recognized under the equity method do not constitute investment income, instead they reduce the carrying value of the investment

Based on the above, since Roberts Inc has purchased 35% shares of sunk therefore sunk has become its associate company. Therefore, Equity Method of accounting is being followed by Roberts Inc.

ekkarill92 answered 11 months ago

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