Question

In: Accounting

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:

  1. 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.

  1. 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 (140000*35%) 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 1 year ago
Next > < Previous

Related Solutions

On January 1, 2019, UMB Corporation had 1,000,000 shares of common stock outstanding. On April 1,...
On January 1, 2019, UMB Corporation had 1,000,000 shares of common stock outstanding. On April 1, the corporation issued 200,000 new shares to raise additional capital. On July 1, the corporation declared and issued a 2-for-1 stock split. On Nov. 1, the corporation purchased 600,000 treasury shares from the market. In addition, in 2018, UMB issued 5,000, $1,000 face value, 10% 10-year convertible bonds at par value. Each bond is convertible into 100 shares of common stock. The par value...
On January 1, Year 4, Handy Company (Handy) purchased 70% of the outstanding common shares of...
On January 1, Year 4, Handy Company (Handy) purchased 70% of the outstanding common shares of Dandy Limited (Dandy) for $7,000. On that date, Dandy’s shareholders’ equity consisted of common shares of $390 and retained earnings of $5,900. The financial statements for Handy and Dandy for Year 9 were as follows: BALANCE SHEETS At December 31, Year 9 Handy Dandy Cash $ 1,480 $ 920 Accounts receivable 2,940 1,190 Inventory 3,540 3,060 Property, plant, and equipment—net 4,480 3,150 Investment in...
On January 1, 2019, Halstead, Inc., purchased 71,000 shares of Sedgwick Company common stock for $1,485,000,...
On January 1, 2019, Halstead, Inc., purchased 71,000 shares of Sedgwick Company common stock for $1,485,000, giving Halstead 25 percent ownership and the ability to apply significant influence over Sedgwick. Any excess of cost over book value acquired was attributed solely to goodwill. Sedgwick reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout these years. Dividends are declared and paid in the same period. Net Income Annual Cash Dividends (paid quarterly) 2019 $407,000...
On January 1, 2018, Warren Corporation had 1,000,000 shares of common stock outstanding. On March 1,...
On January 1, 2018, Warren Corporation had 1,000,000 shares of common stock outstanding. On March 1, the corporation issued 160,000 new shares to raise additional capital. On July 1, the corporation declared and issued a 2-for-1 stock split. On October 1, the corporation purchased on the market 520,000 of its own outstanding shares and retired them. Compute the weighted average number of shares to be used in computing earnings per share for 2018. Weighted average number of shares
Jeffery Company purchased 10% of the outstanding common stock (75,000 shares) of Another Company on January...
Jeffery Company purchased 10% of the outstanding common stock (75,000 shares) of Another Company on January 1, 2020 for $750,000. The investment was not sufficient to give Jeffery Company the ability to significantly influence the operations of Another Company. On January 1, 2020, the fair value of the percentage of Another Company’s net assets purchased by Jeffery Company exceeded book value by $20,000. The difference was attributable to plant assets with remaining useful life of five years. During 2020, Another...
Dunbar Company had 1,000,000 shares of $1 par value common stock outstanding at January 1, 2015....
Dunbar Company had 1,000,000 shares of $1 par value common stock outstanding at January 1, 2015. On July 1, 2015, the company issued 100,000 additional shares of common stock. In addition, at December 31, 2015, 90,000 shares were issuable upon exercise of executive stock options which require a $40 cash payment upon exercise. The average market price during 2015 was $50.    Dunbar Company also has two convertible securities. There are 10,000 convertible bonds with a face amount of $1,000,...
Her Company purchased 16,000 common shares (20%) of Him Inc. on January 1, Year 4, for...
Her Company purchased 16,000 common shares (20%) of Him Inc. on January 1, Year 4, for $272,000. Additional information on Him for the three years ending December 31, Year 6, is as follows: Year Net Income Dividends Paid Market Value per Share at December 31 Year 4 $160,000 $120,000 $18 Year 5 180,000 128,000 20 Year 6 192,000 140,000 23 On December 31, Year 6, Her sold its investment in Him for $368,000. Required: (a) Compute the balance in the...
Her Company purchased 16,000 common shares (20%) of Him Inc. on January 1, Year 4, for...
Her Company purchased 16,000 common shares (20%) of Him Inc. on January 1, Year 4, for $272,000. Additional information on Him for the three years ending December 31, Year 6, is as follows: Year Net Income Dividends Paid Market Value per Share at December 31 Year 4 $160,000 $120,000 $18 Year 5 180,000 128,000 20 Year 6 192,000 140,000 23 On December 31, Year 6, Her sold its investment in Him for $368,000. Required: (a) Compute the balance in the...
On January 1 , 2017, Newyork Capital Corporation purchased 30% of the outstanding common shares of...
On January 1 , 2017, Newyork Capital Corporation purchased 30% of the outstanding common shares of Delta Crating Corp. for $250 million and accounts for this investment under the equity method. The following information is available regarding Delta Crating Corp. ($ in millions) Net identifiable assets at 1/1/2017 acquisition: Fair Value 700 Book Value 500 2017 Net Income 100 2017 Dividends declared and paid 30 2018 net income 80 2018 dividends declared and paid 20 12/31/2017 fair value (based on...
On May 4, 2019, Docker Inc. purchased 850 shares of its own common stock in the...
On May 4, 2019, Docker Inc. purchased 850 shares of its own common stock in the market at a price of $18.50 per share. On September 19, 2019, 500 of these shares were sold in the open market at a price of $20.20 per share. There were 35,000 shares of Docker common stock outstanding prior to the May 4 purchase of treasury stock. A $0.35 per share cash dividend on the common stock was declared and paid on June 15,...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT