Question

Recording Entries under the Fair Value Option—Equity Method

Assume that Fireside Inc. purchased 30% of the common stock of Theater Supplies Corporation on January 1, 2020, for $270,000. Fireside Inc. elected to account for its investment using the fair value option. During the year, Fireside Inc. reported net income of $216,000 and declared and paid dividends of $40,500. The fair value of Fireside’s investment in Theater Supplies common stock is $283,500. Assume that Fireside Inc. has significant influence over Theater Supplies Corporation.

a. What amount would Fireside Inc. report on its balance sheet on December 31, 2020, for its investment in Theater Supplies Corporation?

Balance Sheet	December 31, 2020
Assets
Investment in stock	Answer

b. What amount would Fireside Inc. report in its income statement for the year ended December 31, 2020, for its investment in Theater Supplies Corporation?

Note: Use a negative sign to indicate a loss.

Income Statement	2020
Other Revenues and Gains
Net gain (loss) on investment	Answer

Answer 1

Part A

Balance Sheet
December 31, 2020
Assets
Investment in stock	283,500

Part B

Income Statement
For the year ended Dec 31, 2020
Other Revenues and Gains
Net gain (loss) on investment (12150+13500)	25,650

Explain

Date	Account title [Fair value method]	Debit	Credit
Mar 18, 2017	Investment in Theater Supplies Corporation	270,000
	Cash		270,000
	(To record acquisition cost of investment.)
June 30, 2017	Cash	12,150
	Dividend income		12,150
	(To record Dividend Income.) (40500*30%)
Dec 31, 2017	Fair value investment	13,500
	Unrealized realised gain, net income		13,500
	(To record adjustment of Investment in fair value) (283500-270000)