Question

In: Accounting

14. The Anderson Company acquired 100,000 shares of the Beck Company on January 1, 2016, at...

14. The Anderson Company acquired 100,000 shares of the Beck Company on January 1, 2016, at $25 per share. Beck’s stock price on December 31, 2016, was $35 per share. During 2016, Beck declared and paid dividends of $1.50 per share and had earnings of $2.50 per share. Anderson Company accounted for its investment in Beck Company shares as subsequently measured at fair value through OCI. What was the net effect of investment in Beck Company shares on Anderson’s income statement for 2016?

  1. $250,000.
  2. $100,000.
  3. $150,000.

Answer is c, why

Solutions

Expert Solution

Accounting for investments in equity instruments

Classification

Investments in equity instruments (such as an investment in the ordinary shares of another entity) are measured at either:

• fair value through profit or loss, or

• fair value through other comprehensive income.

Fair value through profit or loss :- The normal expectation is that equity instruments will have the designation of fair value through profit or loss.

Fair value through other comprehensive income :- It is possible to designate an equity instrument as fair value through other comprehensive income, provided that the following conditions are complied with:

• the equity instrument must not be held for trading, and

• there must have been an irrevocable choice for this designation upon initial recognition of the asset.

Investments in equity instruments that are classified as fair value through other comprehensive income are initially recognized at fair value plus transaction costs. At the reporting date, the asset is revalued to fair value with the gain or loss recorded in other comprehensive income. This gain or loss will not be reclassified to profit or loss in future periods.

Journal Entries to be recorded in the present case:-

01.01.2016 Investments in Shares                   2,500,000.00
To Bank                   2,500,000.00
(Being Investment in shares of Anderson Company recorded)
31.12.2016 Investments in Shares                   1,000,000.00
To Other Comprehensive Income                   1,000,000.00
(Being revaluation of Investements in Equity Shares recorded)
31.12.2016 Bank                         150,000.00
To Dividend Income                         150,000.00
(being dividend received on Investments recorded)

The only impact to the PL would be of $ 150,000 which relates to dividend recieved from Investment in Beck.


Related Solutions

(A) Corporation acquired 20,000 of the 100,000 outstanding common shares of (B) Company on January 1,...
(A) Corporation acquired 20,000 of the 100,000 outstanding common shares of (B) Company on January 1, 2016, for a cash consideration of $200,000. During 2016, (B) Company had net income of $120,000 and paid dividends of $80,000. At the end of 2016, shares of (B) Company were trading for $11 each. During 2017, (B) Company had a loss of $60,000 and paid dividends of $40,000. Income for the first half of the year was $80,000 and the loss in the...
6. A plant asset is acquired by a business on January 1, 2016, for $100,000. The...
6. A plant asset is acquired by a business on January 1, 2016, for $100,000. The asset's estimated residual value is $10,000 and its estimated life is 5 years. Management chooses to use straight-line depreciation. On January 1, 2018, management revises the total useful life to 8 years and the residual value to $5,000. Required: Compute the balance in Accumulated Depreciation on January 1, 2018. Compute the Depreciation Expense for the year ending December 31, 2018. Compute the balance in...
osada Company acquired 7,000 of the 10,000 outstanding shares of Sabathia Company on January 1, 2016,...
osada Company acquired 7,000 of the 10,000 outstanding shares of Sabathia Company on January 1, 2016, for $840,000. The subsidiary’s total fair value was assessed at $1,200,000 although its book value on that date was $1,130,000. The $70,000 fair value in excess of Sabathia’s book value was assigned to a patent with a five-year remaining life. On January 1, 2018, Posada reported a $1,085,000 equity method balance in the Investment in Sabathia Company account. On October 1, 2018, Posada sells...
osada Company acquired 7,000 of the 10,000 outstanding shares of Sabathia Company on January 1, 2016,...
osada Company acquired 7,000 of the 10,000 outstanding shares of Sabathia Company on January 1, 2016, for $840,000. The subsidiary’s total fair value was assessed at $1,200,000 although its book value on that date was $1,130,000. The $70,000 fair value in excess of Sabathia’s book value was assigned to a patent with a five-year remaining life. On January 1, 2018, Posada reported a $1,085,000 equity method balance in the Investment in Sabathia Company account. On October 1, 2018, Posada sells...
Fortran Inc. purchased 100,000 shares, representing more than 20%, of Cobol Company on January 1, 2016....
Fortran Inc. purchased 100,000 shares, representing more than 20%, of Cobol Company on January 1, 2016. On July 1, 2016, Cobol paid dividends. The cost of the purchase, Cobol’s net income and total dividends for 2016 are given below. The market price of Cobol’s stock at 12/31/16 was $60 per share. 25% purchased, $5,125,000 cost, $600,000 total dividends paid, $3,000,000 Net Income a.) What method of accounting should Fortran Inc. use to account for the investment in Cobol. b.) Prepare...
On January 1, 2016, Aronsen Company acquired 80 percent of Siedel Company’s outstanding shares. Siedel had...
On January 1, 2016, Aronsen Company acquired 80 percent of Siedel Company’s outstanding shares. Siedel had a net book value on that date of $410,000: common stock ($10 par value) of $200,000 and retained earnings of $210,000. Aronsen paid $656,000 for this investment. The acquisition-date fair value of the 20 percent noncontrolling interest was $164,000. The excess fair value over book value associated with the acquisition was used to increase land by $350,000 and to recognize copyrights (12-year remaining life)...
On January 1, 2016, Aronsen Company acquired 80 percent of Siedel Company’s outstanding shares. Siedel had...
On January 1, 2016, Aronsen Company acquired 80 percent of Siedel Company’s outstanding shares. Siedel had a net book value on that date of $630,000: common stock ($14 par value) of $280,000 and retained earnings of $350,000. Aronsen paid $640,000 for this investment. The acquisition-date fair value of the 20 percent noncontrolling interest was $160,000. The excess fair value over book value associated with the acquisition was used to increase land by $110,000 and to recognize copyrights (12-year remaining life)...
Purnama Bhd acquired 45% of the ordinary shares of Bulan Bhd on 1 January 2016. The...
Purnama Bhd acquired 45% of the ordinary shares of Bulan Bhd on 1 January 2016. The remaining shares are held by Bintang Bhd and Matahari Bhd ,each holding 25% and 30% of the ordinary shares of Bulan Bhd respectively. Starting from 1 January 2016, it has been agreed that the key management of Purnama Bhd will direct the relevant activities of Bula Bhd which include approving any kind of transactions related to sales and purchases of goods as well as...
On January 1, Patterson Corporation acquired 80 percent of the 100,000 outstanding voting shares of Soriano,...
On January 1, Patterson Corporation acquired 80 percent of the 100,000 outstanding voting shares of Soriano, Inc., in exchange for $31.25 per share cash. The remaining 20 percent of Soriano’s shares continued to trade for $30 both before and after Patterson’s acquisition. At January 1, Soriano’s book and fair values were as follows Book Values Fair Values Remaining Life Current assets $80,000 $80,000 Buildings and equipment $1,250,000 $1,000,000 5 years Trademarks    $700,000    $900,000 10 years Patented technology   ...
On January 1, Patterson Corporation acquired 80 percent of the 100,000 outstanding voting shares of Soriano,...
On January 1, Patterson Corporation acquired 80 percent of the 100,000 outstanding voting shares of Soriano, Inc., in exchange for $31.25 per share cash. The remaining 20 percent of Soriano’s shares continued to trade for $30 both before and after Patterson’s acquisition. At January 1, Soriano’s book and fair values were as follows Book Values Fair Values Remaining Life Current assets $80,000 $80,000 Buildings and equipment $1,250,000 $1,000,000 5 years Trademarks    $700,000    $900,000 10 years Patented technology   ...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT