Question

In: Accounting

On January 1, 2017, Gillettey Company purchases an investment in Buffalo, Inc., a company whose stock...

On January 1, 2017, Gillettey Company purchases an investment in Buffalo, Inc., a company whose stock trades over the counter, for $2,700,000, representing 20% of the book value of Buffalo. During the year, Buffalo reports a net income of $942,000 and pays cash dividends of $294,000. The fair value of Buffalo’s stock on December 31, 2017, is $15,000,000. Gillettey has a calendar year-end. a. What amount does Gillettey report on its 2017 balance sheet for its investment in Buffalo, if 20% ownership does not imply any significant influence over Buffalo? b. What amount does Gillettey report on its 2017 balance sheet for its investment in Buffalo, if 20% ownership implies significant influence over Buffalo?

Solutions

Expert Solution

a). If 20% ownership does not imply any significant influence over Buffalo.
Here we have to use cost method of investment because there is no significant influence.
In Cost method, first investment is shown at the purchase price and then there will no change in the value of investment due to dividend and net Income declared by the investee until then there will change in fair value of that investment.

As the fair value of Buffalo’s stock on December 31, 2017, is $15,000,000, the amount to be reported by Gillettey on its 2017 balance sheet is the fair value which is $15,000,000.

b). If 20% ownership implies significant influence over Buffalo.
Here we have to use equity method of investment because of significant influence. Here we do not change value of investment due to its fair value instead, it is changed on the basis of dividend and net income. Dividend received is reduced from the value of investment and Investment is increased by the share of net income.

Calculation of amount to be reported in the 2017 balance sheet by Gillettey.
Investment amount on Jan 1, 2017 = $2,700,000
Less: Dividend share ($294,000 * 20%) = $58,800
Add: Share of Net Income ($942,000 * 20%) = $188,400
Amount to be reported in balance sheet as investment = $2,829,600

ekkarill92 answered 1 year ago
Next > < Previous

Related Solutions

The following information is related to Buffalo Company for 2017. Retained earnings balance, January 1, 2017...
The following information is related to Buffalo Company for 2017. Retained earnings balance, January 1, 2017 $997,830 Sales Revenue 26,123,300 Cost of goods sold 16,214,400 Interest revenue 78,400 Selling and administrative expenses 4,737,300 Write-off of goodwill 827,800 Income taxes for 2017 1,287,700 Gain on the sale of investments 113,900 Loss due to flood damage 397,600 Loss on the disposition of the wholesale division (net of tax) 457,400 Loss on operations of the wholesale division (net of tax) 96,820 Dividends declared...
Monsters Inc began operations on January 1, 2017. The company employs 15 monsters whose jobs are...
Monsters Inc began operations on January 1, 2017. The company employs 15 monsters whose jobs are to scare little children. They are paid eight-hour days and are paid hourly. Each employee earns 15 paid vacation days and 10 paid sick days annually. Vacation days may be taken immediately. Sick days may be taken as soon as they are earned; unused sick days accumulate. Additional information is as follows: Actual Hourly                      Vacation Days Used                      Sick Days Used Wage Rate                            by Each...
On January 1, 2017, Buffalo Company purchased  12% bonds, having a maturity value of $ 304,000, for...
On January 1, 2017, Buffalo Company purchased  12% bonds, having a maturity value of $ 304,000, for $ 327,047.70. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Buffalo Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified as available-for-sale category. The fair value of the bonds at December 31 of each year-end is as...
On January 1, 2017, Buffalo Company purchased $290,000, 6% bonds of Aguirre Co. for $266,477. The...
On January 1, 2017, Buffalo Company purchased $290,000, 6% bonds of Aguirre Co. for $266,477. The bonds were purchased to yield 8% interest. Interest is payable semiannually on July 1 and January 1. The bonds mature on January 1, 2022. Buffalo Company uses the effective-interest method to amortize discount or premium. On January 1, 2019, Buffalo Company sold the bonds for $267,985 after receiving interest to meet its liquidity needs. (c) Prepare the journal entries to record the semiannual interest...
Place Company purchased 92% of the common stock of Shaw, Inc. on January 1, 2017, for...
Place Company purchased 92% of the common stock of Shaw, Inc. on January 1, 2017, for $400,000. Trial balances at the end of 2017 for the companies were: Place Shaw Cash $   80,350 $ 87,000 Accounts and Notes Receivable 200,000 210,000 Inventory, 1/1 70,000 50,000 Investment in Shaw, Inc. 400,000 —0— Plant Assets 300,000 200,000 Dividends Declared 35,000 22,000 Purchases 240,000 150,000 Selling Expenses 28,000 20,000 Other Expenses     15,000    13,000 $1,368,350 $752,000 Accounts and Notes Payable $   99,110 $ 38,000...
On January 1, 2017, Astrakan Company acquires 80% of the outstanding common stock of Gobi, Inc....
On January 1, 2017, Astrakan Company acquires 80% of the outstanding common stock of Gobi, Inc. for a purchase price of $970,000. It was determined that the fair value of the non-controlling interest in the subsidiary is $240,000. The book value of the Gobi’s stockholders’ equity on the date of acquisition is $700,000 and its fair value of net assets is $1,100,000. The acquisition-date acquisition accounting premium (AAP) is allocated $250,000 to equipment with a remaining useful life of 10...
Fesler Inc. acquired all of the outstanding common stock of Pickett Company on January 1, 2017....
Fesler Inc. acquired all of the outstanding common stock of Pickett Company on January 1, 2017. Annual amortization of $22,000 resulted from this transaction. On the date of the acquisition, Fesler reported retained earnings of $520,000 while Pickett reported a $240,000 balance for retained earnings. Fesler reported net income of $100,000 in 2017 and $68,000 in 2018, and paid dividends of $25,000 in dividends each year. Pickett reported net income of $24,000 in 2017 and $36,000 in 2018, and paid...
Link Company acquired Tuna Inc. on January 1, 2017. On January 1, 2017 all of Tuna's...
Link Company acquired Tuna Inc. on January 1, 2017. On January 1, 2017 all of Tuna's assets and liabilities had a FVs = BV except for the following: Land was undervalued by $30,000 Buildings were overvalued by $45,000 (20-yr remaining useful life) Equipment was undervalued by $90,000 (5-yr remaining useful life) In addition, Tuna had internally developed a customer list with an appraised value of $150,000 and a 10-yr remaining useful life. Link originally acquired Tuna at the FV of...
Harper,  Inc. acquires 40 percent of the outstanding voting stock of Kinman Company on January 1, 2017,...
Harper,  Inc. acquires 40 percent of the outstanding voting stock of Kinman Company on January 1, 2017, for $259,200 in cash. The book value of Kinman's net assets on that date was $465,000, although one of the company's buildings, with a $72,200 carrying amount, was actually worth $129,700. This building had a 10-year remaining life. Kinman owned a royalty agreement with a 20-year remaining life that was undervalued by $125,500. Kinman sold inventory with an original cost of $109,200 to Harper...
Harper,  Inc. acquires 40 percent of the outstanding voting stock of Kinman Company on January 1, 2017,...
Harper,  Inc. acquires 40 percent of the outstanding voting stock of Kinman Company on January 1, 2017, for $242,500 in cash. The book value of Kinman's net assets on that date was $425,000, although one of the company's buildings, with a $62,800 carrying amount, was actually worth $119,050. This building had a 10-year remaining life. Kinman owned a royalty agreement with a 20-year remaining life that was undervalued by $125,000. Kinman sold inventory with an original cost of $37,800 to Harper...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT