Question

nzelmo Corporation invested in Jones Manufacturing by purchasing a​ 10% interest in the company. Anzelmo had no significant influence in Jones. Over​ time, Anzelmo acquired more shares in​ Jones, and in​ 2016, Anzelmo's president became a member of the board of directors when its ownership interest reached​ 30% of Jones. The cost basis of its investment is​ $2,000,000. Under the equity​ method, the valuation of the investment would be​ $2,400,000. The fair value of the investment is​ $2,600,000. What is the amount of the adjustment to the investment account necessary to properly record the change in accounting​ principal?

Answer 1

Cost method of investment should be used if the investors do not have more than 20% to 50% investment and do not have sufficient influence over the company. Under this method, dividend received should be recorded as income.

Investment under costing method = 2,000,000

The equity method of investment should be used if the investors have more than 20% to 50% investment and have sufficient influence over the company. Under this method, dividend received should be recorded considered as a return on investment and added to investment opening balance.

Investment under costing method = 2,400,000

Assuming dividend earned would be = 2,400,000 - 2,000,000 = 400,000

The fair value method, if the investor owns less than 20% of shares in a company it implies that the investor does not have sufficient influence over the company. Under the fair value method, an investor required to update his investment on the basis of fair value.

Investment under fair value method = 2,600,000

Unrealized gain or loss = 2,600,000 - 2,000,000 = 600,000