Company A purchased a certain number of Company B's outstanding voting shares at $25 per share as a long-term investment. Company B had outstanding 32,000 shares of $12 par value stock. Complete the following table relating to the measurement and reporting by Company A after acquisition of the shares of Company B stock. Required: a. What level of ownership by Company A of Company B is required to apply the method? b. What events should cause Company A to recognize revenue related to the investment in Company B? c. After the acquisition date, how should Company A change the balance of the investment account with respect to the stock owned in Company B (other than for the disposal of the investments)? Additional information: Net income reported by Company B in the first year Dividends declared by Company B in the first year Market price of Company B stock at the end of the first year Number of Company B shares acquired a. Level of ownership b. Event to recognize revenue d. At acquisition, the investment account on the books of Company A should be debited for what amount? e. What is the balance in the investment account on the balance sheet of Company A at the end of the first year? f. What amount of revenue from the investment in Company B should Company A report at the end of the first year? g. What amount of unrealized loss should Company A report at the end of the first year? c. Adjust the investment account d. Amount to be debited (Company A) e. Investment account balance (Company A) f. Revenue from the investment in Company B g. Unrealized loss (Company A) Fair Value Method 4,000 Based on stock price changes $ 65,000 $ 18,000 $22 per share 100,000 88,000✔ 0x 12,000✔ Equity Method Less than 20% At least 20% but not more than 50% Only on declaration of cash dividend Only when Company B reports income or loss 9,600 For its share of investee's income less dividends and losses ✓ 240,000 211,200 x 19,500✔ 28,800 X
Company A purchased a certain number of Company B's outstanding voting shares at $25 per share as a long-term investment. Company B had outstanding 32,000 shares of $12 par value stock. Complete the following table relating to the measurement and reporting by Company A after acquisition of the shares of Company B stock. Required: a. What level of ownership by Company A of Company B is required to apply the method? b. What events should cause Company A to recognize revenue related to the investment in Company B? c. After the acquisition date, how should Company A change the balance of the investment account with respect to the stock owned in Company B (other than for the disposal of the investments)? Additional information: Net income reported by Company B in the first year Dividends declared by Company B in the first year Market price of Company B stock at the end of the first year Number of Company B shares acquired a. Level of ownership b. Event to recognize revenue d. At acquisition, the investment account on the books of Company A should be debited for what amount? e. What is the balance in the investment account on the balance sheet of Company A at the end of the first year? f. What amount of revenue from the investment in Company B should Company A report at the end of the first year? g. What amount of unrealized loss should Company A report at the end of the first year? c. Adjust the investment account d. Amount to be debited (Company A) e. Investment account balance (Company A) f. Revenue from the investment in Company B g. Unrealized loss (Company A) Fair Value Method 4,000 Based on stock price changes $ 65,000 $ 18,000 $22 per share 100,000 88,000✔ 0x 12,000✔ Equity Method Less than 20% At least 20% but not more than 50% Only on declaration of cash dividend Only when Company B reports income or loss 9,600 For its share of investee's income less dividends and losses ✓ 240,000 211,200 x 19,500✔ 28,800 X
Cornerstones of Financial Accounting
4th Edition
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Jay Rich, Jeff Jones
ChapterA2: Investments
Section: Chapter Questions
Problem 25E
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Transcribed Image Text:Company A purchased a certain number of Company B's outstanding voting shares at $25 per share as a long-term investment.
Company B had outstanding 32,000 shares of $12 par value stock.
Complete the following table relating to the measurement and reporting by Company A after acquisition of the shares of Company B
stock.
Required:
a. What level of ownership by Company A of Company B is required to apply the method?
b. What events should cause Company A to recognize revenue related to the investment in Company B?
c. After the acquisition date, how should Company A change the balance of the investment account with respect to the stock owned
in Company B (other than for the disposal of the investments)?
Additional information:
Net income reported by Company B in the first year
Dividends declared by Company B in the first year
Market price of Company B stock at the end of the first year
d. At acquisition, the investment account on the books of Company A should be debited for what amount?
e. What is the balance in the investment account on the balance sheet of Company A at the end of the first year?
f. What amount of revenue from the investment in Company B should Company A report at the end of the first year?
g. What amount of unrealized loss should Company A report at the end of the first year?
Number of Company B shares acquired
a. Level of ownership
b. Event to recognize revenue
c. Adjust the investment account
d. Amount to be debited (Company A)
e. Investment account balance (Company A)
f. Revenue from the investment in Company B
g. Unrealized loss (Company A)
Fair Value Method
Less than 20%
4,000
9,600
✔ At least 20% but not more than 50%
Only on declaration of cash dividend Only when Company B reports income
or loss
Based on stock price changes
✓
$ 65,000
$ 18,000
$22 per share
100,000✔
88,000✔
0x
12,000 ✓
Equity Method
For its share of investee's income less
dividends and losses
240,000✔
211,200
19,500✔
28,800
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