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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Change to Equity Method On January 1, 2019, Lion Company paid $600,000 for 10,000 shares of Wolf Company’s voting common stock, which was a 10% interest in Wolf. Lion does not have the ability to exercise significant influence over the operating and financial polices of Wolf. Lion received dividends of $1.00 per share from Wolf on October 2, 2019. Wolf reported net income of $400,000 for the year ended December 31, 2019, and the ending market price of its shares was $63.

On July 2, 2020, Lion paid $1,950,000 for 30,000 additional shares of Wolf’s voting common stock, which represents a 30% investment in Wolf. The fair values of all of Wolf’s assets, net of liabilities, were equal to their book values of $6,500,000. As a result of this transaction, Lion has the ability to exercise significant influence over the operating and financial policies of Wolf. Lion received dividends of $1.00 per share from Wolf on April 2, 2020, and $1.35 per share on October 1, 2020. Wolf reported net income of $500,000 for the year ended December 31, 2020, and $200,000 for the 6 months ended December 31, 2020.

Required:

  1. 1. For Lion, show the dividend income for 2019, as well as the December 31, 2019, unrealized holding gain or loss for the equity securities and carrying value of the investment account.
  2. 2. Assuming that Lion issues comparative financial statements for 2019 and 2020, show the investment income for 2019 and 2020, as well as the December 31, 2019 and 2020 carrying value of the investment account.

1.

To determine

Determine the dividend income for 2019, unrealized holding gain or loss for Equity securities and the carrying value of the investment as at December 31, 2019.

Explanation

Investment: It refers to the process of using the currently held excess cash to earn profitable returns in future. The investments can be made in equity securities such as shares or debt securities such as bonds.

Determine the amount of dividend income earned by Company L on October 2, 2019.

Dividend income for 2019 = [Number of shares purchased×Dividend per share]=10,000shares×$1.00=$10,000

Hence, the amount of dividend for 2019 is $10,000.

On January 1, 2019, Company L purchased Company W’s 10,000 shares for $600,000.

Therefore Company L paid $60 per share ($600,00010,000shares) .

Determine the amount of unrealized gain or loss on holding equity securities at December 31, 2019.

Unrealized gain or loss on holdingequity securities}=[Number of shares purchased×(Market

2.

To determine

Determine the investment income for 2019 and 2020, and the carrying value of the investment account as at December 31, 2019 and 2020.

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