Textbook Problem

For the past 5 years, Herbert has maintained an investment properly accounted for and reported upon) in Broome amounting to a 10% interest in the voting common stock of Broome. The purchase price was $700,000 and the underlying net equity in Broome at the date of purchase was $620,000 . On January 2 of the current year, Herbert purchased an additional 15% of the voting common stock of Broome for $1,200,000; the underlying net equity of additional investment at January 2 was $1,000,000. Broome has been profitable and has paid dividends annually since Herbert’s initial acquisition.

Required:

Discuss how this increase in ownership affects the accounting for and reporting upon the investment in Broome. Include in your discussion adjustments, if any, to the amount shown prior to the increase in investment to bring the amount into conformity with GAAP. Also include how the company would report in current and subsequent periods.