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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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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.

To determine

Discuss the manner in which the increase in ownership affects the accounting and reporting the investment, include the adjustments if any and also the way in which the company would report that in the current and subsequent periods.

Explanation

The investment has increased from 10% to 25% in Company B’s common stock. Thus, Company H has attained the ability to exercise the significant influence over Company B. Hence, to report this significant change Company H must use the equity method.

The change in the reporting method from the fair value method to the equity method should be made retrospectively restating each period in which the investments were held as it is used from the beginning. While making the necessary changes, Company H should return to the original amount paid for the purchase of the initial investment and it must make the following adjustments:

  • The cumulative adjustment of cost to the fair value should be “reversed”.
  • The dividends received must be recorded as the reduction in the amount which is shown for the investment...

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