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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Equity method for stock investment

Hawkeye Company's balance sheet reported, under the equity method, its long-term investment in Raven Company for comparative years as follows:

  Dec. 31, Year 2 Dec. 31, Year 1
Investment in Raven Company stock (in millions) $281 $264

In addition, the Year 2 Hawkeye Company income statement disclosed equity earnings in the Raven Company investment as $25 million. Hawkeye Company neither purchased nor sold Raven Company stock during Year 2. The fair value of the Raven Company stock investment on December 31, Year 2, was $310 million.

Explain the change in Investment in Raven Company Stock from December 31, Year 1, to December 31, Year 2.

To determine

Equity investment: Equity investments are stock instruments which claim ownership in the investee company and pay a dividend revenue to the investor company.

Equity method: Equity method is the method used for accounting equity investments which claim a significant influence of above 20% but less than 50% in the outstanding stock of the investee company.

To explain: The change in stock investment balance for Company H

Explanation

Prepare Investment in Company R Stock account to find the stock investment balance as on December 31.

Investment in Company R Stock account

Investment in Company R Stock
Date Details Debit ($) Date Details Credit ($)
  Cash 264,000,000     Cash(dividends) 8,000,000
  Income 25,000,000        
  Total 289,000,000     Total 8,000,000
Balance $281,000,000  

Table (1)

Working Notes:

Compute dividends received from Company R...

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